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Before September 2001, we and others had demonstrated significant, long- standing vulnerabilities in aviation security, some of which are depicted in figure 1. These included weaknesses in screening passengers and baggage, controlling access to secure areas at airports, and protecting air traffic control computer systems and facilities. To address these and other weaknesses, ATSA created the Transportation Security Administration and established security requirements for the new agency with mandated deadlines. Before September 2001, screeners, who were then hired by the airlines, often failed to detect threat objects located on passengers or in their carry- on luggage. Principal causes of screeners’ performance problems were rapid turnover and insufficient training. As we previously reported, turnover rates exceeded 100 percent a year at most large airports, leaving few skilled and experienced screeners, primarily because of low wages, limited benefits, and repetitive, monotonous work. In addition, before September 2001, controls for limiting access to secure areas of airports, including aircraft, did not always work as intended. As we reported in May 2000, our special agents used fictitious law enforcement badges and credentials to gain access to secure areas, bypass security checkpoints at two airports, and walk unescorted to aircraft departure gates. The agents, who had been issued tickets and boarding passes, could have carried weapons, explosives, or other dangerous objects onto aircraft. DOT’s Inspector General also documented numerous problems with airport access controls, and in one series of tests, nearly 7 out of every 10 attempts by the Inspector General’s staff to gain access to secure areas were successful. Upon entering the secure areas, the Inspector General’s staff boarded aircraft 117 times. The Inspector General further reported that the majority of the aircraft boardings would not have occurred if employees had taken the prescribed steps, such as making sure doors closed behind them. Our reviews also found that the security of the air traffic control computer systems and of the facilities that house them had not been ensured. The vulnerabilities we identified, such as not ensuring that contractors who had access to the air traffic control computer systems had undergone background checks, made the air traffic control system susceptible to intrusion and malicious attacks. The air traffic control computer systems provide information to air traffic controllers and aircraft flight crews to help ensure the safe and expeditious movement of aircraft. Failure to protect these systems and their facilities could cause a nationwide disruption of air traffic or even collisions and loss of life. Over the years, we made numerous recommendations to the Federal Aviation Administration (FAA), which, until ATSA’s enactment, was responsible for aviation security. These recommendations were designed to improve screeners’ performance, strengthen airport access controls, and better protect air traffic control computer systems and facilities. As of September 2001, FAA had implemented some of these recommendations and was addressing others, but its progress was often slow. In addition, many initiatives were not linked to specific deadlines, making it difficult to monitor and oversee their implementation. ATSA defined TSA’s primary responsibility as ensuring security in all modes of transportation. The act also shifted security-screening responsibilities from the airlines to TSA and established a series of requirements to strengthen aviation security, many of them with mandated implementation deadlines. For example, the act required the deployment of federal screeners at 429 commercial airports across the nation by November 19, 2002, and the use of explosives detection technology at these airports to screen every piece of checked baggage for explosives not later than December 31, 2002. However, the Homeland Security Act subsequently allowed TSA to grant waivers of up to 1 year to airports that would not be able to meet the December deadline. Some aviation security responsibilities remained with FAA. For example, FAA is responsible for the security of its air traffic control and other computer systems and of its air traffic control facilities. FAA also administers the Airport Improvement Program (AIP) trust fund, which is used to fund capital improvements to airports, including some security enhancements, such as terminal modifications to accommodate explosives detection equipment. Over the past 2 years, TSA and FAA have taken major steps to increase aviation security. TSA has implemented congressional mandates and explored options for increasing the use of technology and information to control access to secure areas of airports and to improve passenger screening. FAA has focused its efforts on enhancing the security of the nation’s air traffic control systems and facilities. In ongoing work, we are examining some of these efforts in more detail (see app. IV). In its first year, TSA worked to establish its organization and focused primarily on meeting the aviation security deadlines set forth in ATSA, accomplishing a large number of tasks under a very ambitious schedule. In January 2002, TSA had 13 employees—1 year later, the agency had about 65,000 employees. TSA reported that it met over 30 deadlines during 2002 to improve aviation security. (See app. I for the status of mandates in ATSA.) For example, according to TSA, it met the November 2002 deadline to deploy federal passenger screeners at airports across the nation by hiring, training, and deploying over 40,000 individuals to screen passengers at 429 commercial airports (see fig. 2); hired and deployed more than 20,000 individuals to screen all checked has been using explosives detection systems or explosives trace detection equipment to screen about 90 percent of all checked baggage as of December 31, 2002; has been using alternative means such as canine teams, hand searches, and passenger-bag matching to screen the remaining checked baggage; confiscated more than 4.8 million prohibited items (including firearms, knives, and incendiary or flammable objects) from passengers; and has made substantial progress in expanding the Federal Air Marshal Service. In addition, according to FAA, U.S. and foreign airlines met the April 2003 deadline to harden cockpit doors on aircraft flying in the United States. Not unexpectedly, TSA experienced some difficulties in meeting these deadlines and achieving these goals. For example, operational and management control problems, cited later in this testimony, emerged with the rapid expansion of the Federal Air Marshal Service, and TSA’s deployment of some explosives detection systems was delayed. As a result, TSA had to grant waivers of up to a year (until Dec. 31, 2003) to a few airports, authorizing them to use alternative means to screen all checked baggage. Recently, airport representatives with whom we spoke expressed concern that not all of these airports would meet the new December 2003 deadline established in their waivers because, according to the airport representatives, there has not been enough time to produce, install, and integrate all of the systems required to meet the deadline. To strengthen control over access to secure areas of airports and other transportation facilities, TSA is pursuing initiatives that make greater use of technology and information. For example, the agency is investigating the establishment of a Transportation Workers Identification Card (TWIC) program. TWIC is intended to establish a uniform, nationwide standard for the secure identification of 12 million workers who require unescorted physical or cyber access to secure areas at airports and other transportation facilities. Specifically, TWIC will combine standard background checks and biometrics so that a worker can be positively matched to his or her credential. Once the program is fully operational, the TWIC card will be the standard credential for airport workers and will be accepted by all modes of transportation. According to TSA, developing a uniform, nationwide standard for identification will minimize redundant credentialing and background checks. Currently, each airport is required, as part of its security program, to issue credentials to workers who need access to secure, nonpublic areas, such as baggage loading areas. Airport representatives have told us that they think a number of operational issues need to be resolved for the TWIC card to be feasible. For example, the TWIC card would have to be compatible with the many types of card readers used at airports around the country, or new card readers would have to be installed. At large airports, this could entail replacing hundreds of card readers, and airport representatives have expressed concerns about how this effort would be funded. In April 2003, TSA awarded a contract to test and evaluate various technologies at three pilot sites. In addition, TSA has continued to develop the next-generation Computer Assisted Passenger Prescreening System (CAPPS II)—an automated passenger screening system that takes personal information, such as a passenger’s name, date of birth, home address, and home telephone number, to confirm the passenger’s identity and assess a risk level. The identifying information will be run against national security information and commercial databases, and a “risk” score will be assigned to the passenger. The risk score will determine any further screening that the passenger will undergo before boarding. TSA expects to implement CAPPS II throughout the United States by the fall of 2004. However, TSA’s plans have raised concerns about travelers’ privacy rights. It has been suggested, for example, that TSA is violating privacy laws by not explaining how the risk assessment data will be scored and used and how a TSA decision can be appealed. These concerns about the system will need to be addressed as it moves toward implementation. In ongoing work, we are examining CAPPS II, including how it will function, what safeguards will be put in place to protect the traveling public’s privacy, and how the system will affect the traveling public in terms of costs, delays, and risks. Additionally, TSA has begun to develop initiatives that could enable it to use its passenger screening resources more efficiently. For example, TSA has requested funding for fiscal year 2004 to begin developing a registered traveler program that would prescreen low-risk travelers. Under a registered traveler program, those who voluntarily apply to participate in the program and successfully pass background checks would receive a unique identifier or card that would enable them to be screened more quickly and would promote greater focus on those passengers who require more extensive screening at airport security checkpoints. In prior work, we identified key policy and implementation issues that would need to be resolved before a registered traveler program could be implemented. Such issues include the (1) criteria that should be established to determine eligibility to apply for the program, (2) kinds of background checks that should be used to certify applicants’ eligibility to enroll in the program and the entity who should perform these checks, (3) security-screening procedures that registered travelers should undergo and the differences between these procedures and those for unregistered travelers, and (4) concerns that the traveling public or others may have about equity, privacy, and liability. Since September 2001, FAA has continued to strengthen the security of the nation’s air traffic control computer systems and facilities in response to 39 recommendations we made between May 1998 and December 2000. For example, FAA has established an information systems security management structure under its Chief Information Officer, whose office has developed an information systems security strategy, security architecture (that is, an overall blueprint), security policies and directives, and a security awareness training campaign. This office has also managed FAA’s incident response center and implemented a certification and accreditation process to ensure that vulnerabilities in current and future air traffic control systems are identified and weaknesses addressed. Nevertheless, the office faces continued challenges in increasing its intrusion detection capabilities, obtaining accreditation for systems that are already operational, and managing information systems security throughout the agency. In addition, according to senior security officials, FAA has completed assessments of the physical security of its staffed facilities, but it has not yet accredited all of these air traffic control facilities as secure in compliance with its own policy. Finally, FAA has worked aggressively over the past 2 years to complete background investigations of numerous contractor employees. However, ensuring that all new contractors are assessed to determine which employees require background checks, and that those checks are completed in a timely manner, will be a continuing challenge for the agency. Although TSA has focused much effort and funding on ensuring that bombs and other threat items are not carried onto commercial aircraft by passengers or in their luggage, vulnerabilities remain, according to aviation experts, TSA officials, and others. In particular, these vulnerabilities affect air cargo, general aviation, and airport perimeter security. For information on legislative proposals that would address these potential vulnerabilities and other aviation security issues, see appendix II. As we and DOT’s Inspector General have reported, vulnerabilities exist in securing the cargo carried aboard commercial passenger and all-cargo aircraft. TSA has reported that an estimated 12.5 million tons of cargo are transported each year—9.7 million tons on all-cargo planes and 2.8 million tons on passenger planes. Some potential security risks associated with air cargo include the introduction of undetected explosive and incendiary devices in cargo placed aboard aircraft; the shipment of undeclared or undetected hazardous materials aboard aircraft; and aircraft hijackings and sabotage by individuals with access to cargo aircraft. To address some of the risks associated with air cargo, ATSA requires that all cargo carried aboard commercial passenger aircraft be screened and that TSA have a system in place as soon as practicable to screen, inspect, or otherwise ensure the security of cargo on all-cargo aircraft. In August 2003, the Congressional Research Service reported that less than 5 percent of cargo placed on passenger airplanes is physically screened. TSA’s primary approach to ensuring air cargo security and safety and to complying with the cargo-screening requirement in the act is the “known shipper” program—which allows shippers that have established business histories with air carriers or freight forwarders to ship cargo on planes. However, we and DOT’s Inspector General have identified weaknesses in the known shipper program and in TSA’s procedures for approving freight forwarders. Since September 2001, TSA has taken a number of actions to enhance cargo security, such as implementing a database of known shippers in October 2002. The database is the first phase in developing a cargo- profiling system similar to the Computer-Assisted Passenger Prescreening System. However, in December 2002, we reported that additional operational and technological measures, such as checking the identity of individuals making cargo deliveries, have the potential to improve air cargo security in the near term. We further reported that TSA lacks a comprehensive plan with long-term goals and performance targets for cargo security, time frames for completing security improvements, and risk-based criteria for prioritizing actions to achieve those goals. Accordingly, we recommended that TSA develop a comprehensive plan for air cargo security that incorporates a risk management approach, includes a list of security priorities, and sets deadlines for completing actions. TSA agreed with this recommendation and expects to develop such a plan by the fall of 2003. It will be important that this plan include a timetable for implementation and that TSA expeditiously reduce the vulnerabilities in this area. Since September 2001, TSA has taken limited action to improve general aviation security, leaving it far more open and potentially vulnerable than commercial aviation. General aviation is vulnerable because general aviation pilots are not screened before takeoff and the contents of general aviation planes are not screened at any point. General aviation includes more than 200,000 privately owned airplanes, which are located in every state at more than 19,000 airports. Over 550 of these airports also provide commercial service. In the last 5 years, about 70 aircraft have been stolen from general aviation airports, indicating a potential weakness that could be exploited by terrorists. Moreover, it was reported that the September 11 hijackers researched the use of crop dusters to spread biological or chemical agents. General aviation’s vulnerability was revealed in January 2002, when a Florida teenage flight student crashed a single-engine Cessna airplane into a Tampa skyscraper. FAA has since issued a notice with voluntary guidance for flight schools and businesses that provide services for aircraft and pilots at general aviation airports. The suggestions include using different keys to gain access to an aircraft and start the ignition, not giving students access to aircraft keys, ensuring positive identification of flight students, and training employees and pilots to report suspicious activities. However, because the guidance is voluntary, it is unknown how many general aviation airports have implemented these measures. We reported in June 2003 that TSA was working with industry stakeholders as part of TSA’s Aviation Security Advisory Council to close potential security gaps in general aviation. According to our recent discussions with industry representatives, however, the stakeholders have not been able to reach a consensus on the actions needed to improve security in general aviation. General aviation industry representatives, such as the Aircraft Owners and Pilots Association and General Aviation Manufacturers Association, have opposed any restrictions on operating general aviation aircraft and believe that small planes do not pose a significant risk to the country. Nonetheless, some industry representatives indicated that the application of a risk management approach would be helpful in determining the next steps in improving general aviation security. (We discuss risk management in more detail later in this testimony.) To identify these next steps, TSA chartered a working group on general aviation within the existing Aviation Security Advisory Committee, and this working group is scheduled to report to the full committee in the fall of 2003. We have ongoing work that is examining general aviation security in further detail. Airport perimeters present a potential vulnerability by providing a route for individuals to gain unauthorized access to aircraft and secure areas of airports (see fig. 4). For example, in August 2003, the national media reported that three boaters wandered the tarmac at Kennedy International Airport after their boat became beached near a runway. In addition, terrorists could launch an attack using a shoulder-fired missile from the perimeter of an airport, as well as from locations just outside the perimeter. For example, in separate incidents in the late 1970s, guerrillas with shoulder-fired missiles shot down two Air Rhodesia planes. More recently, the national media have reported that since September 2001, al Qaeda has twice tried to down planes outside the United States with shoulder-fired missiles. We reported in June 2003 that airport operators have increased their patrols of airport perimeters since September 2001, but industry officials stated that they do not have enough resources to completely protect against missile attacks. A number of technologies could be used to secure and monitor airport perimeters, including barriers, motion sensors, and closed-circuit television. Airport representatives have cautioned that as security enhancements are made to airport perimeters, it will be important for TSA to coordinate with FAA and the airport operators to ensure that any enhancements do not pose safety risks for aircraft. We have separate ongoing work examining the status of efforts to improve airport perimeter security and assessing the nature and extent of the threat from shoulder- fired missiles. TSA’s efforts to strengthen and sustain aviation security face several longer-term challenges in the areas of risk management, funding, coordination, strategic human capital management, and building a results- oriented organization. As aviation security is viewed in the larger context of transportation and homeland security, it will be important to set strategic priorities so that national resources can be directed to the greatest needs. Although TSA initially focused on increasing aviation security, it has more recently begun to address security in the other transportation modes. However, the size and diversity of the national transportation system make it difficult to adequately secure, and TSA and the Congress are faced with demands for additional federal funding for transportation security that far exceed the additional amounts made available. We have advocated the use of a risk management approach to guide federal programs and responses to better prepare for and withstand terrorist threats, and we have recommended that TSA use this approach to strengthen security in aviation as well as in other transportation modes. A risk management approach is a systematic process to analyze threats, vulnerabilities, and the criticality (or relative importance) of assets to better support key decisions linking resources with prioritized efforts for results. Comprehensive risk-based assessments support effective planning and resource allocation. Figure 5 describes this approach. TSA agreed with our recommendation and has adopted a risk management approach in attempting to enhance security across all transportation modes. TSA’s Office of Threat Assessment and Risk Management is developing two assessment tools that will help assess criticality, threats, and vulnerabilities. The first tool, which assesses criticality, will arrive at a criticality score for a facility or transportation asset by incorporating factors such as the number of fatalities that could occur during an attack and the economic and sociopolitical importance of the facility or asset. This score will enable TSA, in conjunction with transportation stakeholders, to rank facilities and assets within each mode and thus focus resources on those that are deemed most important. TSA is working with another Department of Homeland Security office—the Information Analysis and Infrastructure Protection Directorate—to ensure that the criticality tool will be consistent with the Department’s overall approach for managing critical infrastructure. The second tool—the Transportation Risk Assessment and Vulnerability Evaluation tool (TRAVEL)—will assess threats and analyze vulnerabilities for all transportation modes. The tool produces a relative risk score for potential attacks against a transportation asset or facility. In addition, TRAVEL will include a cost-benefit component that compares the cost of implementing a given countermeasure with the reduction in relative risk due to that countermeasure. We reported in June 2003 that TSA plans to use this tool to gather comparable threat and vulnerability information across all transportation modes. It is important for TSA to complete the development of the two tools and use them to prepare action plans for specific modes, such as aviation, and for transportation security generally. Two key funding and accountability challenges will be (1) paying for increased aviation security and (2) ensuring that these costs are controlled. The costs associated with the equipment and personnel needed to screen passengers and their baggage alone are huge. The administration requested $4.2 billion for aviation security for fiscal year 2004, which included about $1.8 billion for passenger screening and $944 million for baggage screening. ATSA created a passenger security fee to pay for the costs of aviation security, but the fee has not generated enough money to do so. DOT’s Inspector General reported that the security fees are estimated to generate only about $1.7 billion in fiscal year 2004. A major funding issue is paying for the purchase and installation of the remaining explosives detection systems for the airports that received waivers, as well as for the reinstallation of the systems that were placed in airport lobbies last year and now need to be integrated into airport baggage-handling systems. Integrating the equipment with the baggage- handling systems is expected to be costly because it will require major facility modifications. For example, modifications needed to integrate the equipment at Boston’s Logan International Airport are estimated to cost $146 million. Estimates for Dallas/Fort Worth International Airport are $193 million. DOT’s Inspector General has reported that the cost of integrating the equipment nationwide could be as high as $3 billion. A key question is how to pay for these installation costs. Funds from FAA’s AIP grants and passenger facility charges are eligible sources for funding this work. In fiscal year 2002, AIP grant funds totaling $561 million were used for terminal modifications to enhance security. However, using these funds for security reduced the funding available for other airport development projects, such as projects to bring airports up to federal design standards and reconstruction projects. In February 2003, we identified letters of intent as a funding option that has been successfully used to leverage private sources of funding. TSA has since signed letters of intent with three airports—Boston Logan, Dallas-Fort Worth, and Seattle-Tacoma International Airports. Under the agreements, TSA will pay 75 percent of the cost of integrating the explosives detection equipment into the baggage-handling systems. The payments will stretch out over 3 to 4 years. Airport representatives said that about 30 more airports have requested similar agreements. The slow pace of TSA’s approval process has raised concerns about delays in reinstalling and integrating explosives detection equipment with baggage-handling systems—delays that will require more labor-intensive and less efficient baggage screening by other approved means. To provide financial assistance to airports for security-related capital investments, such as the installation of explosives detection equipment, proposed aviation reauthorization legislation would establish an aviation security capital fund that would authorize $2 billion over the next 4 years. The funding would be made available to airports in letters of intent, and large- and medium-hub airports would be expected to provide a match of 10 percent of a project’s costs. A 5 percent match would be required for all other airports. This legislation would provide a dedicated source of funding for security-related capital investments and could minimize the need to use AIP funds for security. An additional funding issue is how to ensure continued investment in transportation research and development. For fiscal year 2003, TSA was appropriated about $110 million for research and development, of which $75 million was designated for the next-generation explosives detection systems. However, TSA has proposed to reprogram $61.2 million of these funds to be used for other purposes, leaving about $12.7 million to be spent on research and development this year. This proposed reprogramming could limit TSA’s ability to sustain and strengthen aviation security by continuing to invest in research and development for more effective equipment to screen passengers, their carry-on and checked baggage, and cargo. In ongoing work, we are examining the nature and scope of research and development work by TSA and the Department of Homeland Security, including their strategy for accelerating the development of transportation security technologies. By reprogramming funds and making acknowledged use of certain funds for purposes other than those intended, TSA has raised congressional concerns about accountability. According to TSA, it has proposed to reprogram a total of $849.3 million during fiscal year 2003, including the $61.2 million that would be cut from research and development and $104 million that would be taken from the federal air marshal program and used for unintended purposes. Because of these congressional concerns, we were asked to investigate TSA’s process for reprogramming funds for the air marshal program and to assess the implications of the proposed funding reductions in areas such as the numbers of hours flown and flights taken. We have ongoing work to address these issues. To ensure appropriate oversight and accountability, it is important that TSA maintain clear and transparent communication with the Congress and industry stakeholders about the use of its funds. In July 2002, we reported that long-term attention to cost and accountability controls for acquisition and related business processes will be critical for TSA, both to ensure its success and to maintain its integrity and accountability. According to DOT’s Inspector General, although TSA has made progress in addressing certain cost-related issues, it has not established an infrastructure that provides effective controls to monitor contractors’ costs and performance. For example, in February 2003, the Inspector General reported that TSA’s $1 billion hiring effort cost more than most people expected and that TSA’s contract with NCS Pearson to recruit, assess, and hire the screener workforce contained no safeguards to prevent cost increases. The Inspector General found that TSA provided limited oversight for the management of the contract expenses and, in one case, between $6 million and $9 million of the $18 million paid to a subcontractor appeared to be a result of wasteful and abusive spending practices. As the Inspector General recommended, TSA has since hired the Defense Contract Audit Agency to audit its major contracts. To ensure control over TSA contracts, the Inspector General has further recommended that the Congress set aside a specific amount of TSA’s contracting budget for overseeing contractors’ performance with respect to cost, schedule, and quality. Sustaining the aviation security advancements of the past 2 years also depends on TSA’s ability to form effective partnerships with federal, state, and local agencies and with the aviation community. Effective, well- coordinated partnerships at the local level require identifying roles and responsibilities; developing effective, collaborative relationships with local and regional airports and emergency management and law enforcement agencies; agreeing on performance-based standards that describe desired outcomes; and sharing intelligence information. The lynchpin in TSA’s efforts to coordinate with airports and local law enforcement and emergency response agencies is, according to the agency, the 158 federal security directors and staff that TSA has deployed nationwide. The security directors’ responsibilities include ensuring that standardized security procedures are implemented at the nation’s airports; working with state and local law enforcement personnel, when appropriate, to ensure airport and passenger security; and communicating threat information to airport operators and others. Airport representatives, however, have indicated that the relationships between federal security directors and airport operators are still evolving and that better communication is needed at some airports. Key to improving the coordination between TSA and local partners is establishing clearly defined roles. In some cases, concerns have arisen about conflicts between the roles of TSA, as the manager of security functions at airports, and of airport officials, as the managers of other airport operations. Industry representatives viewed such conflicts as leading to confusion in areas such as communicating with local entities. According to airport representatives, for example, TSA has developed guidance or rules for airports without involving them, and time-consuming changes have then had to be made to accommodate operational factors. The representatives maintain that it would be more efficient and effective to consider such operational factors earlier in the process. Ultimately, inadequate coordination and unclear roles result in inefficient uses of limited resources. TSA also has to ensure that the terrorist and threat information gathered and maintained by law enforcement and other agencies—including the Federal Bureau of Investigation, the Immigration and Naturalization Service, the Central Intelligence Agency, and the Department of State—is quickly and efficiently communicated among federal agencies and to state and local authorities, as needed. Disseminating such information is important to allow those who are involved in protecting the nation’s aviation system to address potential threats rather than simply react to known threats. In aviation security, timely information sharing among agencies has been hampered by the agencies’ reluctance to share sensitive information and by outdated, incompatible computer systems. As we found in reviewing 12 watch lists maintained by nine federal agencies, information was being shared among some of them but not among others. Moreover, even when sharing was occurring, costly and overly complex measures had to be taken to facilitate it. To promote better integration and sharing of terrorist and criminal watch lists, we have recommended that the Department of Homeland Security, in collaboration with the other departments and agencies that have and use watch lists, lead an effort to consolidate and standardize the federal government’s watch list structures and policies. In addition, as we found earlier this year, representatives of numerous state and local governments and transportation industry associations indicated that the general threat warnings received by government agencies are not helpful. Rather, they said, transportation operators, including airport operators, want more specific intelligence information so that they can understand the true nature of a potential threat and implement appropriate security measures. As it organizes itself to protect the nation’s transportation system, TSA faces the challenge of strategically managing its workforce of more than 60,000 people, most of whom are deployed at airports or on aircraft to detect weapons and explosives and to prevent them from being taken aboard and used on aircraft. Additionally, over the next several years, TSA faces the challenge of “right-sizing” this workforce as efficiency is improved with new security-enhancing technologies, processes, and procedures. For example, as explosives detection systems are integrated with baggage-handling systems, the use of more labor-intensive screening methods, such as trace detection techniques and manual searches of baggage, can be reduced. Other planned security enhancements, such as CAPPS II and the registered traveler program, also have the potential to make screening more efficient. To assist agencies in managing their human capital more strategically, we have developed a model that identifies cornerstones and related critical success factors that agencies should apply and steps they can take. Our model is designed to help agency leaders effectively lead and manage their people and integrate human capital considerations into daily decision- making and the program results they seek to achieve. In January 2003, we reported that TSA was addressing some critical human capital success factors by hiring personnel, using a wide range of tools available for hiring, and beginning to link individual performance to organizational goals. However, concerns remain about the size and training of that workforce, the adequacy of the initial background checks for screeners, and TSA’s progress in setting up a performance management system. As noted earlier in this testimony, TSA now plans to reduce its screener workforce by 6,000 by September 30, 2003, and it has proposed cutting the workforce by an additional 3,000 in fiscal year 2004. This planned reduction has raised concerns about passenger delays at airports and has led TSA to begin hiring part-time screeners to make more flexible and efficient use of its workforce. In addition, TSA used an abbreviated background check process to hire and deploy enough screeners to meet ATSA’s screening deadlines in 2002. After obtaining additional background information, TSA terminated the employment of some of these screeners. TSA reported 1,208 terminations as of May 31, 2003, that it ascribed to a variety of reasons, including criminal offenses and failures to pass alcohol and drug tests. Furthermore, the national media have reported allegations of operational and management control problems that emerged with the expansion of the Federal Air Marshal Service, including inadequate background checks and training, uneven scheduling, and inadequate policies and procedures. In ongoing work, we are examining the effectiveness of TSA’s efforts to train, equip, and supervise passenger screeners, and we are assessing the effects of expansion on the Federal Air Marshal Service. In addition, we reported in January 2003 that TSA had taken the initial steps in establishing a performance management system linked to organizational goals. Such a system will be critical for TSA to motivate and manage staff, ensure the quality of screeners’ performance, and, ultimately, restore public confidence in air travel. For TSA to sustain enhanced aviation security over the long term, it will be important for the agency to continue to build a results-oriented culture within the new Department of Homeland Security. To help federal agencies successfully transform their cultures, as well as the new Department of Homeland Security merge its various components into a unified department, we identified key practices that have consistently been found at the center of successful mergers, acquisitions, and transformations. These key practices, together with implementation strategies such as establishing a coherent mission and integrated strategic goals to guide the transformation, can help agencies become more results oriented, customer focused, and collaborative. (See app. III.) These practices are particularly important for the Department of Homeland Security, whose implementation and transformation we have designated as high risk. The Congress required TSA to adopt a results-oriented strategic planning and reporting framework and, specifically, to provide an action plan with goals and milestones to outline how acceptable levels of performance for aviation security would be achieved. In prior work, we reported that TSA has taken the first steps in performance planning and reporting by defining its mission, vision, and values and that this practice would continue to be important when TSA moved into the Department of Homeland Security. Therefore, we recommended that TSA take the next steps to implement results-oriented practices. These steps included establishing performance goals and measures for all modes of transportation as part of a strategic planning process that involves stakeholders, defining more clearly the roles and responsibilities of its various offices in collaborating and communicating with stakeholders; and formalizing the roles and responsibilities of governmental entities for transportation security. Table 1 shows selected ATSA requirements, TSA’s actions and plans, and the next steps we recommended. TSA agreed with our recommendations. After spending billions of dollars over the past 2 years on people, policies, and procedures to improve aviation security, we have much more security now than we had before September 2001, but it has not been determined how much more secure we are. The vast number of guns, knives, and other potential threat items that screeners have confiscated suggests that security is working, but it also suggests that improved public awareness of prohibited items could help focus resources where they are most needed and reduce delays and inconvenience to the public. Faced with vast and competing demands for security resources, TSA should continue its efforts to identify technologies, such as CAPPS II, that will leverage its resources and potentially improve its capabilities. Improving the efficiency and effectiveness of aviation security will also require risk assessments and plans that help maintain a balance between security and customer service. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have. For further information on this testimony, please contact Gerald L. Dillingham at (202) 512-2834. Individuals making key contributions to this testimony include Elizabeth Eisenstadt, David Hooper, Jennifer Kim, Heather Krause, Maren McAvoy, John W. Shumann, and Teresa Spisak. Require new background checks for those who have access to secure areas of the airport. Institute a 45-day waiting period for aliens seeking flight training for planes of 12,500 pounds or more. Establish qualifications for federal screeners. Report to the Congress on improving general aviation security. Screen all checked baggage in U.S. airports using explosives detection systems, passenger-bag matching, manual searches, canine units, or other approved means. The Federal Aviation Administration (FAA) is to develop guidance for air carriers to use in developing programs to train flight and cabin crews to resist threats (within 60 days after FAA issues the guidance, each airline is to develop a training program and submit it to FAA; within 30 days of receiving a program, FAA is to approve it or require revisions; within 180 days of receiving FAA’s approval, the airline is to complete the training of all flight and cabin crews). Develop a plan to train federal screeners. Foreign and domestic carriers are to provide electronic passenger and crew manifests to Customs for flights from foreign countries to the United States. Begin collecting the passenger security fee. The Under Secretary is to assume civil aviation security functions from FAA. Implement an aviation security program for charter carriers. Begin awarding grants for security-related research and development. The National Institute of Justice is to report to the Secretary on less-than-lethal weapons for flight crew members. Report to the Congress on the deployment of baggage screening equipment. Report to the Congress on progress in evaluating and taking the following optional Require 911 capability for onboard passenger telephones. Establish uniform IDs for law enforcement personnel carrying weapons on planes or in secure areas. Establish requirements for trusted traveler programs. Develop alternative security procedures to avoid damage to medical products. Provide for the use of secure communications technologies to inform airport security forces about passengers who are identified on security databases. Require pilot licenses to include a photograph and biometric identifiers. Use voice stress analysis, biometric, or other technologies to prevent high-risk passengers from boarding. Deploy federal screeners, security managers, and law enforcement officers to screen passengers and property. Report to the Congress on screening for small aircraft with 60 or fewer seats. Establish pilot program to contract with private screening companies (program to last until Nov. 19, 2004). Screen all checked baggage by explosives detection systems. Carriers are to transfer screening property to TSA. FAA is to issue an order prohibiting access to the flight deck, requiring strengthened cabin doors, requiring that cabin doors remain locked, and prohibiting possession of a key for all but the flight deck crew. Improve perimeter screening of all individuals, goods, property, and vehicles. Screen all cargo on passenger flights and cargo-only flights. Establish procedures for notifying FAA, state and local law enforcement officers, and airport security of known threats. Establish procedures for airlines to identify passengers who pose a potential security threat. FAA is to develop and implement methods for using cabin video monitors, continuously operating transponders, and notifying flight deck crew of a hijacking. Require flight training schools to conduct security awareness programs for employees. Completed Work with airport operators to strengthen access control points and consider deploying technology to improve security access. Provide operational testing for screeners. Assess dual-use items that seem harmless but could be dangerous and inform screening personnel. Establish a system for measuring staff performance. Establish management accountability for meeting performance goals. Periodically review threats to civil aviation, including chemical and biological weapons. Ongoing Except where otherwise indicated, the Transportation Security Administration (TSA) is responsible for implementing the provisions. H.R. 2144 - Aviation Security Technical Corrections and Improvements Act - Many of the important provisions of this bill have been incorporated into the Conference Report version of the FAA Reauthorization Act, H.R. 2115. S. 1409 - Rebuild America Act of 2003 - Establishes a new grant program in the Department of Homeland Security (DHS) for airport security improvements, including projects to replace baggage conveyer systems and projects to reconfigure terminal baggage areas as needed to install explosives detection systems. The Under Secretary for Border and Transportation Security is authorized to issue letters of intent to airports for these types of projects. One billion dollars is authorized for this program. H.R. 2555 - House and Senate versions of the Department of Homeland Security Appropriations Act for 2004 House version - Makes fiscal year 2004 appropriations of $3.679 billion for the Transportation Security Administration (TSA) to provide civil aviation security services (aviation security, federal air marshals, maritime and land security, intelligence, research and development, and administration): $1.673 billion for passenger screening activities, $1.285 billion for baggage screening activities, $721 million for airport support and enforcement presence, $235 million for physical modifications of airports to provide for the installation of checked baggage explosives detection systems, and $100 million for the procurement of the explosives detection systems. Continues to cap the number of screeners at 45,000 full-time equivalent positions. Prohibits the use of funds authorized in this act to pursue or adopt regulations requiring airport sponsors to provide, without cost to TSA, building construction, maintenance, utilities and expenses, or space for services relating to aviation security (excluding space for necessary checkpoints). Senate Version of H.R. 2555 - Makes fiscal year 2004 appropriations of $4.524 billion for TSA to provide civil aviation security services: $3.185 billion for screening activities, $1.339 billion for airport support and enforcement presence, $309 million for physical modifications of airports to provide for the installation of checked baggage explosives detection systems, and $151 million for the procurement of the explosives detection systems. Prohibits the use of funds authorized in this act to pursue or adopt regulations requiring airport sponsors to provide, without cost to TSA, building construction, maintenance, utilities and expenses, or space for services relating to aviation security (excluding space for necessary checkpoints). Prohibits the use of funds authorized in this act for the Computer Assisted Passenger Prescreening System (CAPPS II) until GAO has reported to the Committees on Appropriations that certain requirements have been met, including (1) the existence of a system of due process by which passengers considered to pose a threat may appeal their delay or prohibition from boarding a flight; (2) that the underlying error rate of databases will not produce a large number of false positives that will result in a significant number of passengers being treated mistakenly or security resources being diverted; (3) that TSA has stressed-tested and demonstrated the efficacy and predictive accuracy of all search tools in CAPPS II; and (4) that the Secretary has established an internal oversight board to monitor the manner in which CAPPS II is being developed and prepared. Requires a report from the Secretary of Homeland Security on actions taken to develop countermeasures for commercial aircraft against shoulder-fired missile systems and vulnerability assessments of this threat for larger airports. H.R. 2115 - Flight 100 - Century of Aviation Reauthorization Act - Conference Report version - Gives FAA the authority to take a certificate action if it is notified by DHS that the holder of the certificate presents a security threat. Gives the Secretary of Transportation the authority to make grants to general aviation entities (including airports, operators, and manufacturers) to reimburse them for security costs incurred and revenues lost because of restrictions imposed by the federal government in response to the events of September 11. The bill authorizes $100 million for these grants. Authorizes DHS to reimburse air carriers and airports for all security screening activities they are still performing, such as for providing catering services and checking documents at security checkpoints and for providing the space and facilities used to perform screening functions to the extent funds are available. Requires air carriers to carry out a training program for flight and cabin crews to prepare for possible threat conditions. TSA is required to establish minimum standards for this training within 1 year of the act’s passage. Requires DHS to report in 6 months on the effectiveness of aviation security, specifically including the air marshal program; hardening of cockpit doors; and security screening of passengers, checked baggage, and cargo. Establishes within DHS a grant program to airport sponsors for (1) projects to replace baggage conveyer systems related to aviation security; (2) projects to reconfigure terminal baggage areas as needed to install explosives detection systems; and (3) projects to enable the Under Secretary for Border and Transportation Security to deploy explosives detection systems behind the ticket counter, in the baggage sorting area, or in line with the baggage handling system. Requires $250 million annually from the existing aviation security fee that is paid by airline passengers to be deposited in an Aviation Security Capital Fund and made available to finance this grant program. Requires TSA to certify that civil liberty and privacy issues have been addressed before implementing CAPPS II and requires GAO to assess TSA’s compliance 3 months after TSA makes the required certification. Allows cargo pilots to carry guns under the same program for pilots of passenger airlines. Permits an off-duty pilot to transport the gun in a lockbox in the passenger cabin rather than in the baggage hold. Also provides that both passenger and cargo pilots should be treated equitably in their access to training. Requires security audits of all foreign repair stations within 18 months after TSA issues rules governing the audits. The rules must be issued within 240 days of enactment. Requires background checks on aliens seeking flight training in aircraft regardless of the size of the aircraft. For all training on small aircraft, includes a notification requirement but no waiting period. For training on larger aircraft, adopts an expedited procedure if the applicant already has training, a license, or a background check, and adopts a 30-day waiting period for first-time training on large aircraft. Makes TSA responsible for the background check. Requires TSA to issue an interim final rule in 60 days to implement this section. This section takes effect when that rule becomes effective. S.236 - Background Checks for Foreign Flight School Applicants - Amends federal aviation law to require a background check of alien flight school applicants without regard to the maximum certificated weight of the aircraft for which they seek training. (Currently, a background check is required for flight crews operating aircraft with a maximum certificated takeoff weight of 12,500 pounds or more.) S. 165 - Air Cargo Security Act - House companion bill (H.R. 1103) - Amends federal aviation law to require the screening of cargo that is to be transported in passenger aircraft operated by domestic and foreign air carriers in interstate air transportation. Directs TSA to develop a strategic plan to carry out such screening. Requires the establishment of systems that (1) provide for the regular inspection of shipping facilities for cargo shipments; (2) provide an industrywide pilot program database of known shippers of cargo; (3) train persons that handle air cargo to ensure that such cargo is properly handled and safeguarded from security breaches; and (4) require air carriers operating all-cargo aircraft to have an approved plan for the security of their air operations area, the cargo placed aboard the aircraft, and persons having access to their aircraft on the ground or in flight. H.R. 1366 - Aviation Industry Stabilization Act - Requires the Under Secretary for Border and Transportation Security, after all cockpit doors are strengthened, to consider and report to the Congress on whether it is necessary to require federal air marshals to be seated in the first class cabin of an aircraft with strengthened cockpit doors. Requires the Under Secretary to (1) undertake action necessary to improve the screening of mail so that it can be carried on passenger flights and (2) reimburse air carriers for certain screening and related activities, as well as the cost of fortifying cockpit doors, and for any financial losses attributed to the loss of air traffic resulting from the use of force against Iraq in calendar year 2003. Establishes an air cargo security working group composed of various groups to develop recommendations on the enhancement of the current known shipper program. H. R. 115 - Aviation Biometric Badge Act - Amends federal aviation law to direct TSA to require by regulation that each security screener (or employee who has unescorted access, or may permit other individuals to have unescorted access, to an aircraft or a secured area of the airport) be issued a biometric security badge that identifies a person by fingerprint or retinal recognition. H. R. 1049 - Arming Cargo Pilots Against Terrorism Act - Senate companion bill (S. 516) - Expresses the sense of Congress that a flight deck crew member of a cargo aircraft should be armed with a firearm to defend such aircraft against attacks by terrorists that could use the aircraft as a weapon of mass destruction or for other terrorist purposes. Amends federal transportation law to authorize the training and arming of flight deck crew members (pilots) of all-cargo air transportation flights to prevent acts of criminal violence or air piracy. H.R. 765 - (No title) - Legislation to arm cargo pilots - Amends federal aviation law to allow cargo pilots (not just air passenger pilots) to participate in the federal flight deck officer program. H.R. 580 - Commercial Airline Missile Defense Act - Senate companion bill - S. 311 - Directs the Secretary of Transportation to issue regulations that require all turbojet aircraft of air carriers to be equipped with a missile defense system. Requires the Secretary to purchase such defense systems and make them available to all air carriers. Sets forth certain interim security measures to be taken before the deployment of such defense systems. Define and articulate a succinct and compelling reason for change. Balance continued delivery of services with merger and transformation activities. Establish a coherent mission and integrated strategic goals to guide the transformation. Adopt leading practices for results-oriented strategic planning and reporting. Focus on a key set of principles and priorities at the outset of the transformation. Embed core values in every aspect of the organization to reinforce the new culture. Set implementation goals and a time line to build momentum and show progress from day one. Make public implementation goals and a time line. Seek and monitor employee attitudes and take appropriate follow-up actions. dentify cultural features of merging organizations to increase understanding of former work environments. Attract and retain key talent. Establish an organizationwide knowledge and skills inventory to exchange knowledge among merging organizations. Dedicate an implementation team to manage the transformation process. Establish networks to support the implementation team. Select high-performing team members. Use the performance management system to define responsibility and ensure accountability for change. Adopt leading practices to implement effective performance management systems with adequate safeguards. Establish a communication strategy to create shared expectations and report related progress. Communicate early and often to build trust. Ensure consistency of message. Encourage two-way communication. Provide information to meet specific needs of employees. Involve employees to obtain their ideas and gain their ownership for the transformation. Use employee teams. Involve employees in planning and sharing performance information. Incorporate employee feedback into new policies and procedures. Delegate authority to appropriate organizational levels. Adopt leading practices to build a world-class organization. Transportation Security Research and Development Programs at DHS and TSA Key Questions: (1) What were the strategy and organizational structure for transportation security research and development (R&D) prior to 9/11 and what is the current strategy and structure? (2) How do DHS and TSA select their transportation security R&D projects and what projects are in their portfolios? (3) What are DHS’s and TSA’s goals and strategies for accelerating the development of transportation security technologies? (4) What are the nature and scope of coordination of R&D efforts between DHS and TSA, as well as with other public and private sector research organizations? Key Questions: (1) How has the federal air marshal program evolved, in terms of recruiting, training, retention, and operations since its management was transferred to TSA? (2) To what extent has TSA implemented the internal controls needed to meet the program’s operational and management control challenges? (3) To what extent has TSA developed plans and initiatives to sustain the program and accommodate its future growth and maturation? Key Questions: (1) What are the status and associated costs of TSA’s efforts to acquire, install, and operate explosives detection equipment (electronic trace detection technology and explosives detection systems) to screen all checked baggage by December 31, 2003? (2) What are the benefits and trade-offs—to include costs, operations, and performance— of using alternative explosives detection technologies currently available for baggage screening? Reprogramming of Air Marshal Program Funds Key Questions: (1) Describe the internal preparation, review, and approval process for DHS’s reprogrammings and, specifically, the process for the May 15 and July 25 reprogramming requests for the air marshal program. (2) Determine whether an impoundment or deferral notice should have been sent to the Congress and any other associated legal issues. (3) Identify the implications, for both the air marshal program and other programs, of the pending reprogramming request. Key Questions: (1) How have security concerns and measures changed at general aviation airports since September 11, 2001? (2) What steps has TSA taken to improve general aviation security? Background Checks for Banner-Towing Aircraft Key Questions: (1) What are the procedures for conducting background and security checks for pilots of small banner-towing aircraft requesting waivers to perform stadium overflights? (2) To what extent have these procedures been followed in conducting required background and security checks since September 11, 2001? (3) How effective have these procedures been in reducing risks to public safety? TSA’s Computer Assisted Passenger Prescreening System II (CAPPS II) Key Questions: (1) How will the CAPPS II system function and what data will be needed to make the system operationally effective? (2) What safeguards will be put in place to protect the traveling public’s privacy? (3) What systems and measures are in place to determine whether CAPPS II will result in improved national security? (4) What impact will CAPPS II have on the traveling public and on the airline industry in terms of costs, delays, risks, inconvenience, and other factors? Key Questions: (1) What efforts have been taken or planned to ensure that passenger screeners comply with federal standards and other criteria, including efforts to train, equip, and supervise passenger screeners? (2) What methods does TSA use to test screeners’ performance, and what have been the results of these tests? (3) How have the results of tests of TSA passenger screeners compared with the results achieved by screeners before September 11, 2001, and at five pilot program airports? (4) What actions is TSA taking to remedy performance concerns? TSA’s Efforts to Implement Sections 106, 136, and 138 of the Aviation and Transportation Security Act Key Questions: What is the status of TSA’s efforts to implement (1) section 106 of the act requiring improved airport perimeter access security, (2) section 136 requiring the assessment and deployment of commercially available security practices and technologies, and (3) section 138 requiring background investigations for TSA and other airport employees? Assessment of the Portable Air Defense Missile Threat Key Questions: (1) What are the nature and extent of the threat from man- portable air defense systems (MANPAD)? (2) How effective are U.S. controls on the use of exported MANPADs? (3) How do multilateral efforts attempt to stem MANPAD proliferation? (4) What types of countermeasures are available to minimize this threat and at what cost? Airline Assistance Determination of Whether the $5 Billion Provided by P.L. 107-42 Was Used to Compensate the Nation’s Major Air Carriers for Their Losses Stemming from the Events of Sept. 11, 2001 Key Questions: (1) Was the $5 billion used only to compensate major air carriers for their uninsured losses incurred as a result of the terrorist attacks? (2) Were carriers reimbursed, per the act, only for increases in insurance premiums resulting from the attacks? TSA’s Use of Sole-Source Contracts Key Questions: (1) To what extent does TSA follow applicable acquisition laws and policies, including those for ensuring adequate competition? (2) How well does TSA’s organizational structure facilitate effective, efficient procurement? (3) How does TSA ensure that its acquisition workforce is equipped to award and oversee contracts? (4) How well do TSA’s policies and processes ensure that TSA receives the supplies and services it needs on time and at reasonable cost? Transportation Security: Federal Action Needed to Help Address Security Challenges. GAO-03-843. Washington, D.C.: June 30, 2003. Transportation Security: Post-September 11th Initiatives and Long- Term Challenges. GAO-03-616T. Washington, D.C.: April 1, 2003. Aviation Security: Measures Needed to Improve Security of Pilot Certification Process. GAO-03-248NI. Washington, D.C.: February 3, 2003. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Vulnerabilities and Potential Improvements for the Air Cargo System. GAO-03-286NI. Washington, D.C.: December 20, 2002. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Vulnerabilities and Potential Improvements for the Air Cargo System. GAO-03-344. Washington, D.C.: December 20, 2002. Aviation Security: Vulnerability of Commercial Aviation to Attacks by Terrorists Using Dangerous Goods. GAO-03-30C. Washington, D.C.: December 3, 2002. Aviation Security: Registered Traveler Program Policy and Implementation Issues. GAO-03-253. Washington, D.C.: November 22, 2002. Aviation Security: Transportation Security Administration Faces Immediate and Long-Term Challenges. GAO-02-971T. Washington, D.C.: July 25, 2002. Aviation Security: Information Concerning the Arming of Commercial Pilots. GA0-02-822R. Washington, D.C.: June 28, 2002. Aviation Security: Deployment and Capabilities of Explosive Detection Equipment. GAO-02-713C. Washington, D.C.: June 20, 2002. (CLASSIFIED) Aviation Security: Information on Vulnerabilities in the Nation’s Air Transportation System. GAO-01-1164T. Washington, D.C.: September 26, 2001. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Information on the Nation’s Air Transportation System Vulnerabilities. GAO-01-1174T. Washington, D.C.: September 26, 2001. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Vulnerabilities in, and Alternatives for, Preboard Screening Security Operations. GAO-01-1171T. Washington, D.C.: September 25, 2001. Aviation Security: Weaknesses in Airport Security and Options for Assigning Screening Responsibilities. GAO-01-1165T. Washington, D.C.: September 21, 2001. Aviation Security: Terrorist Acts Demonstrate Urgent Need to Improve Security at the Nation’s Airports. GAO-01-1162T. Washington, D.C.: September 20, 2001. Aviation Security: Terrorist Acts Illustrate Severe Weaknesses in Aviation Security. GAO-01-1166T. Washington, D.C.: September 20, 2001. Responses of Federal Agencies and Airports We Surveyed about Access Security Improvements. GAO-01-1069R. Washington, D.C.: August 31, 2001. Responses of Federal Agencies and Airports We Surveyed about Access Security Improvements. GAO-01-1068R. Washington, D.C.: August 31, 2001. (RESTRICTED) FAA Computer Security: Recommendations to Address Continuing Weaknesses. GAO-01-171. Washington, D.C.: December 6, 2000. Aviation Security: Additional Controls Needed to Address Weaknesses in Carriage of Weapons Regulations. GAO/RCED-00-181. Washington, D.C.: September 29, 2000. FAA Computer Security: Actions Needed to Address Critical Weaknesses That Jeopardize Aviation Operations. GAO/T-AIMD-00-330. Washington, D.C.: September 27, 2000. FAA Computer Security: Concerns Remain Due to Personnel and Other Continuing Weaknesses. GAO/AIMD-00-252. Washington, D.C.: August 16, 2000. Aviation Security: Long-Standing Problems Impair Airport Screeners’ Performance. GAO/RCED-00-75. Washington, D.C.: June 28, 2000. Aviation Security: Screeners Continue to Have Serious Problems Detecting Dangerous Objects. GAO/RCED-00-159. Washington, D.C.: June 22, 2000. (NOT FOR PUBLIC DISSEMINATION) Computer Security: FAA Is Addressing Personnel Weaknesses, but Further Action Is Required. GAO/AIMD-00-169. Washington, D.C.: May 31, 2000. Security: Breaches at Federal Agencies and Airports. GAO-OSI-00-10. Washington, D.C.: May 25, 2000. Aviation Security: Screener Performance in Detecting Dangerous Objects during FAA Testing Is Not Adequate. GAO/T-RCED-00-143. Washington, D.C.: April 6, 2000. (NOT FOR PUBLIC DISSEMINATION) Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism. GAO/NSIAD-00-85. Washington, D.C.: April 7, 2000. Aviation Security: Vulnerabilities Still Exist in the Aviation Security System. GAO/T-RCED/AIMD-00-142. Washington, D.C.: April 6, 2000. U.S. Customs Service: Better Targeting of Airline Passengers for Personal Searches Could Produce Better Results. GAO/GGD-00-38. Washington, D.C.: March 17, 2000. Aviation Security: Screeners Not Adequately Detecting Threat Objects during FAA Testing. GAO/T-RCED-00-124. Washington, D.C.: March 16, 2000. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Slow Progress in Addressing Long-Standing Screener Performance Problems. GAO/T-RCED-00-125. Washington, D.C.: March 16, 2000. Computer Security: FAA Needs to Improve Controls Over Use of Foreign Nationals to Remediate and Review Software. GAO/AIMD-00-55. Washington, D.C.: December 23, 1999. Aviation Security: FAA’s Actions to Study Responsibilities and Funding for Airport Security and to Certify Screening Companies. GAO/RCED- 99-53. Washington, D.C.: February 24, 1999. Aviation Security: FAA’s Deployments of Equipment to Detect Traces of Explosives. GAO/RCED-99-32R. Washington, D.C.: November 13, 1998. Air Traffic Control: Weak Computer Security Practices Jeopardize Flight Safety. GAO/AIMD-98-155. Washington, D.C.: May 18, 1998. Aviation Security: Progress Being Made, but Long-Term Attention Is Needed. GAO/T-RCED-98-190. Washington, D.C.: May 14, 1998. Air Traffic Control: Weak Computer Security Practices Jeopardize Flight Safety. GAO/AIMD-98-60. Washington, D.C.: April 29, 1998. (LIMITED OFFICIAL USE –DO NOT DISSEMINATE) Aviation Security: Implementation of Recommendations Is Under Way, but Completion Will Take Several Years. GAO/RCED-98-102. Washington, D.C.: April 24, 1998. Combating Terrorism: Observations on Crosscutting Issues. T-NSIAD-98- 164. Washington, D.C.: April 23, 1998. Aviation Safety: Weaknesses in Inspection and Enforcement Limit FAA in Identifying and Responding to Risks. GAO/RCED-98-6. Washington, D.C.: February 27, 1998. Aviation Security: FAA’s Procurement of Explosives Detection Devices. GAO/RCED-97-111R. Washington, D.C.: May 1, 1997. Aviation Security: Commercially Available Advanced Explosives Detection Devices. GAO/RCED-97-ll9R. Washington, D.C.: April 24, 1997. Aviation Safety and Security: Challenges to Implementing the Recommendations of the White House Commission on Aviation Safety and Security. GAO/T-RCED-97-90. Washington, D.C.: March 5, 1997. Aviation Security: Technology’s Role in Addressing Vulnerabilities. GAO/T-RCED/NSIAD-96-262. Washington, D.C.: September 19, 1996. Aviation Security: Oversight of Initiatives Will Be Needed. C-GAO/T- RCED/NSIAD-96-20. Washington, D.C.: September 17, 1996. (CLASSIFIED) Aviation Security: Urgent Issues Need to Be Addressed. GAO/T- RCED/NSIAD-96-251. Washington, D.C.: September 11, 1996. Aviation Security: Immediate Action Needed to Improve Security. GAO/T-RCED/NSIAD-96-237. Washington, D.C.: August 1, 1996. Aviation Security: FAA Can Help Ensure That Airports’ Access Control Systems Are Cost Effective. GAO/RCED-95-25. Washington, D.C.: March 1, 1995. Aviation Security: Development of New Security Technology Has Not Met Expectations. GAO/RCED-94-142. Washington, D.C.: May 19, 1994. Aviation Security: Additional Actions Needed to Meet Domestic and International Challenges. GAO/RCED-94-38. Washington, D.C.: January 27, 1994. Homeland Security: Information Sharing Responsibilities, Challenges, and Key Management Issues. GAO-03-715T. Washington, D.C.: May 3, 2003. Information Technology: Terrorist Watch Lists Should Be Consolidated to Promote Better Integration and Sharing. GAO-03-322. Washington, D.C.: April 15, 2003. Combating Terrorism: Observations on National Strategies Related to Terrorism. GAO-03-519T. Washington, D.C.: March 3, 2003. Transportation Security Administration: Actions and Plans to Build a Results-Oriented Culture. GAO-03-190. Washington, D.C.: January 17, 2003. Major Management Challenges and Program Risks: Department of Homeland Security. GAO-03-102. Washington, D.C.: January 1, 2003. Major Management Challenges and Program Risks: Department of Transportation. GAO-03-108. Washington, D.C.: January 2003. National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security. GAO-02-621T. Washington, D.C.: April 11, 2002. Homeland Security: Progress Made, More Direction and Partnership Sought. GAO-02-490T. Washington, D.C.: March 12, 2002. A Model of Human Capital Management. GAO-02-373SP. Washington, D.C.: March 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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In the 2 years since the terrorist attacks of September 11, 2001, the security of our nation's civil aviation system has assumed renewed urgency, and efforts to strengthen aviation security have received a great deal of congressional attention. On November 19, 2001, the Congress enacted the Aviation and Transportation Security Act (ATSA), which created the Transportation Security Administration (TSA) within the Department of Transportation (DOT) and defined its primary responsibility as ensuring security in aviation as well as in other modes of transportation. The Homeland Security Act, passed on November 25, 2002, transferred TSA to the new Department of Homeland Security, which assumed overall responsibility for aviation security. GAO was asked to describe the progress that has been made since September 11 to strengthen aviation security, the potential vulnerabilities that remain, and the longer-term management and organizational challenges to sustaining enhanced aviation security. Since September 11, 2001, TSA has made considerable progress in meeting congressional mandates designed to increase aviation security. By the end of 2002, the agency had hired and deployed about 65,000 passenger and baggage screeners, federal air marshals, and others, and it was using explosives detection equipment to screen about 90 percent of all checked baggage. TSA is also initiating or developing efforts that focus on the use of technology and information to advance security. One effort under development, the next-generation Computer-Assisted Passenger Prescreening System (CAPPS II), would use national security and commercial databases to identify passengers who could pose risks for additional screening. Concerns about privacy rights will need to be addressed as this system moves toward implementation. Although TSA has focused on ensuring that bombs and other threat items are not carried onto planes by passengers or in their luggage, vulnerabilities remain in air cargo, general aviation, and airport perimeter security. Each year, an estimated 12.5 million tons of cargo are transported on all-cargo and passenger planes, yet very little air cargo is screened for explosives. We have previously recommended, and the industry has suggested, that TSA use a risk-management approach to set priorities as it works with the industry to determine the next steps in strengthening aviation security. TSA faces longer-term management and organizational challenges to sustaining enhanced aviation security that include (1) developing and implementing a comprehensive risk management approach, (2) paying for increased aviation security needs and controlling costs, (3) establishing effective coordination among the many entities involved in aviation security, (4) strategically managing its workforce, and (5) building a results-oriented culture within the new Department of Homeland Security. TSA has begun to respond to recommendations we have made addressing many of these challenges, and we have other studies in progress.

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Congress passed LDA and IRC sections 4911 and 162(e) at different times and for different purposes. LDA, which was enacted in 1995 and became effective on January 1, 1996, requires organizations that lobby certain federal officials in the legislative and executive branches to register with the Secretary of the Senate and the Clerk of the House of Representatives. It also requires lobbying organizations that register to semiannually report expenditures and certain other information related to their lobbying efforts. Congress intended LDA’s registration and reporting requirements to provide greater public disclosure of attempts by paid lobbyists to influence decisions made by various federal legislative and executive branch officials. Unlike LDA, neither IRC section 162(e) nor section 4911 was intended to facilitate the public disclosure of lobbying. IRC section 4911, which was enacted in 1976, provides for a limit on the amount of lobbying by 501(c)(3) organizations and thereby helps clarify the extent to which these public charities can lobby without jeopardizing their tax-exempt status. Section 162(e), as amended in 1993, denies the federal income tax deductibility of certain lobbying expenses for businesses. It does not otherwise place restrictions on lobbying activities. LDA requires lobbying organizations, such as lobbying firms, to register with the Secretary of the Senate and the Clerk of the House of Representatives no later than 45 days after they first make a lobbying contact on behalf of a client. Also, organizations that have employees who lobby on behalf of the organizations—the organizations on which this report focuses—must register under LDA. The lobbying registration includes such information as the registering organization’s name and address; the client’s name and address; the names of all individuals acting as lobbyists for the client; the general and specific issues to be addressed by lobbying; and organizations substantially affiliated with the client, including foreign organizations. An organization that has employees who lobby on the organization’s behalf must identify itself as both the registering organization and the client, because the organization’s own employees represent the organization. LDA includes minimum dollar thresholds in its registration requirements. Specifically, an organization with employees who lobby on the organization’s behalf does not have to register under LDA unless its total lobbying expenses exceed or are expected to exceed $20,500 during the 6 month reporting period (i. e., January through June and July through December of each year). LDA also includes minimum thresholds for determining which employees must be listed as lobbyists in the lobbying registration. Under LDA, to be listed as a lobbyist, an individual must make more than one lobbying contact and must spend at least 20 percent of his or her time engaged in lobbying activities on behalf of the client or employing organization during the 6 month reporting period. An organization must have both $20,500 in lobbying expenses and an employee who makes more than one lobbying contact and spends at least 20 percent of his or her time lobbying before it is required to register under LDA. All organizations that register under LDA must file lobbying reports with the Secretary of the Senate and Clerk of the House of Representatives for every 6 month reporting period. The lobbying reports filed under LDA by organizations that lobby on their own behalf must include the following disclosures: total estimated expenses relating to lobbying activities (total expenses are reported either by checking a box to indicate that expenses were less than $10,000 or by including an amount, rounded to the nearest $20,000, for expenses of $10,000 or more); a three-digit code for each general issue area (such as AGR for Agriculture and TOB for Tobacco) addressed during lobbyists’ contacts with federal government officials; specific issues, such as bill numbers and references to specific executive branch actions that are addressed during lobbyists’ contacts with federal government officials; the House of Congress and federal agencies contacted; the name of each individual who acted as a lobbyist; and the interest of the reporting organization’s foreign owners or affiliates in each specific lobbying issue. Unless it terminates its registration, once a lobbying organization registers, it must file reports semiannually, regardless of whether it has lobbied during the period. Under LDA, lobbying firms that are hired to represent clients are required to use the LDA lobbying definition. However, LDA gives organizations that lobby on their own behalf and that already use an IRC lobbying definition for tax purposes the option of using the applicable IRC lobbying definition (IRC sections 4911 or 162(e)), instead of the LDA lobbying definition, for determining whether the LDA registration threshold of $20,500 in semiannual lobbying expenses is met and calculating the lobbying expenses to meet the LDA reporting requirement. For all other purposes of the act, including reporting issues addressed during contacts with federal government officials and the House of Congress and federal agencies contacted, LDA provides that organizations using an IRC definition must (1) use the IRC definition for executive branch lobbying and (2) use the LDA definition for legislative branch lobbying. By allowing certain organizations to use an IRC definition to calculate lobbying expenses, LDA helps those organizations avoid having to calculate their lobbying expenses under two different lobbying definitions—the LDA definition for reporting under LDA and the applicable IRC definition for calculating those expenses for tax purposes. An organization that chooses to use the applicable IRC definition, instead of the LDA definition to calculate its lobbying expenses, must use the IRC definition for both lobbying reports filed during a calendar year. However, from one year to the next, the organization can switch between using the LDA definition and using the applicable IRC definition. Under LDA, we are required to report to Congress on (1) the differences among the definitions of certain lobbying-related terms found in LDA and the IRC, (2) the impact that any differences among these definitions may have on filing and reporting under the act, and (3) any changes to LDA or to the appropriate sections of the IRC that the Comptroller General may recommend to harmonize the definitions. As agreed with your offices, our objectives for this report were to describe the differences between the LDA and IRC section 4911 and 162(e) determine the impact that differences in the definitions may have on registration and reporting under LDA, including information on the number of organizations using each definition and the expenses they have reported; and identify and analyze options, including harmonizing the three definitions, that may better ensure that the public disclosure purposes of LDA are realized. To identify the differences among the LDA and IRC lobbying definitions, we reviewed the relevant statutory provisions. We also reviewed related regulations and guidance, including guidance issued by the Secretary of the Senate and the Clerk of the House of Representatives. We also reviewed journal articles and an analysis of the definitions of lobbying and met with registered lobbyists, representatives of nonprofit and business organizations, and other parties who were knowledgeable about the different statutory definitions and their effect on lobbying registrations. To determine the differences among the LDA and IRC lobbying definitions regarding the number of federal executive branch officials covered for contacts dealing with nonlegislative matters, we reviewed the LDA and IRC statutory definitions of covered executive branch officials that apply for lobbying contacts on nonlegislative matters. To determine the number of officials covered by these definitions, we counted the number of Executive Schedule Levels I through V positions listed in sections 5312 through 5316 of Title 5 of the United States Code. In several cases, these sections of Title 5 list federal boards and commissions as having Executive Schedule positions but do not specify the number of such positions. In these cases, we did not attempt to determine the number of positions and counted only one position for each such listed board or commission. Thus, our estimate of the number of Executive Schedule Levels I through V positions is understated. Further, to determine the number of officials covered, we obtained data from The United States Government Manual 1998/1999 on cabinet-level officials and the number of offices in the Executive Office of the President; the Department of Defense (DOD) on military personnel ranked 0-7 and above as of September 30, 1997; the U.S. Coast Guard, the Public Health Service, and the National Oceanic and Atmospheric Administration (NOAA) on the number of commissioned corps ranked 0-7 and above as of February 1999; the Office of Personnel Management’s (OPM) Central Personnel Data File on the number of Schedule C officials as of September 30, 1997; and Budget of the United States Government, Appendix, Fiscal Year 1999 on the actual full-time-equivalent employment for fiscal year 1997 in each office of the Executive Office of the President. To determine the impact that differences in the definitions may have on registration and reporting under LDA, we first had to define how we would measure impact. We defined impact as (1) the way differences among the definitions can affect who must register with the Secretary of the Senate and the Clerk of the House of Representatives and what lobbying expenses and related information must be included in those reports; (2) the number of organizations that reported using the LDA and IRC section 4911 and 162(e) definitions when reporting lobbying expenses and related information for July through December 1997; and (3) the lobbying expenses reported under each of the three definitions for this period. To determine the way differences among the definitions can affect who must register and what they must report, we reviewed, analyzed, and categorized the general effects of the differences that we found among the definitions under our first objective. We also looked for possible effects during our reviews of statutes, regulations, guidance, and journal articles. Finally, we discussed the possible effects of the differences among the definitions with registered lobbyists, representatives of nonprofit and business organizations, and other knowledgeable parties. To identify the number of organizations that reported using the definitions of lobbying in LDA or IRC to calculate their lobbying expenses for July through December 1997 and to determine the lobbying expenses reported under LDA that were calculated using one of the three definitions, we obtained data on all lobbying reports filed with the Secretary of the Senate during this period from the new lobbying database of the Senate Office of Public Records. Only the lobbying reports for one semiannual period—July through December 1997—were available from the new database when we began our analysis in October 1998. Using the database, we identified the number of organizations that lobbied on their own behalf and filed reports for the period July through December 1997. We also analyzed the reported expenses of these organizations and determined the mean and median expenses reported under each of the three definitions. Because lobbyists did not round their lobbying expenses to the nearest $20,000 in some cases, as required by LDA, we rounded all reported expenses to the nearest $20,000 before conducting our analysis. Officials from the Senate Office of Public Records said that they had not verified the data in the database, and we did not perform a reliability assessment of the data contained in this database. However, we reviewed the lobbying reports of all organizations whose lobbying expenses were recorded in the database as being less than $10,000, which is the minimum amount required to be recorded on the lobbying form, but had erroneous Senate Office of Public Records codes. We corrected any errors we found before conducting our analysis. To identify and analyze options that may better ensure that the public disclosure purposes of LDA are realized, we relied on (1) information we collected from our review of the relevant literature on lobbying, including statutory provisions, regulations, and guidance; and (2) our findings for our first two objectives. We did our work during two periods. From November 1996 through April 1997, we reviewed the differences in the LDA and IRC definitions of lobbying-related terms. As agreed by the Senate Committee on Governmental Affairs and the House Subcommittee on the Constitution, Committee on the Judiciary, we postponed completing our review until data on lobbying expenses became available. The second period of our review was from October 1998 through January 1999, after we obtained data on lobbying expenses from the new lobbying database of the Senate Office of Public Records. We did our work in Washington, D.C., and in accordance with generally accepted government auditing standards. We obtained technical comments on a draft of this report from the Internal Revenue Service and incorporated changes in the report as appropriate. The Clerk of the House of Representatives, the Secretary of the Senate, and the Department of the Treasury had no comments on the report. The contacts, activities, and expenses that are considered to be lobbying under the LDA lobbying definition differ in many ways from those covered by the IRC definitions. Most significantly, LDA covers contacts only with federal officials; the IRC definitions cover contacts with officials in other levels of government as well as attempts to influence the public through grassroots lobbying. Also, the definitions differ in their coverage of contacts with federal officials depending on whether the contact was on a legislative or nonlegislative matter. Table 1 and the following sections present some of the key differences in coverage under the different definitions. Appendix I discusses these differences in more detail; and appendix II provides a detailed table of the differences among the definitions concerning coverage of the federal, state, and local levels of government. LDA covers only the lobbying of federal government officials, so organizations using the LDA definition would not include any information in their lobbying reports about lobbying state and local officials. But both IRC lobbying definitions cover contacts with state government officials to influence state legislation. In addition, both IRC definitions cover contacts with local government officials to influence local government legislation, but IRC section 162(e) provides an exception for contacts with local legislative officials regarding legislation of direct interest to the organization. The LDA lobbying definition covers only lobbying of federal government officials, so organizations using the LDA definition would not include in their lobbying reports any information related to attempts to influence legislation by affecting the opinions of the public—that is, grassroots lobbying. Both IRC lobbying definitions cover grassroots lobbying, such as television commercials; newspaper advertisements; and direct mail campaigns to influence federal, state, and local legislation, including referenda and ballot initiatives. To determine if a lobbyist’s contact with a federal government official is covered by one of the three lobbying definitions, one must (1) have certain information about the government official, such as whether the official is in the legislative or executive branch; and (2) know whether a legislative or nonlegislative subject was addressed during the contact. The three definitions differ in many ways regarding the officials and subjects they cover. The LDA definition does not distinguish between covered legislative and executive branch officials on the basis of whether the subject of the lobbyist’s contact is legislative or nonlegislative in nature. The IRC definitions define covered officials differently, depending on whether the subject of the lobbying contact was legislative or nonlegislative in nature. When the subject of a lobbyist’s contact concerns a nonlegislative matter, such as a regulation, grant, or contract, LDA covers more officials than the IRC definitions cover. When the subject of a lobbyist’s contact is a legislative matter, both IRC definitions potentially cover more levels of executive branch officials than the LDA definition does. Under LDA, lobbying organizations’ contacts with all Members of Congress and employees of Congress and approximately 4,600 executive branch officials are covered for either legislative or nonlegislative subjects. In contrast, under IRC section 4911, contacts with legislative or executive branch officials, including Members of Congress and the President, about any nonlegislative subject do not count as lobbying. Also, under IRC section 162(e), contacts with Members of Congress and other legislative branch officials do not count as lobbying if they deal with a nonlegislative subject; and very few executive branch officials are covered if contacts are about nonlegislative matters. As table 2 shows, LDA covers 10 times the number of executive branch officials that IRC section 162(e) covers for nonlegislative matters; it also contrasts with IRC section 4911, which does not cover federal officials for nonlegislative contacts. For contacts on legislation, LDA covers contacts with Members of Congress, employees of Congress and the approximately 4,600 executive branch officials shown in table 2. In contrast, for contacts on legislation, the IRC definitions cover Members of Congress, employees of Congress, and any executive branch officials who may participate in the formulation of the legislation. Therefore, for contacts addressing legislation, the IRC definitions potentially cover more levels of executive branch officials than the LDA definition does. LDA contains 19 exceptions to the definition of lobbying; however, for the most part, these exceptions make technical clarifications in the law and do not provide special exceptions for particular groups. The IRC section 162(e) definition has one exception in the statute, which is for contacts with local government legislative branch officials on legislation of direct interest to the organization. In addition, IRC section 162(e) has seven exceptions, which are provided for by Treasury Regulations and which are technical clarifications of the statutory provisions. IRC section 4911 has five exceptions, and two of these could allow a significant amount of lobbying expenses to be excluded from IRC section 4911 coverage. The first is an exception for making available the results of nonpartisan analysis, study, or research. Due to this exception, IRC section 4911 does not cover 501(c)(3) organizations’ advocacy on legislation as long as the organization provides a full and fair exposition of the pertinent facts that would enable the public or an individual to form an independent opinion or conclusion. The second significant exception under IRC section 4911 is referred to as the self-defense exception. This exception excludes from coverage lobbying expenses related to appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization. According to IRS officials, this exception provides that a 501(c)(3) nonprofit tax-exempt organization can lobby legislative branch officials on matters that might affect its tax-exempt status or the activities it can engage in without losing its tax-exempt status, and such lobbying will not be counted under the IRC section 4911 definition. According to IRS officials, this exception does not cover lobbying on state or federal funding. For those organizations that lobby on their own behalf, the choice of using either the LDA definition or the applicable IRC definition can significantly affect whether they must register with the Secretary of the Senate and the Clerk of the House of Representatives. In addition, the lobbying definition an organization uses can materially affect the information, such as federal- level lobbying, it must disclose on its semiannual lobbying report. Allowing organizations to use an IRC definition for LDA reporting can result in organizations disclosing information that may not be comparable, is unrelated to LDA’s purpose, or that falls short of what LDA envisions. However, of the 1,824 organizations that lobbied on their own behalf and filed reports under LDA from July through December 1997, most reported using the LDA definition. Those organizations that used the IRC section 162(e) definition had the highest mean and median expenses reported. The lobbying definition an organization uses, which governs how it calculates lobbying expenses, can affect whether the organization is required to register under LDA. If (1) the actual or expected expenses of an organization lobbying on its own behalf exceed or are expected to exceed the $20,500 LDA threshold for a 6-month period, and (2) the organization has an employee that makes more than one lobbying contact and spends at least 20 percent of his or her time lobbying during the same 6-month period, then the organization must register. Lobbying activities and contacts that count toward the $20,500 and 20 percent thresholds depend on which lobbying definition—LDA, IRC section 4911, or IRC section 162(e)—an organization uses. If an activity is not covered under a particular definition, then the expenses related to that activity do not count toward the lobbying expenses of an organization using that definition. In some cases, allowing organizations to use an IRC definition instead of the LDA definition could result in the organization having covered lobbying expenses below the $20,500 threshold and no employees who spend 20 percent of their time lobbying; however, if the organization used the LDA definition, its lobbying expenses and activities could be above the LDA registration thresholds. For example, for an organization that primarily focuses its lobbying efforts on lobbying federal officials about nonlegislative matters, using an IRC definition is likely to result in lower covered lobbying expenses than using the LDA definition and, therefore, could result in an organization not meeting the $20,500 registration threshold. This could occur because any contacts with legislative branch officials about nonlegislative matters are not covered under either IRC sections 4911 or 162(e). Also, for contacts on nonlegislative matters, IRC section 4911 does not cover executive branch officials, and IRC section 162(e) covers only about one-tenth of the executive branch officials that LDA covers. Thus, an organization could spend over $20,500 lobbying federal officials who are covered by LDA for nonlegislative matters, with the possibility that none of these expenses would count toward the registration requirement if the organization used an IRC definition. It is also possible that an organization could have over $20,500 in lobbying expenses and one or more employees spending 20 percent of their time lobbying by using an IRC definition, when using an LDA definition would put its covered expenses below $20,500 and put its lobbying employees under the 20-percent threshold. For example, the IRC definitions potentially cover contacts with more executive branch officials than LDA covers when those contacts are about legislation. So, if an organization lobbies executive branch officials not covered under LDA in order to influence legislation, those contacts would count as lobbying under the IRC definitions but not under the LDA definition. This could result in the organization’s covered lobbying expenses being above the $20,500 threshold and in an employee’s time spent on lobbying being above the 20 percent threshold. However, no data exist to determine the number of organizations (1) that are not registered under LDA as a result of using an IRC definition or (2) that met the thresholds under an IRC definition but not under the LDA definition. Similarly, the individuals who must be listed as lobbyists on an organization’s lobbying registration can be affected by the choice of definition. Individuals must be listed as lobbyists on the registration if they make more than one lobbying contact and spend at least 20 percent of their time engaged in lobbying activities for their employers during the 6 month reporting period. Using an IRC definition instead of the LDA definition could result in an individual not being listed as a lobbyist on his or her organization’s registration or subsequent semiannual report. For example, this could occur if a lobbyist spends most of his or her time lobbying high-level officials at independent federal agencies about regulations, contracts, or other nonlegislative matters, because the IRC definitions do not consider such contacts as lobbying. Just as the choice of definition affects whether an organization must register under LDA with the Secretary of the Senate and the Clerk of the House of Representatives, the choice of definition also can materially affect the information that is reported semiannually. Because an organization can switch from using the LDA definition one year to using the applicable IRC definition another year and vice versa, organizations can use the definitions that enable them to minimize what they must disclose on their lobbying reports. The three definitions were written at different times for different purposes, so what they cover differs in many ways, both subtle and substantial. These differences result in organizations that use one definition reporting expenses and related information that organizations using another definition would not report. The reported expenses and other information may provide less disclosure and may be unrelated to what is needed to fulfill LDA’s purpose of publicly disclosing the efforts of lobbyists to influence federal officials’ decisionmaking. Whether an organization uses the LDA definition or the applicable IRC definition, it is required to disclose on its lobbying report its total estimated expenses for all activities covered by the definition. Thus, organizations using the LDA definition must report all expenses for lobbying covered federal government officials about subject matters covered by LDA. Similarly, organizations using an IRC definition must disclose on their lobbying reports all expenses for activities that are covered by the applicable IRC definition, including federal, state, and local government lobbying and grassroots lobbying. However, organizations report only their total expenses, so the lobbying reports do not reveal how much of the reported expenses were for individual activities and for what level of government. Thus, even if an organization using the LDA definition reported the same total lobbying expenses as an organization using an IRC definition, it would be impossible to tell from the lobbying reports how similar the two organizations’ federal lobbying efforts may have been. In addition, an organization reporting under an IRC definition would be, in all likelihood, including expenses that are not related to LDA’s focus on federal lobbying because the IRC definitions go beyond lobbying at the federal level. An organization reporting under an IRC definition could also be reporting less information on federal level lobbying than would be provided under the LDA definition, which Congress wrote to carry out the public disclosure purpose of LDA. For example, the IRC definitions include far fewer federal officials in their definitions for lobbying on nonlegislative matters. Also, an organization using the IRC section 4911 definition could exclude considerable lobbying expenses from its lobbying report, if its lobbying fell under the IRC section 4911 exception for nonpartisan analysis or the self- defense exception. For example, in 1995, a 501(c)(3) tax-exempt nonprofit organization lobbied against legislation that would have sharply curtailed certain activities of charities. On its 1995 tax return, the organization, which used the IRC section 4911 definition to calculate its lobbying expenses for tax purposes, reported about $106,000 in lobbying expenses. However, in a letter to a congressional committee, the organization stated that its 1995 lobbying expenses totaled over $700,000; it cited the self- defense exception as a reason for excluding about $594,000 in lobbying expenses from its tax return. In contrast to reporting expenses, when reporting information other than expenses on the LDA lobbying reports, organizations are required to report only information related to federal lobbying. This information includes issues addressed during lobbying contacts with federal government officials and the House of Congress and federal agencies contacted. Therefore, if an organization uses an IRC definition and includes expenses for state lobbying and grassroots lobbying in its total lobbying expenses, it is not required to report any issues or other information related to those nonfederal expenses. Further, LDA provides that for reporting information other than expenses for contacts with federal executive branch officials, organizations using an IRC definition to calculate their expenses must use the IRC definition for reporting other information. But for contacts with federal legislative branch officials, organizations using an IRC definition to calculate their lobbying expenses must use the LDA definition in determining what other information, such as the issues addressed during lobbyists’ contacts and the House of Congress contacted, must be disclosed on their reports. Because of this latter provision, organizations that use an IRC definition and lobby legislative branch officials about nonlegislative matters are required to disclose the issues addressed and the House of Congress contacted, even though they are not required to report the expenses related to this lobbying. For the July through December 1997 reporting period, lobbying firms that had to use the LDA definition to calculate lobbying income filed reports for 9,008 clients. In addition, for this reporting period, 1,824 organizations that lobbied on their own behalf and were able to elect which definition to use in calculating their lobbying expenses filed lobbying reports. Of the 1,824 organizations, 1,306 (71 percent) used the LDA definition to calculate their lobbying expenses. Another 157 organizations (9 percent) elected to use the IRC 4911 definition. Finally, 361 organizations (20 percent) used the IRC 162(e) definition to calculate their lobbying expenses. (See table 3.) Data do not exist that would enable us to estimate the number of organizations that may not be registered because they used an IRC definition but would have had to register had they used the LDA definition. Because computerized registration data were available only for one 6- month period when we did our analysis, we did not analyze changes in registrations over time. Thus, we do not know whether, or to what extent, organizations switch between definitions from year to year as allowed by LDA. Organizations that lobbied on their own behalf and reported using the IRC section 162(e) definition had the highest mean and median expenses reported. These organizations had 87 percent higher mean lobbying expenses than organizations that reported using the LDA definition and 58 percent higher mean lobbying expenses than those using the IRC section 4911 definition. Organizations that reported using the IRC section 162(e) definition had $180,000 in median expenses; organizations that reported using the LDA definition and those that reported using the IRC section 4911 definition each had median expenses of $80,000. Organizations that lobby on their own behalf do not have to register if their lobbying expenses for the 6 month reporting period are below $20,500. However, until a registered organization terminates its registration, it must file lobbying reports, even if its lobbying expenses are below the $20,500 registration threshold. activities. Therefore, data do not exist that would help explain the reasons for the differences. Table 4 shows the total, mean, and median expenses for organizations using each of the three lobbying definitions that reported having $10,000 or more in lobbying expenses from July to December 1997. Table 4 includes only data on organizations reporting lobbying expenses of $10,000 or more, because organizations with less than $10,000 in expenses check a box on the LDA reporting form and do not include an amount for their expenses. Because, as shown in table 3, many more of these organizations used the LDA definition than used either of the IRC definitions, it follows that the largest total amount of all expenses reported was under the LDA definition. Because the differences among the three lobbying definitions can significantly affect who registers and what they report under LDA, the current statutory provisions do not always complement LDA’s purpose. As discussed earlier, allowing organizations to use an IRC definition for LDA purposes can result in organizations (1) not registering under LDA, (2) disclosing information that may not be comparable, and (3) disclosing information that is unrelated to LDA’s purpose or that falls short of what LDA envisions. Options for revising the statutory framework exist; LDA requires us to consider one option, harmonizing the definitions; and we identified two other options on the basis of our analysis. Those options are eliminating the current authorization for businesses and tax-exempt organizations to use the IRC lobbying definitions for LDA reporting and requiring organizations that use an IRC lobbying definition to include only expenses related to federal lobbying covered by that IRC definition when the organizations register and report under LDA. The options address, in varying degrees, the effects of the differences on registration and reporting, but all have countervailing effects that must be balanced in determining what, if any, change should be made. In addition to charging us with analyzing the differences among the three lobbying definitions and the impact of those differences on organizations’ registration and reporting of their lobbying efforts, LDA charges us with reporting any changes that we may recommend to harmonize those definitions. Harmonization implies the adoption of a common definition that would be used for LDA’s registration and reporting purposes and for the tax reporting purposes currently served by the IRC definitions. Harmonizing the three lobbying definitions would ensure that organizations would not have the burden of keeping track of their lobbying expenses and activities under two different definitions–one for tax purposes and another for LDA registration and reporting purposes. Requiring the use of a common definition would also mean that no alternative definitions could be used to possibly avoid LDA’s registration requirement and that all data reported under the common definition would be comparable. However, developing a lobbying definition that could be used for the purposes of LDA, IRC section 4911, and IRC section 162(e) would require Congress to revisit fundamental decisions it made when it enacted each definition. For example, if a common definition included state lobbying expenses that are included under the current IRC definitions, then the current objective of LDA to shed light on efforts to influence federal decisionmaking would essentially be rewritten and expanded. On the other hand, if a common definition did not include state lobbying expenses, fundamental decisions that were made when the statutes containing the IRC definitions were written would be similarly modified. Adopting a harmonized definition of lobbying could result in organizations disclosing less information on lobbying reports, if the new definition covered less than what is covered by the current LDA definition. In addition, a new definition would not be used only by organizations lobbying on their own behalf, which currently have the option of using an IRC definition for LDA reporting, but also by lobbying firms, which currently must use the LDA definition for their clients’ lobbying reports. Eliminating the current authorization for using the IRC lobbying definitions for LDA purposes would mean that consistent registration and reporting requirements would exist for all lobbyists, and the requirements would be those developed by Congress specifically for LDA. This would result in all organizations following the LDA definition for LDA purposes; thus, only the data that Congress determined were related to LDA’s purposes would be reported. However, this option could increase the reporting burden of the relatively small number of organizations currently using the IRC definitions under LDA, because it would require them to track their lobbying activities as defined by LDA while also tracking the activities covered under the applicable IRC lobbying definition. The last option we identified would require organizations that elected to use an IRC definition for LDA to use only expenses related to federal lobbying efforts as defined under the IRC definitions when they determine whether they should register and what they should report under LDA. This would improve the alignment of registrations and the comparability of lobbying information that organizations reported, because organizations that elected to use the IRC definitions would no longer be reporting to Congress on their state, local, or grassroots lobbying. The reporting of expenses under this option would be similar to the reporting of all other information required under LDA, such as issues addressed and agencies contacted, which are based on contacts with federal officials. However, this option would only partially improve the comparability of data being reported by organizations using different definitions. Differences in the reported data would remain because the LDA and IRC definitions do not define lobbying of federal officials identically. LDA requires tracking contacts with a much broader set of federal officials than do the IRC definitions when lobbying contacts are made about nonlegislative matters. In addition, because differences would remain between the LDA and IRC definitions of lobbying at the federal level under this option, organizations might still avoid registering under LDA and might still report information that would differ from that reported by organizations using the LDA definition. For example, because the IRC lobbying definitions include fewer federal executive branch officials when a contact is about a nonlegislative matter, organizations using an IRC definition might still have expenses under the $20,500 threshold for lobbying; whereas, under the LDA definition they might exceed the threshold. Finally, this option could impose some additional reporting burden for the relatively small number of organizations currently using IRC definitions for LDA purposes. Reporting only federal lobbying when they use an IRC definition could result in some increased recordkeeping burden if these organizations do not currently segregate such data in their recordkeeping systems. The three lobbying definitions we reviewed were adopted at different times to achieve different purposes. What they cover differs in many subtle and substantial ways. LDA was enacted to help shed light on the identity of, and extent of effort by, lobbyists who are paid to influence decisionmaking in the federal government. IRC section 4911 was enacted to help clarify the extent to which 501(c)(3) organizations could lobby without jeopardizing their tax-exempt status, and IRC section 162(e) was enacted to prevent businesses from deducting lobbying expenses from their federal income tax. Because the IRC definitions were not enacted to enhance public disclosure concerning federal lobbying, as was the LDA definition, allowing organizations to use the IRC definitions for reporting under LDA may not be consistent with achieving the level and type of public disclosure that LDA was enacted to provide. Allowing organizations to use an IRC definition instead of the LDA definition for calculating lobbying expenses under LDA can result in some organizations not filing lobbying registrations, because the use of the IRC definition could keep their federal lobbying below the LDA registration thresholds. On the other hand, under certain circumstances, organizations could meet the thresholds when using the IRC definition but would not do so if they used the LDA definition. We do not know how many, if any, organizations are not registered under LDA that would have met the registration thresholds under LDA but not under the applicable IRC definition. Giving organizations a choice of definitions to use each year can undermine LDA’s purpose of disclosing the extent of lobbying activity that is intended to influence federal decisionmaking, because organizations may disclose very different information on lobbying reports, depending on which definition they use. When an organization can choose which definition to use each year, it can choose the definition that discloses the least lobbying activity. Further, if an organization uses an IRC definition for its lobbying report, the report can include expenses for state, local, and grassroots lobbying that are unrelated to the other information on the report that only relates to federal lobbying. Also, if an organization uses an IRC definition, its lobbying report can exclude expenses and/or other information about lobbying that is not covered under the selected IRC definition (e.g., contacts about nonlegislative matters) but that nevertheless constitutes an effort to influence federal decisionmaking. In this situation, less information would be disclosed than LDA intended. Because the differences among the LDA and IRC lobbying definitions can significantly affect who registers and what they report under LDA, the use of the IRC definitions can conflict with LDA’s purpose of disclosing paid lobbyists’ efforts to influence federal decisionmaking. Options for reducing or eliminating these conflicts exist. These options include (1) harmonizing the definitions, (2) eliminating organizations’ authorization to use an IRC definition for LDA purposes, or (3) requiring those that use an IRC definition to include only expenses related to federal lobbying under the IRC definition when they register and report under LDA. The options, to varying degrees, could improve the alignment of registrations and the comparability of reporting with Congress’ purpose of increasing public disclosure of federal lobbying efforts. However, each option includes trade-offs between better ensuring LDA’s purposes and other public policy objectives and could result in additional reporting burden in some cases. In our opinion, the trade-offs involved in the option of harmonizing the definitions are disproportionate to the problem of LDA registrations and reporting not being aligned with LDA’s purpose. Harmonizing the definitions would best align registrations and reporting with LDA’s purposes if LDA’s definition is imposed for tax purposes as well, which would significantly alter previous congressional decisions about how best to define lobbying for tax purposes. Adopting a common lobbying definition that includes activities, such as state lobbying, that are covered under the current IRC definitions would require a rewrite and expansion of LDA’s objective of shedding light on efforts to influence federal decisionmaking. Such major changes in established federal policies that would be required to harmonize the definitions appear to be unwarranted when only a small portion of those reporting under LDA use the IRC definitions. The trade-offs for the other two options are less severe. Eliminating organizations’ authorization to use a tax definition for LDA purposes would ensure that all lobbyists register and report under the definition that Congress wrote to carry out LDA’s purpose. However, eliminating the authorization likely would impose some additional burden on the relatively small number of organizations currently using IRC definitions for LDA. Requiring that only expenses related to federal-level lobbying under the IRC definitions be used for LDA purposes would not align reporting with LDA’s purposes as thoroughly as eliminating the authorization to use an IRC definition for LDA would. Under this option organizations could still avoid registering under LDA when the use of an IRC definition results in total expenses falling below the LDA registration threshold. The option also could impose some additional recordkeeping burden for the relatively small number of organizations currently using the IRC definitions. If Congress believes that the inclusion of nonfederal lobbying expenses and the underreporting of lobbying efforts at the federal level due to the optional use of the IRC lobbying definitions seriously detract from LDA’s purpose of public disclosure, then it should consider adopting one of two options. Congress could remove the authorization for organizations to use an IRC definition for reporting purposes. In this case, data reported to the Senate and House would adhere to the LDA definition, which Congress enacted specifically to achieve LDA’s public reporting purpose. Alternatively, Congress could allow organizations to continue using the IRC definitions but require that they use only the expenses related to federal-level lobbying that those definitions yield when they register and report under LDA. The data reported would be more closely aligned with LDA’s purpose of disclosing federal level lobbying efforts, but some differences would remain between the data so reported and the data that would result from applying only the LDA definition. If either of these options were considered, Congress would need to weigh the benefit of reporting that would be more closely aligned with LDA’s public disclosure purpose against the additional reporting burden that some organizations would likely bear. On February 11, 1999, we sent a draft of this report for review and comment to the Clerk of the House of Representatives, the Secretary of the Senate, the Secretary of the Treasury, and the Commissioner of the Internal Revenue Service. Representatives of the Clerk of the House of Representatives, the Secretary of the Senate, and the Secretary of the Treasury told us that no comments would be forthcoming. On February 17, 1999, we met with officials from the Internal Revenue Service, and they provided technical comments on a draft of this report. On the basis of their comments, we made changes to the report as appropriate. In a letter dated March 5, 1999, the Chief Operations Officer of the Internal Revenue Service stated that IRS had reached general consensus with us on the technical matters in the report. We are sending copies of this report to Senator Carl Levin; Senator Ted Stevens; Senator William V. Roth, Jr., Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member, Senate Committee on Finance; Representative Bill Archer, Chairman, and Representative Charles B. Rangel, Ranking Minority member, House Committee on Ways and Means; the Honorable Gary Sisco, Secretary of the Senate; the Honorable Jeff Trandahl, Clerk of the House of Representatives; the Honorable Robert E. Rubin, Secretary of the Treasury; and the Honorable Charles O. Rossotti, Commissioner of Internal Revenue. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix IV. Please call me on (202) 512-8676 if you have any questions. The types of activities and contacts that are covered by the Lobbying Disclosure Act of 1995 (LDA) lobbying definition are significantly different from those covered under the Internal Revenue Code (IRC) definitions. First, LDA does not cover grassroots lobbying. The IRC lobbying definitions cover grassroots lobbying, such as television advertisements and direct mail campaigns, that are intended to influence legislation at the federal, state, or local levels. Second, LDA covers lobbying only at the federal level. However, both IRC definitions cover lobbying of federal officials, as well as state and local government officials. The IRC definitions potentially cover contacts with more levels of executive branch officials than LDA covers when those contacts are about legislation. However, when contacts are about nonlegislative subject matters, such as regulations or policies, LDA covers contacts with a broader range of federal officials than the IRC definitions. Further, LDA’s definition of lobbying includes legislative matters and an extensive list of nonlegislative matters. IRC section 4911 only covers lobbying contacts that address specific legislative proposals. IRC section 162(e) covers lobbying contacts on legislative and nonlegislative subjects, but its coverage of legislative subjects is somewhat more limited than LDA’s coverage, and its coverage of nonlegislative subjects is not clearly defined. Grassroots lobbying—efforts to influence legislation by influencing the public’s view of that legislation—is covered under the IRC definitions but not under the LDA definition. Grassroots lobbying campaigns can use such means as direct mailings and television, radio, and newspaper advertisements and can be very expensive. Both IRC section 4911 and IRC section 162(e) cover grassroots lobbying at the federal, state, and local levels. However, IRC section 4911 has a narrower definition of grassroots lobbying than IRC section 162(e) does. Under IRC section 4911, grassroots lobbying is defined as any attempt to influence legislation through an attempt to affect the opinions of the general public or any segment thereof. To be considered grassroots lobbying under IRC section 4911, a communication with the public must refer to a specific legislative proposal, reflect a view on such legislative proposal, and encourage the recipient of the communication to take action with respect to such legislative proposal. IRC section 162(e) does not have the same stringent tests that IRC section 4911 has for determining if a communication with the public is grassroots lobbying. Under IRC section 162(e), communications with the public that attempt to develop a grassroots point of view by influencing the general public to propose, support, or oppose legislation are considered to be grassroots lobbying. To be considered as grassroots lobbying under IRC section 162(e), a communication with the public does not have to encourage the public to take action with respect to a specific legislative proposal. Therefore, the IRC section 162(e) grassroots lobbying provision is likely to encompass more lobbying campaigns than IRC section 4911 does. The LDA lobbying definition covers only contacts with federal government officials and does not require lobbyists to report any expenses for contacts with state and local government officials. This is consistent with LDA’s overall purpose of increasing public disclosure of the efforts of lobbyists paid to influence federal decisionmaking. The IRC lobbying definitions also cover contacts with federal government officials. However, in contrast to LDA, the IRC lobbying definitions require that expenses for contacts with state officials to influence state legislation be included in lobbying expenses. Further, both IRC lobbying definitions cover contacts with local government officials to influence local government legislation; but coverage of local government contacts is limited under IRC section 162(e), because that section has an exception for contacts with local councils on legislation of direct interest to the organization. (Contacts with state and local government officials to influence something other than legislation, such as a state or local policy or regulation, are not covered by either of the IRC definitions.) The amounts spent lobbying state governments can be significant. For example, in 1997, under state lobbying disclosure laws, reported spending on lobbying state government officials was $144 million in California, $23 million in Washington, and $23 million in Wisconsin. Whether a lobbyist’s contact with a federal government official counts as lobbying under any of the three lobbying definitions depends, in part, on whether the contact is with a covered official. Covered officials are defined by several factors, such as their branch of government, the office they work in, and their rank. All three definitions include as lobbying lobbyists’ contacts with legislative branch officials—Members and employees of Congress—to influence legislation. However, for contacts with executive branch officials to influence legislation and contacts with either legislative branch or executive branch officials on legislative matters, such as regulations and contracts, the definitions of what is counted as lobbying differ significantly. Under LDA, contacts with any covered government officials about any legislative or nonlegislative matters covered by LDA are considered lobbying contacts, and their associated expenses must be reported. However, under the IRC definitions, whether the contact is on legislative or nonlegislative matters determines which officials are covered. For contacts to influence legislation, any executive branch officials who may participate in the formulation of legislation are covered under both IRC definitions. But, for nonlegislative matters, IRC section 4911 covers no executive branch officials, and IRC section 162(e) covers very few executive branch officials. Many of the executive branch officials covered by LDA for contacts on any lobbying subject are not covered by IRC section 162(e) when contacts are intended to influence nonlegislative matters. Also, none of the executive branch officials covered by LDA are covered by IRC section 4911 for contacts on nonlegislative matters, because IRC section 4911 covers only contacts to influence legislation. For contacts to influence the official actions or positions of an executive branch official on nonlegislative matters, IRC section 162(e) provides a list of covered executive branch officials. LDA’s list of covered executive branch officials includes all the officials on the IRC section 162(e) list, plus several more categories of officials. LDA’s list applies to contacts on any matter covered by LDA—legislative or nonlegislative. Table I.1 shows that LDA covers about 10 times the number of officials that IRC section 162(e) covers for nonlegislative matters. As shown in table I.1, LDA and IRC section 162(e) include contacts with the President and Vice President and Cabinet Members and similar high- ranking officials and their immediate deputies. In the Executive Office of the President, LDA includes all contacts with all offices; IRC section 162(e) includes only all officials in the White House Office and the two most senior level officers in the other agencies of the Executive Office of the President. Further, LDA includes contacts with officials in levels II through V of the Executive Schedule, which includes agency heads and deputy and assistant secretaries; IRC section 162(e) does not. Also, LDA includes contacts with officials at levels O-7 and above, such as Generals and Admirals, in the uniformed services. Finally, LDA includes contacts with all Schedule C appointees, who are political appointees (graded GS/GM-15 and below) in positions that involve determining policy or require a close, confidential relationship with the agency head or other key officials of the agency. The narrow scope of IRC section 162(e)’s list of covered executive branch officials can result in organizations not including on their lobbying reports expenses or other information, such as issues addressed, relating to contacts with very high-ranking officials. For example, if an organization made contacts to influence an official action or position with the top official at most independent agencies, including the National Aeronautics and Space Administration, the General Services Administration, the Export-Import Bank, and the Federal Communications Commission, these contacts would not be considered as contacts with covered executive branch officials and therefore would not be covered by the IRC section 162(e) definition. Similarly, contacts on nonlegislative matters with the heads of agencies within cabinet departments, such as the heads of the Internal Revenue Service, the Occupational Safety and Health Administration, the Bureau of Export Administration, and the Food and Drug Administration, would not be considered as contacts with officials at a high enough level for the list of covered executive branch officials under the IRC section 162(e) definition. However, contacts with all of these officials would be covered under the LDA definition of lobbying. The two IRC definitions generally provide the same coverage of contacts with executive branch officials for influencing legislation. The two definitions provide that a contact with “any government official or employee who may participate in the formulation of legislation” made to influence legislation must be counted as a lobbying expense. Thus, these definitions potentially cover many more levels of executive branch officials than are included on LDA’s list of covered executive branch officials. LDA’s list of covered officials is shown in table I.1 and applies to both legislative and nonlegislative matters. Therefore, contacts with officials in the Senior Executive Service or in grades GS/GM-15 or below who are not Schedule C appointees would generally count as lobbying contacts under the IRC definitions if such contacts were for the purpose of influencing legislation and those officials participated in the formulation of legislation. But such contacts would not count as lobbying contacts under the LDA definition, because LDA does not include these officials as covered executive branch officials. Neither IRC section 162(e) nor IRC section 4911 covers contacts with legislative branch officials on nonlegislative matters. The two IRC definitions cover only legislative branch officials in regard to contacts to influence legislation. However, LDA counts as lobbying any contacts with Members of Congress and congressional employees on any subject matter covered by LDA. Therefore, a lobbyist who contacts Members of Congress to influence a proposed federal regulation would be required to count these contacts in lobbying expenses calculated under the LDA definition and to disclose the issues addressed and the House of Congress contacted. LDA and the two IRC definitions cover the same federal legislative branch officials for contacts made to influence legislation. LDA covers contacts with any Member or employee of Congress for contacts on any legislative or nonlegislative subject matter covered by the act. Both IRC definitions cover contacts with any Member or employee of Congress for contacts made to influence legislation. The subject matters for which contacts with officials count as lobbying are different under the three lobbying definitions. LDA provides a comprehensive list of subjects about which contacts with a covered official are considered to be lobbying. For example, for nonlegislative matters, the list includes, in part, “the formulation, modification, or adoption of a federal rule, regulation, Executive order, or any other program, policy, or position of the United States Government.” Under IRC section 4911, the only subject covered by lobbying contacts is “influencing legislation.” Under IRC section 162(e), the subjects covered are “influencing legislation” and “influencing official actions or positions” of executive branch officials. The phrase “official actions or positions” applies to contacts on nonlegislative matters. Further, more specific information about what was covered in a lobbyist’s contact is needed under IRC sections 4911 and 162(e) than is needed under LDA to determine if the contact should count as lobbying. For legislative matters, LDA covers “the formulation, modification, or adoption of Federal legislation (including legislative proposals).” In contrast, for legislative matters, the IRC lobbying definitions list only “influencing legislation,” which, according to the Treasury Regulations, refers to contacts that address either specific legislation that has been introduced or a specific legislative proposal that the organization supports or opposes. Under both IRC definitions, a contact to influence legislation is a contact that refers to specific legislation and reflects a view on that legislation. Therefore, a lobbyist’s contact with a legislative branch official in which the lobbyist provides information or a general suggestion for improving a situation but in which the lobbyist does not reflect a view on specific legislation would not be considered to be a lobbying contact under the IRC definitions. For example, the Treasury regulations for IRC section 162(e) provide an example of a lobbying contact in which a lobbyist tells a legislator to take action to improve the availability of new capital. In this example, the lobbyist is not referring to a specific legislative proposal, so the contact does not count as lobbying. However, according to the Treasury Regulations, a lobbyist’s contact with a Member of Congress in which the lobbyist urges a reduction in the capital gains tax rate to increase the availability of new capital does count as lobbying, because the contact refers to a specific legislative proposal. In contrast, because LDA covers legislation from its formulation to adoption, the fact that a specific legislative proposal was not addressed during a lobbyist’s contact with a government official does not prevent the contact from being counted as a lobbying contact. LDA’s list of nonlegislative matters under its definition of “lobbying contact” seems to include most activities of the federal government. The list includes the formulation, modification, or adoption of a federal rule, regulation, executive order, or any other program, policy, or position of the United States Government; the administration or execution of a federal program or policy (including the negotiation, award, or administration of a federal contract, grant, loan, or permit, or license); and the nomination or confirmation of a person for a position subject to confirmation by the Senate. IRC section 4911 does not include any nonlegislative matters in its lobbying definition. The only nonlegislative matter included under the IRC section 162(e) lobbying definition is “any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.” However, neither IRC section 162(e) nor its regulations define what is meant by “official actions or positions,” thus leaving the interpretation of what activities to count up to the lobbyist. Some lobbyists might consider an official action to be almost anything a federal official does while at work, while others might consider that official actions must be more formal actions, such as those requiring the signing of official documents. LDA contains 19 exceptions to the definition of lobbying and IRC sections 4911 and 162(e) contain 5 and 7 exceptions, respectively. These exceptions are listed in appendix III. Although LDA includes an extensive list of exceptions, for the most part these exceptions make technical clarifications in the law and do not provide special exceptions for particular groups. Many of the LDA exceptions are for contacts made during the participation in routine government business, and some of these are for contacts that would be part of the public record. For example, these include (1) contacts made in response to a notice in the Federal Register soliciting communications from the public and (2) a petition for agency action made in writing and required to be a matter of public record pursuant to established agency procedures. Other exceptions are for contacts dealing with confidential information, such as contacts “not possible to report without disclosing information, the unauthorized disclosure of which is prohibited by law.” LDA includes four exceptions for particular groups, including an exception for contacts made by public officials acting in an official capacity; an exception for representatives of the media making contacts for news purposes; an exception for any contacts made by certain tax-exempt religious organizations; and an exception for contacts made with an individual’s elected Member of Congress or the Member’s staff regarding the individual’s benefits, employment, or other personal matters. Of the five exceptions to the IRC section 4911 lobbying definition, two could allow a significant amount of lobbying expenses to be excluded from IRC section 4911 coverage. The first is an exception for making available the results of nonpartisan analysis, study, or research. Due to this exception, IRC section 4911 does not cover 501(c)(3) organizations’ advocacy on legislation as long as the organization provides a full and fair exposition of the pertinent facts that would enable the public or an individual to form an independent opinion or conclusion. The second significant exception under IRC section 4911 is referred to as the self-defense exception. This exception excludes from coverage lobbying expenses related to appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax- exempt status, or the deduction of contributions to the organization. According to IRS officials, this exception provides that a 501(c)(3) nonprofit tax-exempt organization can lobby legislative branch officials on matters that might affect its tax-exempt status or the activities it can engage in without losing its tax exempt status, and such lobbying will not be counted under the IRC section 4911 definition. According to IRS officials, this exception does not cover lobbying on state or federal funding. The IRC section 162(e) definition has one exception in the statute, which is for contacts with local government legislative branch officials on legislation of direct interest to the organization. In addition, IRC section 162(e) has seven exceptions, which are provided for by Treasury Regulations. These seven exceptions provide technical clarifications to the statutory provisions and do not appear to exclude a significant amount of expenses that would be counted as lobbying expenses under the other lobbying definitions. For example, the IRC section 162(e) exceptions include (1) any communication compelled by subpoena, or otherwise compelled by federal or state law; and (2) performing an activity for purposes of complying with the requirements of any law. This appendix contains detailed information about which contacts, activities, and expenses are covered under the definitions of lobbying for LDA, IRC section 4911, and IRC section 162(e). Table II.1 shows the coverage of federal lobbying. Table II.2 shows the coverage of state lobbying, and table II.3 shows the coverage of local lobbying. IRC section 162(e) Yes 2 U.S.C. 1602 (7) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(i) & (4)(C) & (D) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8) (A)(i) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8) (A)(i) & (3)(D) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) IRC section 162(e) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(ii) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(ii) & (4)(C) & (D) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & 4(A) IRC section 162(e) Yes 2 U.S.C. 1602(8)(A)(iii) & (4)(C) & (D) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes2 U.S.C. 1602(8)(A) & (3)(A), (B) & (D) Yes2 U.S.C. 1602(8)(A) & (3)(D) Yes2 U.S.C. 1602(8)(A) & (3)(E) Yes2 U.S.C. 1602(8)(A) & (3)(F) IRC section 162(e) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes 26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(iv) &(4)(C) & (D) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A)& (4)(A) Yes 26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 4911(d)(1)(B) Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) IRC section 162(e) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C) & (4)(B) 26 U.S.C. 4911(e)(2) IRC section 162(e) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C ) & (4)(B) 26 U.S.C. 4911(e)(2) IRC section 162(e) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C)& (e)(4)(B) 26 U.S.C. 4911 (e)(2) Title 2 of the United States Code contains 19 exceptions to LDA’s lobbying definition. Under Title 2, the term “lobbying contact” does not include a communication that is: 1. made by a public official acting in the public official’s official capacity; 2. made by a representative of a media organization if the purpose of the communication is gathering and disseminating news and information to the public; 3. made in a speech, article, publication, or other material that is distributed and made available to the public, or through radio, television, cable television, or other medium of mass communication; 4. made on behalf of a government of a foreign country or a foreign political party and disclosed under the Foreign Agents Registration Act of 1938;5. a request for a meeting, a request for the status of an action, or any other similar administrative request, if the request does not include an attempt to influence a covered executive branch official or a covered legislative branch official; 6. made in the course of participation in an advisory committee subject to the Federal Advisory Committee Act; 7. testimony given before a committee, subcommittee, or task force of Congress, or submitted for inclusion in the public record of a hearing conducted by such committee, subcommittee, or task force; 8. information provided in writing in response to an oral or written request by a covered executive branch official or a covered legislative branch official for specific information; 9. required by subpoena, civil investigative demand, or otherwise compelled by statute, regulation, or other action of Congress or an agency, including any communication compelled by a federal contract, grant, loan, permit, or license; 10. made in response to a notice in the Federal Register, Commerce Business Daily, or other similar publication soliciting communications from the public and directed to the agency official specifically designated in the notice to receive such communications; 11. not possible to report without disclosing information, the unauthorized disclosure of which is prohibited by law; 12. made to an official in an agency with regard to—(1) a judicial proceeding or a criminal or civil law enforcement inquiry, investigation, or proceeding; or (2) a filing or proceeding that the government is specifically required by statute or regulation to maintain or conduct on a confidential basis–if that agency is charged with responsibility for such proceeding, inquiry, investigation, or filing; 13. made in compliance with written agency procedures regarding an adjudication conducted by the agency under section 554 of Title 5 or substantially similar provisions; 14. a written comment filed in the course of a public proceeding or any other communication that is made on the record in a public proceeding; 15. a petition for agency action made in writing and required to be a matter of public record pursuant to established agency procedures; 16. made on behalf of an individual with regard to that individual’s benefits, employment, or other personal matters involving only that individual, except that this clause does not apply to any communication with—(1) a covered executive branch official, or (2) a covered legislative branch official (other than the individual’s elected Members of Congress or employees who work under such Member’s direct supervision)–with respect to the formulation, modification, or adoption of private legislation for the relief of that individual; 17. a disclosure by an individual that is protected under the amendments made by the Whistleblower Protection Act of 1989 under the Inspector General Act of 1978 or under another provision of law; 18. made by (1) a church, its integrated auxiliary, or a convention or association of churches that is exempt from filing a federal income tax return under paragraph (2)(A)(i) of such section 6033(a) of Title 26, or (2) a religious order that is exempt from filing a federal income tax return under paragraph (2)(A)(iii) of such section 6033(a); and 19. between (1) officials of a self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act) that is registered with or established by the Securities and Exchange Commission as required by that act or a similar organization that is designated by or registered with the Commodities Future Trading Commission as provided under the Commodity Exchange Act; and (2) the Securities and Exchange Commission or the Commodities Future Trading Commission, respectively, relating to the regulatory responsibilities of such organization under the act. Title 26 of the United States Code contains five exceptions to the lobbying definition in IRC section 4911. Under IRC section 4911, the term “influencing legislation”, with respect to an organization, does not include: 1. making available the results of nonpartisan analysis, study, or research; 2. providing technical advice or assistance (where such advice would otherwise constitute influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be; 3. appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization; 4. communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members, other than communications that directly encourage the members to take action to influence legislation; 5. any communication with a government official or employee, other than (1) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or (2) a communication the principal purpose of which is to influence legislation. Title 26 of the United States Code contains a single exception to the lobbying definition in IRC section 162(e): 1. appearances before, submission of statements to, or sending communications to the committees, or individual members, of local councils or similar governing bodies with respect to legislation or proposed legislation of direct interest to the taxpayer. In addition, the Treasury Regulations contain eight exceptions: 2. any communication compelled by subpoena, or otherwise compelled by federal or state law;3. expenditures for institutional or “good will” advertising which keeps the taxpayer’s name before the public or which presents views on economic, financial, social, or other subjects of a general nature but which do not attempt to influence the public with respect to legislative matters;4. before evidencing a purpose to influence any specific legislation— determining the existence or procedural status of specific legislation, or the time, place, and subject of any hearing to be held by a legislative body with respect to specific legislation;5. before evidencing a purpose to influence any specific legislation— preparing routine, brief summaries of the provisions of specific legislation; 6. performing an activity for purposes of complying with the requirements of any law; 7. reading any publications available to the general public or viewing or listening to other mass media communications; and 8. merely attending a widely attended speech. Alan N. Belkin, Assistant General Counsel Rachel DeMarcus, Assistant General Counsel Jessica A. Botsford, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. 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Pursuant to a legislative requirement, GAO reviewed the reporting of lobbying activities by organizations that have employees who lobby on the organizations' behalf and have the option to report their lobbying expenses under the Lobbying Disclosure Act (LDA) of 1995 or applicable Internal Revenue Code (IRC) provisions that they use for tax purposes, focusing on: (1) the differences between the LDA and IRC section 4911 and 162(e) definitions of lobbying; (2) the impact that differences in the definitions may have on registration and reporting under LDA, including information on the number of organizations using each definition and the expenses they have reported; and (3) identifying and analyzing options, including harmonizing the three definitions, that may better ensure that the public disclosure purposes of LDA are realized. GAO noted that: (1) the LDA definition covers only contacts with federal officials; (2) the IRC definitions cover contacts with federal, state, and local officials as well as attempts to influence the public through grassroots lobbying; (3) the definitions differ in their coverage of contacts with federal officials, depending on whether the contact concerns a legislative or nonlegislative matter; (4) the differences in the lobbying definitions can affect whether organizations register under LDA; (5) an organization that engages or expects to engage in certain lobbying activities during a 6-month period, including incurring at least $20,500 in lobbying expenses, is required to register under LDA; (6) the definition an organization uses in calculating its lobbying expenses determines the expenses it counts toward the $20,500 threshold; (7) when using the LDA definition would result in expenses of more than $20,500, an organization may be able to use the applicable IRC definition to keep its lobbying expenses below $20,500 or vice versa; (8) the lobbying definition an organization uses affects the information it must disclose on its semiannual lobbying report; (9) when using an IRC definition, an organization must report its total lobbying expenses for all activities covered by that definition; (10) however, all of these expenses are reported in one total amount, so the lobbying reports do not indicate the amount related to different levels of government and types of lobbying activities; (11) when organizations report information other than expenses, they are required to report only information related to federal government lobbying, regardless of whether they use the LDA definition or one of the IRC definitions to calculate expenses; (12) because of the differences in definitions, information disclosed on lobbying reports filed by organizations using the IRC definitions is not comparable to information on reports filed by organizations using the LDA definition; (13) under the IRC definitions, organizations can disclose less information than under the LDA definition; (14) of the organizations that lobbied on their own behalf and had the option of using an IRC definition for reporting expenses under LDA, most used the LDA definition; (15) the organizations that reported using the IRC section 162(e) definition had the highest mean and median expenses; and (16) because the differences among the three lobbying definitions can significantly affect who registers and what they report under LDA, the use of the IRC definitions can conflict with LDA's public disclosure purpose.

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GAO has been assessing strategic sourcing and the potential value of applying these techniques to federal acquisitions for more than a decade. In 2002, GAO reported that leading companies of that time committed to a strategic approach to acquiring services—a process that moves a company away from numerous individual procurements to a broader aggregate approach—including developing knowledge of how much they were spending on services and taking an enterprise-wide approach to As a result, companies made structural changes services acquisition.with top leadership support, such as establishing commodity managers— responsible for purchasing services within a category—and were better able to leverage their buying power to achieve substantial savings. Strategic sourcing can encompass a range of tactics for acquiring products and services more effectively and efficiently. In addition to leveraged buying, tactics include managing demand by changing behavior, achieving efficiencies through standardization of the acquisition process, evaluating total cost of ownership, and better managing supplier relationships. We have particularly emphasized the importance of comprehensive spend analysis for efficient procurement since 2002. Spend analysis provides knowledge about how much is being spent for goods and services, who the buyers are, who the suppliers are, and where the opportunities are to save money and improve performance. Private sector companies are using spend analysis as a foundation for employing a strategic approach to procurement. We have previously reported that because procurement at federal departments and agencies is generally decentralized, the federal government is not fully leveraging its aggregate buying power to obtain the most advantageous terms and conditions for its procurements. Agencies act more like many unrelated, medium-sized businesses and often rely on hundreds of separate contracts for many commonly used items, with prices that vary widely. Recognizing the benefits of strategic sourcing, the Office of Management and Budget (OMB) issued a memorandum in 2005 that implemented strategic sourcing practices. Agencies were directed to develop and implement strategic sourcing efforts based on the results of spend analyses. In addition to individual agency efforts, a government-wide strategic sourcing program—known as the Federal Strategic Sourcing Initiative (FSSI)—was established in 2005. FSSI was created to address government-wide opportunities to strategically source commonly purchased products and services and eliminate duplication of efforts across agencies. The FSSI mission is to encourage agencies to aggregate requirements, streamline processes, and coordinate purchases of like products and services to leverage spending to the maximum extent possible. At the time of our 2012 report, four FSSI efforts were ongoing— focused on office supplies, domestic delivery of packages, telecommunications, and print management—and three were planned related to SmartBUY, Wireless plans and devices, and publication licenses. In our September 2012 report, we found that most of the agencies we reviewed leveraged a fraction of their buying power through strategic sourcing. More specifically, in fiscal year 2011, the Department of Defense (DOD), Department of Homeland Security (DHS), Department of Energy, and Department of Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts. Similarly, we found that the FSSI program had only managed a small amount of spending through its four government- wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts. Further, we found that most selected agencies’ efforts did not address their highest spending areas, such as services, which provides opportunities for significant savings. We found that when strategically sourced contracts were used, agencies generally reported achieving savings. For example, selected agencies generally reported savings ranging from 5 percent to over 20 percent of spending through strategically sourced contracts. In fiscal year 2011, DHS reported managing 20 percent of its spending and achieving savings of $324 million. At the government-wide level, the FSSI program reported managing $339 million through several government-wide initiatives in fiscal year 2011 and achieving $60 million in savings, or almost 18 percent of the procurement spending it managed through these initiatives. After strategic sourcing contracts are awarded, realizing cost savings and other benefits depends on utilization of these contracts. We found that only 15 percent of government-wide spending for the products and services covered by the FSSI program went through FSSI contracts in fiscal year 2011. Agencies cited a variety of reasons for not participating, such as wanting to maintain control over their contracting activities, or because the agency had unique requirements. FSSI use is not mandatory and agencies face no consequences for not using FSSI contract vehicles. There are a variety of impediments to strategic sourcing in the federal setting but several stood out prominently in our 2012 review.agencies faced challenges in obtaining and analyzing reliable and detailed data on spending as well as securing expertise, leadership support, and developing metrics. Data: Our reports have consistently found that the starting point for strategic sourcing efforts is having good data on current spending and yet this is the biggest stumbling block for agencies. A spending analysis reveals how much is spent each year, what was bought, from whom it was bought, and who was purchasing it. The analysis also identifies where numerous suppliers are providing similar goods and services—often at varying prices—and where purchasing costs can be reduced and performance improved by better leveraging buying power and reducing the number of suppliers to meet needs. The FSSI program and selected agencies generally cited the Federal Procurement Data System-Next Generation (FPDS-NG)—the federal government’s current system for tracking information on contracting actions—as their primary source of data, and noted numerous deficiencies with these data for the purposes of conducting strategic sourcing research. Agencies reported that when additional data sources are added, incompatible data and separate systems often presented problems. We have previously reported extensively on issues agencies faced in gathering data to form the basis for their spend analysis. However, some agencies have been able to make progress on conducting enterprise-wide opportunity analyses despite flaws in the available data. For example, both the FSSI Program Management Office and DHS told us that current data, although imperfect, provide sufficient information for them to begin to identify high spend opportunities. DHS has in fact evaluated the majority of its 10 highest-spend commodities and developed sourcing strategies for seven of those based on its analysis of primarily FPDS-NG data. Further, we have previously reported that the General Services Administration estimated federal agencies spent about $1.6 billion during fiscal year 2009 purchasing office supplies from more than GSA used available data on spending to support 239,000 vendors.development of the Office Supplies Second Generation FSSI, which focuses office supply spending to 15 strategically sourced contracts. Expertise: Officials at several agencies also noted that the lack of trained acquisition personnel made it difficult to conduct an opportunity analysis and develop an informed sourcing strategy. For example, Army officials cited a need for expertise in strategic sourcing and spend analysis data, and OMB officials echoed that a key challenge is the dearth of strategic sourcing expertise in government. VA and Energy also reported this challenge. A few agencies have responded to this challenge by developing training on strategic sourcing for acquisition personnel. For example, the Air Force noted that it instituted training related to strategic sourcing because it is necessary to have people who are very strong analytically to do the front-end work for strategic sourcing, and these are the hardest to find. The training course facilitates acquisition personnel in obtaining the strong analytical skills to perform steps like market evaluation. VA has also begun to develop training to address this challenge. Leadership commitment: We also found in 2012 that most of the agencies we reviewed were challenged by a lack of leadership commitment to strategic sourcing, although improvements were under way. We have reported that in the private sector, the support and commitment of senior management is viewed as essential to facilitating companies’ efforts to re-engineer their approaches to acquisition as well as to ensuring follow through with the strategic sourcing approach. However, we found in 2012 that leaders at some agencies were not dedicating the resources and providing the incentives that were necessary to build a strong foundation for strategic sourcing. Metrics: A lack of clear guidance on metrics for measuring success has also impacted the management of ongoing FSSI efforts as well as most selected agencies’ efforts. We found that agencies were challenged to produce utilization rates and other metrics—such as spending through strategic sourcing contracts and savings achieved— that could be used to monitor progress. Several agencies also mentioned a need for sustained leadership support and additional resources in order to more effectively monitor their ongoing initiatives. Agency officials also mentioned several disincentives that can discourage procurement and program officials from proactively participating in strategic sourcing, and at many agencies, these disincentives have not been fully addressed by leadership. Key disincentives identified by agency officials include the following: A perception that reporting savings due to strategic sourcing could lead to program budgets being cut in subsequent years, Difficulty identifying existing strategic sourcing contracts that are available for use as there is no centralized source for this information, A perception that strategically sourced contract vehicles may limit the ability to customize requirements, A desire on the part of agency officials to maintain control of their Program officials’ and contracting officers’ relationships with existing The opportunity to get lower prices by going outside of strategically sourced contracts. Leaders at some agencies have proactively introduced practices that address these disincentives to strategically source. For example, DHS and VA reported increasing personal incentives for key managers by adding strategic sourcing performance measures to certain executives’ performance evaluations. In addition, several agencies including DOD, DHS, and VA have instituted policies making use of some strategic sourcing contracts mandatory or mandatory “with exception,” although the extent to which these policies have increased use of strategic sourcing vehicles is not yet clear. Some agencies have made use of automated systems to direct spending through strategic sourcing contracts. For example, FSSI issued a blanket purchase agreement through its office supplies initiative that included provisions requiring FSSI prices to be automatically applied to purchases made with government purchase cards. VA reported that its utilization rate for the office supplies FSSI contracts increased from 12 percent to 90 percent after these measures took effect. In fiscal year 2012, the federal government obligated $307 billion to acquire services ranging from the management and operations of government facilities, to information technology services, to research and development. This represents over half of all government procurements. Making services procurement more efficient is particularly relevant given the current fiscal environment, as any savings from this area can help agencies mitigate the adverse effects of potential budget reductions on their mission. Moreover, our reports have shown that agencies have difficulty managing services acquisition and have purchased services inefficiently, which places them at risk of paying more than necessary. These inefficiencies can be attributed to several factors. First, agencies have had difficulty defining requirements for services, such as developing clear statements of work which can reduce the government’s risk of paying for more services than needed. Second, agencies have not always leveraged knowledge of contractor costs when selecting contract types. Third, agencies have missed opportunities to increase competition for services due to overly restrictive and complex requirements; a lack of access to proprietary, technical data; and supplier preferences. We found that strategic sourcing efforts addressed products significantly more often than services and that agencies were particularly reluctant to apply strategic sourcing to the purchases of services. For example, of the top spending categories that DOD components reported targeting through implemented strategic sourcing initiatives, only two are services. Officials reported that they have been reluctant to strategically source services for a variety of reasons, such as difficulty in standardizing requirements or a decision to focus on less complex commodities that can demonstrate success. Yet, like the commercial sector, federal agencies can be strategic about buying services. For example, DHS has implemented a strategic sourcing initiative for engineering and technical services, which is also in the top 10 spending categories for the Army, Air Force, and Navy. The reluctance of federal agencies to apply strategic sourcing to services stands in sharp contrast to leading companies. As described below, leading companies perceive services as prime candidates for strategic sourcing, though they tailor how they acquire these services based on complexity and availability. Given the trend of increased federal government spending on services and today’s constrained fiscal environment, this Committee asked that we identify practices used by large commercial organizations in purchasing services. We reported on the results of this review in April 2013. Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years, have been examining ways to better manage them. Officials from seven leading companies GAO spoke with reported saving 4 to15 percent over prior year spending through strategically sourcing the full range of services they buy, including services very similar to what the federal government buys: facilities management, engineering, and information technology, for example. Leading company practices suggest that it is critical to analyze all procurement spending with equal rigor and with no categories that are off limits. Achieving savings can require a departure from the status quo. Companies’ keen analysis of spending, coupled with central management and knowledge sharing about the services they buy, is key to their savings. Their analysis of spending patterns can be described as comprising two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation; they do not treat all services the same. In our 2013 report, we highlighted quotes from company officials that illuminate what their approach to increasing procurement efficiency means to them (see table 1). Leading companies generally agreed that the following foundational principles are all important to achieving successful services acquisition outcomes: maintaining spend visibility, developing category strategies, focusing on total cost of ownership, and regularly reviewing strategies and tactics. Taken together, these principles enable companies to better identify and share information on spending and increase market knowledge about suppliers to gain situational awareness of their procurement environment. This awareness positions companies to make more informed contracting decisions. For example, in addition to leveraging knowledge about spending, leading companies centralize procurement decisions by aligning, prioritizing, and integrating procurement functions within the organization. The companies we spoke with overcame the challenge of having a decentralized approach to purchasing services, which had made it difficult to share knowledge internally or use consistent procurement tactics. Without a centralized procurement process, officials told us, companies ran the risk that different parts of the organization could be unwittingly buying the same item or service, thereby missing an opportunity to share knowledge of procurement tactics proven to reduce costs. Company officials noted that centralizing procurement does not necessarily refer to centralizing procurement activity, but to centralizing procurement knowledge. This is important because there is a perception in the federal community that strategic sourcing requires the creation of a large, monolithic buying organization. Companies also develop category-specific procurement strategies with stakeholder buy-in in order to use the most effective sourcing strategies for each category. Category-specific procurement strategies describe the most cost-effective sourcing vehicles and supplier selection criteria to be used for each category of service, depending on factors such as current and projected requirements, volume, cyclicality of demand, risk, the services that the market is able to provide, supplier base competition trends, the company’s relative buying power, and market price trends. Company officials told us that category strategies help them conduct their sourcing according to a proactive strategic plan and not just on a reactive, contract-by-contract basis. One company’s Chief Procurement Officer referred to the latter as a “three bids and a buy” mentality that can be very narrowly focused and result in missed opportunities such as not leveraging purchases across the enterprise or making decisions based only on short term requirements. Similarly, Boeing says it sometimes chooses to execute a short-term contract to buy time if market research shows a more competitive deal can be obtained later. In addition, companies focus on total cost of ownership—making a holistic purchase decision by considering factors other than price. This is also contrary to a perception that strategic sourcing can lose a focus on best value. For example, while Walmart may often award a contract to the lowest bidder, it takes other considerations into account—such as average invoice price, time spent on location, average time to complete a task, supplier diversity, and sustainability—when awarding contracts. Humana is developing internal rate cards for consulting services that would help the company evaluate contractors’ labor rates based on their skill level. Pfizer’s procurement organization monitors compliance with company processes and billing guidelines. The company considers its procurement professionals as essentially risk managers rather than contract managers because they need to consider what is best for the company and how to minimize total cost of ownership while maintaining flexibility. By following the foundational principles to improve knowledge about their procurement environment, companies are well positioned to choose procurement tactics tailored to each service. While companies emphasize the importance of observing the principles, including category strategies, they do not take a one-size-fits-all approach to individual service purchase decisions. Two factors—the degree of complexity of the service and the number of available suppliers—determine the choice of one of four general categories of procurement tactics appropriate for that service: leveraging scale, standardizing requirements, prequalifying suppliers, and understanding cost drivers. Figure 1 below shows how the two factors help companies categorize different services and select appropriate tactics. For commodity services with many suppliers, such as administrative support, facilities maintenance, and housekeeping, companies generally focus on leveraging scale and competition to lower cost. Typical tactics applicable to this quadrant of services include consolidating purchases across the organization; using fixed price contracts; developing procurement catalogs with pre-negotiated prices for some services; and varying bidding parameters such as volume and scale in order to find new ways to reduce costs. For commodity services with few suppliers, such as specialized logistics and utilities, companies focus on standardizing requirements. Typical tactics applicable to this quadrant of services include paring back requirements in order to bring them more in line with standard industry offerings, and developing new suppliers to maintain a competitive industrial base. For example, Walmart holds pre-bid conferences with suppliers such as those supplying store security for “Black Friday”—the major shopping event on the day after Thanksgiving—to discuss requirements and what suppliers can provide. Delphi makes an effort to maintain a competitive industrial base by dual-sourcing certain services in order to minimize future risk—a cost trade-off. For knowledge-based services with many suppliers, such as information technology, legal, and financial services, companies prequalify and prioritize suppliers to highlight the most competent and reasonable suppliers. Typical tactics applicable to this quadrant of services include prequalifying suppliers by skill level and labor hour rates; and tracking supplier performance over time in order to inform companies’ prioritization of suppliers based on efficiency. For example, Pfizer Legal Alliance was created to channel the majority of legal services to pre-selected firms. Delphi only awards contracts to companies on their Category Approved Supplier List. The list is approved by Delphi leadership and is reviewed annually. For knowledge-based services with few suppliers, such as engineering and management support and research and development services, companies aim to maximize value by better understanding and negotiating individual components that drive cost. Typical tactics applicable to this quadrant of services include negotiating better rates on the cost drivers for a given service; closely monitoring supplier performance against pre-defined standards; benchmarking supplier rates against industry averages in order to identify excess costs; and improving collaboration with suppliers (see table 2). Companies we reviewed are not content to remain limited by their environment; over the long term, they generally seek to reduce the complexity of requirements and bring additional suppliers into the mix in order to commoditize services and leverage competition. This dynamic, strategic approach has helped companies demonstrate annual, sustained savings. Companies generally aim to commoditize services over the long term as much as possible because, according to them, the level of complexity directly correlates with cost. Companies also aim to increase competition, whether by developing new suppliers or reducing requirements complexity, which could allow more suppliers to compete. In doing so, companies can leverage scale and competition to lower costs. OMB and other agencies have recently taken actions to expand the use of strategic sourcing. In September 2012, GAO recommended that the Secretary of Defense, the Secretary of Veterans Affairs, and the Director of OMB take a series of detailed steps to improve strategic sourcing efforts. More specifically, we recommended that DOD evaluate the need for additional guidance, resources, and strategies, and focus on DOD’s highest spending categories; VA evaluate strategic sourcing opportunities, set goals, and establish OMB issue updated government-wide guidance on calculating savings, establish metrics to measure progress toward goals, and identify spending categories most suitable for strategic sourcing. In commenting on the September 2012 report, DOD, VA, and OMB concurred with the recommendations and stated they would take action to adopt them. We reported in April 2013 that DOD and VA had not fully adopted a strategic sourcing approach but had actions under way. For example, at that time, DOD had developed a more comprehensive list of the department’s strategic sourcing efforts, was creating additional guidance that includes a process for regular review of proposed strategic sourcing initiatives, noted a more focused targeting of top procurement spending categories for supplies, equipment, and services, and was assessing the need for additional resources to support strategic sourcing efforts. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives, and adding resources to increase strategic sourcing efforts. In 2012, OMB released a Cross-Agency Priority Goal Statement, which called for agencies to strategically source at least two new products or services in both 2013 and 2014 that yielded at least 10 percent savings. At least one of these new initiatives is to target information technology commodities or services. In December 2012, OMB further directed certain agencies to reinforce senior leadership commitment by designating an official responsible for coordinating the agency’s strategic sourcing activities. In addition, OMB identified agencies that should take a leadership role on strategic sourcing. OMB called upon these agencies to lead government-wide strategic sourcing efforts by taking steps such as recommending management strategies for specific goods and services to ensure that the federal government receives the most favorable offer possible. OMB directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending. In closing, current fiscal pressures and budgetary constraints have heightened the need for agencies to take full advantage of strategic sourcing. These practices drive efficiencies and yield benefits beyond savings, such as increased business knowledge and better supplier management. Government-wide strategic sourcing efforts have been initiated, and federal agencies have improved and expanded upon their use of strategic sourcing to achieve cost savings and other benefits. However, little progress has been made over the past decade and much more needs to be done to better incorporate strategic sourcing leading practices, increase the amount of spending through strategic sourcing, and direct more efforts at high spend categories, such as services. Companies have shown that it is possible to save money by strategically managing services. They have done so not just by consolidating purchases of simple, commodity-like services; they have devised strategies and tactics to manage sophisticated services. Companies have also shown that savings come over a wide base and that results can be achieved with leadership, shared data, and a focus on strategic categories that is dynamic rather than static. Strategic sourcing efforts to date have targeted a small fraction of federal procurement spending. As budgets decline, however, it is important that the cost culture in federal agencies change. Adopting leading practices can enable agencies to provide more for the same budget. Chairman Carper, Ranking Member Coburn, and Members of the Committee, this concludes my statement. I would be pleased to answer any questions at this time. For future questions about this statement, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include W. William Russell, Assistant Director; Peter Anderson; Leigh Ann Haydon; John Krump; Roxanna Sun; Molly Traci; Ann Marie Udale; Alyssa Weir; and Rebecca Wilson. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO has reported that the government is not fully leveraging its aggregate buying power. Strategic sourcing, a process that moves an organization away from numerous individual procurements to a broader aggregate approach, has allowed leading companies to achieve savings of 10 percent or more. A savings rate of 10 percent of total federal procurement spending would represent more than $50 billion annually. While strategic sourcing makes good sense and holds the potential to achieve significant savings, federal agencies have been slow to embrace it, even in a time of great fiscal pressure. This statement highlights GAO's recent findings related to the use of strategic sourcing across government, best practices leading companies are adopting to increase savings when acquiring services, and recent actions that could facilitate greater use of strategic sourcing. GAO's testimony is based largely on GAO's September 2012 report on strategic sourcing and GAO's April 2013 report on leading practices for acquiring services, as well as other GAO reports on contracting and acquisition. Most of the agencies GAO reviewed for its September 2012 report leveraged a fraction of their buying power. More specifically, in fiscal year 2011, the Departments of Defense (DOD), Homeland Security, Energy, and Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts. Similarly, GAO found that the Federal Strategic Sourcing Initiative had only managed a small amount of spending through its four government-wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts. Further, we found that most selected agencies' efforts did not address their highest spending areas, such as services, which may provide opportunities for significant savings. Companies' keen analysis of spending is key to their savings, coupled with central management and knowledge sharing about the services they buy. Their analysis of spending patterns comprises two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation, and do not treat all services the same. Leading companies generally agreed that foundational principles--maintaining spend visibility, centralizing procurement, developing category strategies, focusing on total cost of ownership, and regularly reviewing strategies and tactics--are all important to achieving successful services acquisition outcomes. Taken together, these principles enable companies to better identify and share information on spending and increase market knowledge about suppliers to gain situational awareness of their procurement environment and make more informed contracting decisions. Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years have been examining ways to better manage spending. Officials from seven leading companies GAO spoke with reported saving 4 to 15 percent over prior year spending through strategically sourcing the full range of services they buy, including those very similar to what the federal government buys--for example, facilities management, engineering, and information technology. Agencies have not fully adopted a strategic sourcing approach but some have actions under way. For example, in April 2013, DOD was assessing the need for additional resources to support strategic sourcing efforts, and noted a more focused targeting of top procurement spending categories for supplies, equipment, and services. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives. In 2012, the Office of Management and Budget (OMB) released a Cross-Agency Priority Goal Statement, which called for agencies to strategically source at least two new products or services in both 2013 and 2014 that yield at least 10 percent savings. In December 2012, OMB further directed agencies to reinforce senior leadership commitment by designating an official responsible for coordinating the agency's strategic sourcing activities. In addition, OMB identified agencies that should take a leadership role on strategic sourcing. OMB directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending. GAO is not making any new recommendations in this testimony. GAO has made recommendations to OMB, DOD, VA, and other agencies on key aspects of strategic sourcing and acquisition of products and services in the past. These recommendations addressed such matters as setting goals and establishing metrics. OMB and the agencies concurred with the recommendations, and are in the process of implementing them.

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Current surface transportation programs do not effectively address the transportation challenges the nation faces. Collectively, post-interstate-era programs addressing highway, transit, and safety are an agglomeration that has been established over half a century without a well-defined vision of the national interest and federal role. Many surface transportation programs are not linked to performance of the transportation system or grantees, as most highway, transit, and safety funds are distributed through formulas that only indirectly relate to needs and may have no relationship to performance. In addition, the programs often do not use the best tools or best approaches, such as using more rigorous economic analysis to select projects. Finally, the fiscal sustainability of the numerous highway, transit, and safety programs funded by the Highway Trust Fund is in doubt, as a result of increased spending from the fund without commensurate increases in revenues. Since the Federal-Aid Highway Act of 1956 funded the modern federal highway program, the federal role in surface transportation has expanded to include broader goals, more programs, and a variety of program structures. Although most surface transportation funds remain dedicated to highway infrastructure, federal surface transportation programs have grown in number and complexity, incorporating additional transportation, environmental, and societal goals. While some of these goals have led to new grant programs in areas such as transit, highway safety, and motor carrier safety, others have led to additional procedural requirements for receiving federal aid, such as environmental review and transportation planning requirements. This expansion has also created a variety of grant structures and federal approaches for establishing priorities and distributing federal funds. Most highway infrastructure funds continue to be distributed to states in accordance with individual grant program formulas and eligibility requirements. However, broad program goals, eligibility requirements, and authority to transfer funds between highway programs give state and local governments broad discretion to allocate highway infrastructure funds according to their priorities. Although some transit formula grant programs also give grantees considerable discretion to allocate funds, a portion of transit assistance requires grantees to compete for funding based on specific criteria and goals. Similarly, basic safety formula grant programs are augmented by smaller programs that directly target federal funds to specific goals and actions using financial incentives and penalty provisions. We have found that many federal surface transportation programs are not effective at addressing key transportation challenges, such as increasing congestion and growing freight demand, because federal goals and roles are unclear, and many programs lack links to needs or performance. The goals of federal surface transportation programs are numerous and sometimes conflicting, which contributes to a corresponding lack of clarity in the federal role. For example, despite statutes and regulations that call for an intermodal approach (one that creates connections across modes), only one federal program is specifically directed at intermodal infrastructure. Most highway, transit, and safety grant funds are distributed through formulas that have only an indirect relationship to needs and many have no relationship to performance or outcomes. The largest safety grants are more likely than highway grants to be focused on goals rather than specific transportation systems such as the interstate system, and several highway safety and motor carrier safety grants allocate incentive funds on the basis of performance or state efforts to carry out specific safety- related activities. However, since the majority of surface transportation funds are distributed without regard to performance, it is difficult to assess the impact of recent record levels of federal highway expenditures. For example, while the condition of highways showed some improvement between 1997 and 2004, traffic congestion increased in the same period. Mechanisms to link programs to goals also appear insufficient because, particularly within the Federal-aid Highway program, federal rules for transferring funds between different highway infrastructure programs are flexible, weakening the distinctions between individual programs (see fig. 1). Surface transportation programs often do not employ the best tools and approaches to ensure effective investment decisions. Rigorous economic analysis does not generally drive the investment decisions of state and local governments—in a 2004 survey of state departments of transportation, 34 of 43 state departments of transportation cited political support and public opinion as very important factors, whereas 8 said the same of the ratio of benefits to costs. The federal government also does not possess adequate data to assess outcomes or implement performance measures. For example, the Department of Transportation (DOT) does not have a central source of data on congestion, even though it has identified congestion as a top priority. While some funds can be transferred between highway and transit programs, modally stovepiped funding nevertheless impedes efficient planning and project selection. Additionally, tools to make better use of existing infrastructure, such as intelligent transportation systems and congestion pricing, have not been deployed to their full potential. The solvency of the federal surface transportation program is at risk because expenditures now exceed revenues for the Highway Trust Fund, and projections indicate that the balance of the Highway Trust Fund will soon be exhausted. According to the Congressional Budget Office (CBO), the Highway Account will face a shortfall in 2009, the Transit Account in 2012. The rate of expenditures has affected its fiscal sustainability. As a result of the Transportation Equity Act for the 21st Century (TEA-21), Highway Trust Fund spending rose 40 percent from 1999 to 2003 and averaged $36.3 billion in contract authority per year. The upward trend in expenditures continued under the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), which provided an average of $57.2 billion in contract authority per year. While expenditures from the trust fund have grown, revenues into the fund have not kept pace. The current fuel tax of 18.4 cents per gallon has been in place since 1993, and the buying power of the fixed cents-per-gallon amount has since been eroded by inflation. The reallocation to the Highway Trust Fund of 4.3 cents of federal fuel tax previously dedicated to deficit reduction provided an influx of funds beginning in 1997. However, this influx has been insufficient to sustain current spending levels. Furthermore, while federal funding for transportation has increased, the total funding for transportation may not increase to the same extent because federal funds may be substituted for state and local funds. Thus, added federal funds may not lead to a commensurate increase in the total investment in highways because state and local governments can shift nonfederal funds away from highways to other purposes. Increases in federal funding do appear to reduce state spending for the same purpose, reducing the return on the federal investment. Research estimates that about 50 percent of each additional federal grant dollar for the highway program displaces funds that states would otherwise have spent on highways. As we have previously reported, this situation argues for a fundamental reexamination of the federal approach to surface transportation problems and a restructuring of federal programs to create more focused, performance-based, and sustainable programs. In cases for which there is a significant national interest, maintaining strong federal financial support and a more direct federal involvement in the program may be needed. In other cases, functions may best be carried out by other levels of government or not at all. There may also be cases for which federal financial support is desirable but a more results-oriented approach is appropriate. In addition, depending on the transportation issue and the desired goals, different options and approaches may be appropriate for different problems. Restructuring the current approach to transportation problems will take time, but a vision and strategy are needed to begin the process of transforming to a set of policies and programs to effectively address the nation’s transportation needs and priorities. Through our prior analyses of existing programs, we identified a framework of principles that could help drive an assessment of proposals for restructuring and funding federal surface transportation programs. These principles include (1) creating well-defined goals based on identified areas of national interest, (2) establishing and clearly defining the federal role in achieving each goal, (3) incorporating performance and accountability into funding decisions, (4) employing the best tools and approaches to improve results and emphasize return on investment, and (5) ensuring fiscal sustainability. We have also developed a series of illustrative questions that can be used to determine the extent to which restructuring and funding proposals are aligned with each principle. We developed these principles and illustrative questions based on prior analyses of existing surface transportation programs as well as a body of work that we have developed for Congress, including GAO’s High-Risk, Performance and Accountability, and 21st Century Challenges reports. The principles do not prescribe a specific approach to restructuring or funding, but they do provide key attributes that will help ensure that restructured surface transportation programs address current challenges. Our previous work has shown that identifying areas of national interest is an important first step in any proposal to restructure and fund surface transportation programs. In identifying areas of national interest, proposals should consider existing 21st century challenges and how future trends could affect emerging areas of national importance—as well as how the national interest and federal role may vary by area. For example, experts have suggested that federal transportation policy should recognize emerging national and global imperatives, such as reducing the nation’s dependence on oil and minimizing the impact of the transportation system on global climate change. Once the various national interests in surface transportation have been identified, proposals should also clarify specific goals for federal involvement in surface transportation programs. Goals should be specific and outcome-based to ensure that resources are targeted to projects that further the national interest. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs create well-defined goals based on identified areas of national interest. To what extent are areas of national interest clearly defined? To what extent are areas of national interest reflective of future trends? To what extent are goals defined in relation to identified areas of national interest? After the various national interests and specific goals for federal involvement in surface transportation have been identified, the federal role in working toward each goal should be established. The federal role should be defined in relation to the roles of state and local governments, regional entities, and the private sector. Where the national interest is greatest, the federal government may play a more direct role in setting priorities and allocating resources as well as fund a higher share of program costs. Conversely, where the national interest is less evident, state and local governments and others could assume more responsibility. For example, efforts to reduce transportation’s impact on greenhouse gas emissions may warrant a greater federal role than other initiatives, such as reducing urban congestion, since the impacts of greenhouse gas emissions are widely dispersed, whereas the impacts of urban congestion may be more localized. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund the surface transportation programs establish and clearly define the federal role in achieving each goal. To what extent is the federal role directly linked to defined areas of national interest and goals? To what extent is the federal role defined in relation to the roles of state and local governments, regional entities, and the private sector? To what extent does the proposal consider how the transportation system is linked to other sectors and national policies, such as environmental, security, and energy policies? Our previous work has shown that an increased focus on performance and accountability for results could help the federal government target resources to programs that best achieve intended outcomes and national transportation priorities. Tracking specific outcomes that are clearly linked to program goals could provide a strong foundation for holding grant recipients responsible for achieving federal objectives and measuring overall program performance. In particular, substituting specific performance measures for the current federal procedural requirements could help make the program more outcome-oriented. For example, if reducing congestion were an established federal goal, outcome measures for congestion, such as reduced travel time, could be incorporated into the programs to hold state and local governments responsible for meeting specific performance targets. Furthermore, directly linking the allocation of resources to the program outcomes would increase the focus on performance and accountability for results. Incorporating incentives or penalty provisions into grants can further hold grantees and recipients accountable for achieving results. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs incorporate performance and accountability into funding decisions. Are national performance goals identified and discussed in relation to state, regional, and local performance goals? To what extent are performance measures outcome-based? To what extent is funding linked to performance? To what extent does the proposal include provisions for holding stakeholders accountable for achieving results? We have previously reported that the effectiveness of any overall federal program design can be increased by promoting and facilitating the use of the best tools and approaches to improve results and emphasize return on investment. Importantly, given the projected growth in federal deficits, constrained state and local budgets, and looming Social Security and Medicare spending commitments, the resources available for discretionary programs will be more limited—making it imperative to maximize the national public benefits of any federal investment through a rigorous examination of the use of such funds. A number of specific tools and approaches can be used to improve results and return on investment including using economic analysis, such as benefit-cost analysis, in project selection; requiring grantees to conduct post-project evaluations; creating incentives to better utilize existing infrastructure; providing states and localities with greater flexibility to use certain tools, such as tolling and congestion pricing; and requiring maintenance-of-effort provisions in grants. Using these tools and approaches could help surface transportation programs more directly address national transportation priorities. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs employ the best tools and approaches to improve results and emphasize return on investment. To what extent do the proposals consider how costs and revenues will be shared among federal, state, local, and private stakeholders? To what extent do the proposals address the need better to align fees and taxes with use and benefits? To what extent are trade-offs between efficiency and equity considered? Do the tools and approaches align with the level of federal involvement in a given policy area? To what extent do the proposals provide flexibility and incentives for state and local governments to choose the most appropriate tool in the toolbox? Our previous work has shown that transportation funding, and the Highway Trust Fund in particular, faces an imbalance of revenues and expenditures and other threats to its long term sustainability. Furthermore, the sustainability of transportation funding should also be seen in the context of the broader, governmentwide problem of fiscal imbalance. The federal role in transportation funding must be reexamined to ensure that it is sustainable in this new fiscal reality. A sustainable surface transportation program will require targeted investment, with adequate return on investment, from not only the federal government but also state and local governments and the private sector. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs ensure fiscal sustainability. To what extent do the proposals reexamine current and future spending on surface transportation programs? Are the recommendations affordable and financially stable over the long- term? To what extent are the recommendations placed in the context of federal deficits, constrained budgets, and other spending commitments, and to what extent do they meet a rigorous examination of the use of federal funds? To what extent are recommendations considered in the context of trends that could affect the transportation system in the future, such as population growth, increased fuel efficiency, and increased freight traffic? Current concerns about the sustainability and performance of existing programs suggest that this is an opportune time for Congress to more clearly define the federal role in transportation and improve progress toward specific, nationally defined outcomes. Given the scope of the needed transformation, it may be necessary to shift policies and programs incrementally or on a pilot basis to gain practical lessons for a coherent, sustainable, and effective national program and funding structure to best serve the nation for the 21st century. Absent changes in planned spending, a variety of funding and financing options will likely be needed to address projected transportation funding shortfalls. Although some of the demand for additional investment in transportation could be reduced, there is a growing consensus that some level of additional investment in transportation is warranted. A range of options—from altering existing or introducing new funding approaches to employing various financing mechanisms—could be used to help meet the demand for additional investments. Each of these options has different merits and challenges, and the selection of any of them will likely involve trade-offs among different policy goals. Furthermore, the suitability of any of these options depends on the level of federal involvement or control that policymakers desire for a given area of policy. However, as we have reported, when infrastructure investment decisions are made based on sound evaluations, these options can lead to an appropriate blend of public and private funds to match public and private costs and benefits. Estimates from multiple sources indicate that additional investment in the transportation system could be warranted. For example, in its January 2008 report, the National Surface Transportation Policy and Revenue Study Commission (Policy Commission) recommended an annual investment of about $225 billion from all levels of government in the surface transportation system—an increase of about $140 billion from current spending levels. Similarly, the Congressional Budget Office recently estimated that an annual investment of about $165 billion in surface transportation could be economically justifiable. In addition, in its February 2008 interim report, the National Surface Transportation Infrastructure Financing Commission (Financing Commission) noted that one of its base assumptions is that there is a gap between current funding levels and investment needs. However, some of the demand for additional investment in transportation infrastructure could be reduced. We have previously reported that the ways in which revenue is generated and distributed can influence the decisions made by users as well as decision-making and programs at the state and local levels. In particular, our previous work has shown that current funding and decision-making processes provide a built-in preference for projects that build or maintain transportation infrastructure rather than try to use existing infrastructure more efficiently—which would reduce the overall demand for additional investments. CBO also recently reported that some of the demand for additional spending on infrastructure could be met by providing incentives to use existing infrastructure more efficiently. In its February 2008 interim report, the Financing Commission noted the need to use new approaches and technologies to maximize the use of current capacity. We have also previously reported that increased federal highway grants influence states and localities to substitute federal funds for funds they otherwise would have spent on highways for other purposes. Consequently, additional federal investments in transportation do not necessarily translate into commensurate levels of spending by the states and localities on transportation. Addressing this “leakage” with such tools as maintenance-of-effort requirements could maximize the effectiveness of federal investments. The principles we have identified for restructuring the surface transportation programs can also be used as a framework for considering levels of investment and the funding and financing options described below. For example, in defining the federal role in funding transportation, we have previously reported that where the national interest is greatest, having the federal government fund a higher share of program costs could be appropriate. Conversely, where the national interest is less evident, state and local governments, and others could assume more responsibility. In addition, incorporating incentives or penalty provisions into different funding and financing approaches can help ensure performance and accountability. Various existing funding approaches could be altered or new funding approaches could be developed, to help fund investments in the nation’s infrastructure. These various approaches can be grouped into two categories: taxes and user fees. A variety of taxes have been and could be used to fund the nation’s infrastructure, including excise, sales, property, and income taxes. For example, federal excise taxes on motor fuels are the primary source of funding for the federal surface transportation program. Fuel taxes are attractive because they have provided a relatively stable stream of revenues and the collection and enforcement costs are relatively low. However, fuel taxes do not currently convey to drivers the full costs of their use of the road—such as the costs of wear and tear, congestion, and pollution. Moreover, federal motor fuel taxes have not been increased since 1993—and thus the purchasing power of fuel tax revenues has eroded with inflation. As CBO has previously reported, the existing fuel taxes could be altered in a variety of ways to address this erosion, including increasing the per-gallon tax rate and indexing the rates to inflation. Some transportation stakeholders have suggested exploring the potential of using a carbon tax, or other carbon pricing strategies, to help fund infrastructure investments. In a system of carbon taxes, fossil fuel emissions would be taxed, with the tax proportional to the amount of carbon dioxide released in its combustion. Because a carbon tax could have a broad effect on consumer decisions, we have previously reported that it could be used to complement Corporate Average Fuel Economy standards, which require manufacturers meet fuel economy standards for passenger cars and light trucks to reduce oil consumption. A carbon tax would create incentives that could affect a broader range of consumer choices as well as provide revenue for infrastructure. Another funding source for infrastructure is user fees. The concept underlying user fees—that is, users pay directly for the infrastructure they use—is a long-standing aspect of many infrastructure programs. Examples of user fees that could be altered or introduced include fees based on vehicle miles traveled (VMT) on roadways; freight fees, such as a per- container charge; congestion pricing of roads; and tolling. VMT fees. To more directly reflect the amount a vehicle uses the road, users could be charged a fee based on the number of vehicle miles traveled. In 2006, the Oregon Department of Transportation conducted a pilot program designed to test the technological and administrative feasibility of a VMT fee. The pilot program demonstrated that a VMT fee could be implemented to replace the fuel tax as the principal source of transportation revenue by utilizing a Global Positioning System (GPS) to track miles driven and collecting the VMT fee ($0.012 per mile traveled) at fuel pumps that can read information from the GPS. As we have previously reported, using a GPS could also track mileage in high congestion zones, and the fee could be adjusted upward for miles driven in these areas or during more congested times of day such as rush hour—a strategy that might reduce congestion and save fuel. In addition, the system could be designed to apply different fees to vehicles, depending on their fuel economy. On the federal level, a VMT fee could be based on odometer readings, which would likely be a simpler and less costly way to implement such a program. A VMT fee—unless it is adjusted based on the fuel economy of the vehicle—does not provide incentives for customers to buy vehicles with higher fuel economy ratings because the fee depends only on mileage. Also, because the fee would likely be collected from individual drivers, a VMT fee could be expensive for the government to implement, potentially making it a less cost-effective approach than a motor fuel or carbon tax. The Oregon study also identified other challenges including concerns about privacy and technical difficulties in retrofitting vehicles with the necessary technology. Freight fees. Given the importance of freight movement to the economy, the Policy Commission recently recommended a new federal freight fee to support the development of a national program aimed at strategically expanding capacity for freight transportation. While the volume of domestic and international freight moving through the country has increased dramatically and is expected to continue growing, the capacity of the nation’s freight transportation infrastructure has not increased at the same rate as demand. To support the development of a national program for freight transportation, the Policy Commission recommended the introduction of a federal freight fee. The Policy Commission notes that a freight fee, such as a per-container charge, could help fund projects that remedy chokepoints and increase throughput. The Policy Commission also recommended that a portion of the customs duties, which are assessed on imported goods, be used to fund capacity improvements for freight transportation. The majority of customs duties currently collected, however, are deposited in the U.S. Treasury’s general fund for the general support of federal activities. Therefore, designating a portion of customs duties for surface transportation funding would not create a new source of revenue, but rather transfer funds from the general fund. Congestion pricing. As we have previously reported, congestion pricing, or road pricing, attempts to influence driver behavior by charging fees during peak hours to encourage users to shift to off-peak periods, use less congested routes, or use alternative modes. Congestion pricing can also help guide capital investment decisions for new transportation infrastructure. In particular, as congestion increases, toll rates also increase, and such increases (sometimes referred to as “congestion surcharges”) signal increased demand for physical capacity, indicating where capital investments to increase capacity would be most valuable. Furthermore, these congestion surcharges can potentially enhance mobility by reducing congestion and the demand for roads when the surcharges vary according to congestion to maintain a predetermined level of service. The most common form of congestion pricing in the United States is high-occupancy toll lanes, which are priced lanes that offer drivers of vehicles that do not meet the occupancy requirements the option of paying a toll to use lanes that are otherwise restricted for high- occupancy vehicles. Financing mechanisms can provide flexibility for all levels of government when funding additional infrastructure projects, particularly when traditional pay-as-you-go funding approaches, such as taxes or fees, are not set at high enough levels to meet demands. The federal government currently offers several programs to provide state and local governments with incentives such as bonds, loans, and credit assistance to help finance infrastructure. Financing mechanisms can create potential savings by accelerating projects to offset rapidly increasing construction costs and offer incentives for investment from state and local governments and from the private sector. However, each financing strategy is, in the final analysis, a form of debt that ultimately must be repaid with interest. Furthermore, since the federal government’s cost of capital is lower than that of the private sector, financing mechanisms, such as bonding, may be more expensive than timely, full, and up-front appropriations. Finally, if the federal government chooses to finance infrastructure projects, policy makers must decide how borrowed dollars will be repaid, either by users or by the general population either now or in the future through increases in taxes or reductions in other government services. A number of available mechanisms can be used to help finance infrastructure projects. Examples of these financing mechanisms follow. Bonding. A number of bonding strategies—including tax-exempt bonds, private activity bonds, Grant Anticipation Revenue Vehicles (GARVEE) bonds, and Grant Anticipation Notes (GAN)—offer flexibility to bridge funding gaps when traditional revenue sources are scarce. For example, state-issued GARVEE or GAN bonds provide capital in advance of expected federal funds, allowing states to accelerate highway and transit project construction and thus potentially reduce construction costs. Through April 2008, 20 states and two territories issued approximately $8.2 billion of GARVEE-type debt financing and 20 other states are actively considering bonding or seeking legislative authority to issue GARVEEs. Furthermore, SAFETEA-LU authorized the Secretary of Transportation to allocate $15 billion in tax-exempt bonds for qualified highway and surface freight transfer facilities. To date, $5.3 billion has been allocated for six projects. Several bills have been introduced in this Congress that would increase investment in the nation’s infrastructure through bonding. For example, the Build America Bonds Act would provide $50 billion in new infrastructure funding through bonding. Although bonds can provide up- front capital for infrastructure projects, they can be more expensive for the federal government than traditional federal grants. This higher expense results, in part, because the government must compensate the investors for the risks they assume through an adequate return on their investment. Loans, loan guarantees, and credit assistance. The federal government currently has two programs designed to offer credit assistance for surface transportation projects. The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorized the Federal Highway Administration to provide credit assistance, in the form of direct loans, loan guarantees, and standby lines of credit for projects of national significance. A similar program, Railroad Rehabilitation and Improvement Financing (RRIF), offers loans to acquire, improve, develop, or rehabilitate intermodal or rail equipment and develop new intermodal railroad facilities. To date, 15 TIFIA projects have been approved totaling over $4.8 billion in credit assistance and the RRIF program has approved 21 loan agreements worth more than $747 million. These programs are designed to leverage federal funds by attracting substantial nonfederal investments in infrastructure projects. However, the federal government assumes a level of risk when it makes or guarantees loans for projects financed with private investment. Revolving funds. Revolving funds can be used to dedicate capital to be loaned for qualified infrastructure projects. In general, loaned dollars are repaid, recycled back into the revolving fund, and subsequently reinvested in the infrastructure through additional loans. Such funds exist at both the federal and the state levels and are used to finance various infrastructure projects ranging from highways to water mains. For example, two federal funds support water infrastructure financing, the Clean Water State Revolving Fund for wastewater facilities, and the Drinking Water State Revolving Fund for drinking water facilities. Under each of these programs, the federal government provides seed money to states, which they supplement with their own funds. These funds are then loaned to local governments and other entities for water infrastructure construction and upgrades and various water quality projects. In addition, State Infrastructure Banks (SIBs)—capitalized with federal and state matching funds—are state-run revolving funds that make loans and provide credit enhancements and other forms of nongrant assistance to infrastructure projects. Through June 2007, 33 SIBs have made approximately 596 loan agreements worth about $6.2 billion to leverage other available funds for transportation projects across the nation. Furthermore, other funds— such as a dedicated national infrastructure bank—have been proposed to increase investment in infrastructure with a national or regional significance. A challenge for revolving funds in general is maintaining their capitalized value. Defaults on loans and inflation can reduce the capitalized value of the fund—necessitating an infusion of capital needed to continue the fund’s operations. Another important and emerging vehicle for funding investments in transportation is public-private partnerships. In February 2008 we reported on highway public-private partnerships. These arrangements show promise as a viable alternative, where appropriate, to help meet growing and costly transportation demands and have the potential to provide numerous benefits to the public sector. The highway public- private partnerships created to date have resulted in advantages from the perspective of state and local governments, such as the construction of new infrastructure without using public funding, and obtaining funds by extracting value from existing facilities for reinvestment in transportation and other public programs. For example, the state of Indiana received $3.8 billion from leasing the Indiana Toll Road and used those proceeds to fund a 10-year statewide transportation plan. Highway public-private partnerships potentially provide other benefits, including the transfer or sharing of project risks to the private sector. Such risks include those associated with construction costs and schedules and having sufficient levels of traffic and revenues to be financially viable. In addition, the public sector can potentially benefit from increased efficiencies in operations and life-cycle management, such as increased use of innovative technologies. Finally, through the use of tolling, highway public-private partnerships offer the potential to price highways to better reflect the true costs of operating and maintaining them and to increase mobility by adjusting tolls to manage demand, as well as the potential for more cost effective investment decisions by private investors. Highway public-private partnerships also entail potential costs and risks. Most importantly, there is no “free” money in public-private partnerships. While highway public-private partnerships can be used to obtain financing for highways, these funds are largely a new source of borrowed funds—a form of privately issued debt that must be repaid to private investors seeking a return on their investment by road users over what potentially could be a period of several generations. Though concession agreements can limit the extent to which a concessionaire can raise tolls, it is likely that tolls will increase on a privately operated highway to a greater extent than they would on a publicly operated toll road. To the extent that a private concessionaire gains market power by control of a road where there are not other viable travel alternatives, the potential also exists that the public could pay tolls that are higher than tolls based on the cost of the facilities, including a reasonable rate of return. Additionally, because large up-front concession payments have, in part, been used to fund immediate needs, it remains to be seen whether these agreements will provide long- term benefits to future generations who will potentially be paying progressively higher toll rates throughout the length of a concession agreement. Highway public-private partnerships are also potentially more costly than traditional public procurement—for example, there are costs associated with the need to hire financial and legal advisors. In short, while highway public-private partnerships have promise, they are not a panacea for meeting all transportation system demands. Ultimately the extent to which public-private partnerships can be used as a tool to help meet the nation’s transportation financing challenges will depend on the ability of states to effectively manage and implement them. For example, states must have appropriate enabling legislation in place and the institutional ability to manage complex contractual mechanisms— either in the form of in-house expertise or through contractors. Most importantly, the extent to which public-private partnerships can be used as a tool to help meet the nation’s transportation funding challenges will depend on how well states are able to weigh public interest considerations. The benefits of public-private partnerships are potential benefits—that is, they are not assured and can only be achieved by weighing them against potential costs and trade-offs through careful, comprehensive analysis to determine whether public-private partnerships are appropriate in specific circumstances and, if so, how best to implement them, and how best to protect the public interest. In considering the numerous issues surrounding the protection of the public interest, we reached the following conclusions in our February 2008 report on highway public-private partnerships: First, consideration of highway public-private partnerships could benefit from more consistent, rigorous, systematic, and up-front analysis. While highway public-private partnerships are fairly new in the United States, and although they are meant to serve the public interest, it is difficult to be confident that these interests are being protected when formal identification and consideration of public and national interests has been lacking, and where limited up-front analysis of public interest issues using established criteria has been conducted. Partnerships to date have identified and protected the public interest largely through terms contained in concession contracts, including maintenance and expansion requirements, protections for the workforce, and oversight and monitoring mechanisms to ensure that private partners fulfilled their obligations. While these protections are important, governments in other countries, including Australia and the United Kingdom, have developed systematic approaches to identifying and evaluating public interest before agreements are entered into, including the use of public interest criteria, as well as assessment tools, and require their use when considering private investments in public infrastructure. For example, a state government in Australia uses a public interest test to determine how the public interest would be affected in eight specific areas, including whether the views and rights of affected communities have been heard and protected and whether the process is sufficiently transparent. While similar tools have been used to some extent in the United States, their use has been more limited. Using up-front public interest analysis tools can also assist public agencies in determining the expected benefits and costs of a project and an appropriate means to deliver the project. Not using such tools may lead to certain aspects of protecting public interest being overlooked. Second, fresh thinking is needed on the appropriate federal approach. DOT has done much to promote the benefits, but comparatively little to either assist states and localities in weighing potential costs and trade-offs, nor to assess how potentially important national interests might be protected in highway public-private partnerships. This is in many respects a function of the design of the federal program as few mechanisms exist to identify potential national interests in cases where federal funds have not or will not be used. For example, although the Indiana Toll Road is part of the Interstate Highway System and most traffic on the road is interstate in nature, federal officials had little involvement in reviewing the terms of this concession agreement because minimal federal funds were used to construct it, and those funds were repaid to the federal government. The historic test of the presence of federal funding may have been relevant at a time when the federal government played a larger role in financing highways but may no longer be relevant when there are new players and multiple sources of financing, including potentially significant private money. Reexamining the federal role in transportation provides an opportunity to identify the emerging national public interests in highway public-private partnerships and determine how highway public-private partnerships fit in with national programs. On the basis of these conclusions, we recommended that Congress direct the Secretary of Transportation to develop and submit objective criteria for identifying national public interests in highway public-private partnerships, including any additional legal authority, guidance, or assessment tools that would be appropriately required. We are pleased to note that in a recent testimony before the House, the Secretary indicated a willingness to begin developing such criteria. This is no easy task, however. The recent Policy Commission report illustrates the challenges of identifying national public interests as the Policy Commission’s recommendations for future restrictions—including limiting allowable toll increases and requiring concessionaires to share revenues with the public sector—stood in sharp contrast to the dissenting views of three commissioners. We believe any potential federal restrictions on highway public-private partnerships must be carefully crafted to avoid undermining the potential benefits that can be achieved. Reexamining the federal role in transportation provides an opportunity for DOT we believe, to play a targeted role in ensuring that national interests are considered, as appropriate. The nation’s surface transportation programs are no longer producing the desired results. The reliability of the nation’s surface transportation system is declining as congestion continues to grow. Although infusing surface transportation programs with additional funding, especially in light of the projected shortfalls in the Highway Trust Fund, could be viewed as a quick and direct solution, past experience shows that increased funding for the program does not necessarily translate into improved performance. Furthermore, the nation’s current fiscal outlook may make such solutions fiscally imprudent. In addition, before additional federal funds are committed to the nation’s surface transportation programs, we believe a fundamental reexamination of the program is warranted. Such a reexamination would require reviewing the results of surface transportation programs and testing their continued relevance and relative priority. Appropriate funding sources and financing mechanisms can then be tailored for programs that continue to be relevant in today’s environment and address a national interest, such as freight movement. Over the coming months, various options to restructure and fund surface transportation programs will likely be put forward by a range of transportation stakeholders. Ultimately, Congress and other federal policymakers will have to determine which option—or which combination of options—best meets the nation’s needs. There is no silver bullet that can solve the nation’s transportation challenges, and many of the options, such as allowing greater private-sector investment in the nation’s infrastructure, could be politically difficult to implement both nationally and locally. The principles that we identified provide a framework for evaluating these various options. Although the principles do not prescribe a specific approach to restructuring and funding the programs, they do provide key attributes that will help ensure that a restructured surface transportation program addresses current challenges. We will continue to assist the Congress as it works to evaluate the various options and develop a national transportation policy for the 21st century that improves the design of transportation programs, the delivery of services, and accountability for results. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee might have. For further information on this statement, please contact JayEtta Z. Hecker at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony were Robert Ciszewski, Nikki Clowers, Steve Cohen, Barbara Lancaster, Matthew LaTour, and Nancy Lueke. Federal User Fees: A Design Guide, GAO-08-386SP. Washington, D.C.: May 29, 2008. Physical Infrastructure: Challenges and Investment Options for the Nation’s Infrastructure, GAO-08-763T. Washington, D.C.: May 8, 2008. Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs, GAO-08-400. Washington, D.C.: March 6, 2008. Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest, GAO-08-44. Washington, D.C.: February 8, 2008. Surface Transportation: Preliminary Observations on Efforts to Restructure Current Program, GAO-08-478T. Washington, D.C.: February 6, 2008. Congressional Directives: Selected Agencies’ Processes for Responding to Funding Instructions, GAO-08-209. Washington, D.C.: January 31, 2008. Long-Term Fiscal Outlook: Action Is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future, GAO-08-411T. Washington, D.C.: January 29, 2008. Federal-Aid Highways: Increased Reliance on Contractors Can Pose Oversight Challenges for Federal and State Officials, GAO-08-198. Washington, D.C.: January 8, 2008. Freight Transportation: National Policy and Strategies Can Help Improve Freight Mobility. GAO-08-287. Washington, D.C.: January 7, 2008. A Call For Stewardship: Enhancing the Federal Government’s Ability to Address Key Fiscal and Other 21st Century Challenges. GAO-08-93SP. Washington, D.C.: December 17, 2007. Transforming Transportation Policy for the 21st Century: Highlights of a Forum. GAO-07-1210SP. Washington, D.C.: September 19, 2007. Surface Transportation: Strategies Are Available for Making Existing Road Infrastructure Perform Better. GAO-07-920. Washington, D.C.: July 26, 2007. Intermodal Transportation: DOT Could Take Further Actions to Address Intermodal Barriers. GAO-07-718. Washington, D.C.: June 20, 2007. Performance and Accountability: Transportation Challenges Facing Congress and the Department of Transportation. GAO-07-545T. Washington, D.C.: March 6, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Highway Finance: States’ Expanding Use of Tolling Illustrates Diverse Challenges and Strategies. GAO-06-554. Washington, D.C.: June 28, 2006. Highway Congestion: Intelligent Transportation Systems’ Promise for Managing Congestion Falls Short, and DOT Could Better Facilitate Their Strategic Use. GAO-05-943. Washington, D.C.: September 14, 2005. 21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. Washington, D.C.: February 1, 2005. Highway and Transit Investments: Options for Improving Information on Projects’ Benefits and Costs and Increasing Accountability for Results. GAO-05-172. Washington, D.C.: January 24, 2005. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program Design. GAO-04-802. Washington, D.C.: August 31, 2004. Marine Transportation: Federal Financing and a Framework for Infrastructure Investments. GAO-02-1033. Washington, D.C.: September 9, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. This published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The nation has reached a critical juncture with its current surface transportation policies and programs. Demand has outpaced the capacity of the system, resulting in increased congestion. In addition, without significant changes in funding levels or planned spending, the Highway Trust Fund--the major source of federal highway and transit funding-- is projected to incur significant deficits in the years ahead. Exacerbating concerns about the solvency of the Highway Trust Fund is the federal government's bleak fiscal condition and outlook. As a result, other federal revenue sources may not be available to help solve the nation's current transportation challenges. This statement is based on a body of work that GAO has completed over the past several years for Congress. This testimony discusses (1) GAO's recent findings on the structure and performance of the current surface transportation program (GAO-08-400), (2) a framework to assess proposals for restructuring of the surface transportation program, (3) potential options to fund investments in the surface transportation system, and (4) our recent findings on the benefits, costs, and trade-offs of using public-private partnerships to help fund transportation investments (GAO-08-44). Since federal fundingfor the interstate system was established in 1956, the federal role in surface transportation has expanded to include broader goals, more programs, and a variety of program structures. Consequently, the goals of current programs are numerous and sometimes conflicting, and the federal role in these programs is unclear. For example, federal programs do not effectively address key transportation challenges, such as increasing congestion and freight demand. Many surface transportation programs are also not linked to performance of the transportation system or of the grantees, and programs often do not employ the best tools and approaches. Finally, the fiscal sustainability of the numerous highway, transit, and safety programs funded by the Highway Trust Fund is in doubt, because spending from the fund has increased without commensurate increases in revenues. A number of principles can help guide the assessment of proposals to restructure and fund federal surface transportation programs. These principles include (1) ensuring goals are well defined and focused on the national interest, (2) ensuring the federal role in achieving each goal is clearly defined, (3) ensuring accountability for results by entities receiving federal funds, (4) employing the best tools and approaches to improve results and emphasize return on targeted federal investment, and (5) ensuring fiscal sustainability. A range of options could be used to fund the growing demand for additional investment in the surface transportation system. There are two revenue sources for these additional investments: taxes and fees. Financing mechanisms, such as bonding and revolving funds, could also be used to fund transportation infrastructure projects when tax and user fee approaches are not sufficient to meet demands. However, these financing mechanisms are all forms of debt that ultimately must be repaid with interest by the general population through tax increases or reductions in government services. Each of these options has different merits and challenges, and the selection of any of them will likely involve trade-offs among different policy goals. Highway public-private partnerships show promise as a viable alternative, where appropriate, to help meet growing and costly transportation demands. The highway public-private partnerships created to date have resulted in advantages from the perspective of state and local governments, such as the construction of new infrastructure without using public funding. However, highway public-private partnerships also entail potential costs and risks including the reality that funds from public-private partnerships are largely a new source of borrowed funds--a form of privately issued debt that must be repaid to private investors. Ultimately the extent to which public-private partnerships can be used to help meet the nation's transportation funding challenges will depend on the ability of states to weigh potential benefits against potential costs and trade-offs to determine whether public-private partnerships are appropriate in specific circumstances--and if so--how best to implement them and protect the public interest.

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FAA engages in three primary activities: aviation safety oversight, ATC, and airport infrastructure development (see fig. 1). The costs associated with each of these activities generally depend on the nature and usage of the specific service FAA provides. FAA safety activities include the licensing of pilots and mechanics, as well as the inspection of various aspects of the aviation system, such as aircraft and airline operations. According to FAA, the costs associated with these safety activities are primarily driven by the volume of each (e.g., the number of licenses and inspections). ATC includes a variety of complex activities that guide and control the flow of aircraft through the NAS. Generally, commercial aircraft fly under instrument flight rules (IFR) that require ATC services throughout a flight. Such flights rely on FAA staff in control towers to guide them from the terminal to the runway, and through takeoff. Once in the air and beyond the immediate vicinity of the airport, they rely on terminal radar approach control centers (TRACONs) to guide them out of the airspace in a broader area surrounding the airport. Services provided by control towers and TRACONs are referred to as terminal services. The TRACONs then pass flights off to air route traffic control centers (ARTCC), which provide en- route control until the flights near their destinations; services provided by ARTCCs are referred to as en-route services. When a flight nears its destination, control is passed back to a TRACON, and then to tower guidance, to land and proceed to an airport gate. General aviation’s (GA) use of these services varies greatly. Nearly all business jet flights file flight plans for IFR services, as do roughly half of GA piston flights. Many GA flights operate entirely under visual flight rules (VFR) and may not require any ATC services at all if they do not fly to airports that have towers. These other GA flights may require ground control, or rely on beacons or flight service stations en route. FAA states that the costs imposed by each flight are influenced by the amount and nature of the specific services it uses, and by whether the flight operates at peak periods. FAA funds airport infrastructure development through the Airport Improvement Program (AIP). AIP is a multibillion-dollar grant program that provides funding for the airports included in FAA’s National Plan of Integrated Airport Systems, which includes airports that range from the largest commercial service airports in the United States to small GA airports. Unlike safety and ATC services, AIP expenditures are not the direct result of costs imposed by users of the NAS. FAA distributes AIP funding based on congressional priorities established in authorizing and appropriation legislation. Accordingly, apart from some relatively small administrative expenses, FAA’s spending for AIP does not represent a “cost” of providing services to users. Therefore, it is not possible to establish a direct link between AIP expenditures and taxes or charges paid by system users based on their use of FAA services. The Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system. The Trust Fund provides funding for FAA’s two capital accounts, AIP and the Facilities and Equipment account, which funds technological improvements to the ATC system. The Trust Fund also provides funding for the Research, Engineering, and Development account, which funds continued research on aviation safety, mobility, and environmental issues. In addition, the Trust Fund supports part of FAA’s operations. To fund these accounts, the Trust Fund is credited with revenues collected from system users through the following dedicated excise taxes: 7.5 percent ticket tax on domestic airline tickets $3.30 domestic passenger segment tax (excluding flights to or from rural airports) 6.25 percent tax on the price paid for transportation of domestic cargo or $0.043/gallon tax on domestic commercial aviation fuel $0.193/gallon tax on domestic GA gasoline $0.218/gallon tax on domestic GA jet fuel $14.50/person tax on international arrivals and departures, indexed to 7.5 percent tax on mileage awards (frequent flyer awards tax) $7.30 per passenger tax on flights between the continental United States and Alaska or Hawaii (or between Alaska and Hawaii), indexed to inflation Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The ticket tax was the largest single source of Trust Fund revenue in fiscal year 2005, totaling about $5.2 billion, or about 48 percent of all Trust Fund receipts. The passenger ticket tax was followed by the passenger segment tax and the international departure/arrival taxes, which each totaled about $1.9 billion; fuel taxes, which totaled $870 million; the cargo/mail tax, which totaled $461 million; and interest income, which totaled $430 million. Figure 2 shows the shares received from each source in fiscal year 2005. Since the Trust Fund’s creation in 1970, revenues have, in aggregate, exceeded spending commitments, resulting in a surplus or an uncommitted balance, although expenditures from the Trust Fund exceeded revenues in 2005. The Trust Fund’s uncommitted balance, which was about $1.9 billion at the end of fiscal year 2005, depends on the revenues flowing into the fund and the appropriations made available from the fund for various spending accounts. Policy choices, structural changes in the aviation industry, and external events have affected revenues flowing into and out of the fund. For example, the uncommitted balance has been declining in recent years because Trust Fund revenues for the last 5 years have been less than FAA’s forecasted levels. Figure 3 shows the fluctuations in the Trust Fund’s uncommitted balance since its inception. In addition to Trust Fund revenues, in most years General Fund revenues have been used to fund FAA. The General Fund contribution has varied greatly, ranging from 0 percent to 59 percent of FAA’s budget (see fig. 4). From fiscal year 1997, the year when existing Trust Fund excise taxes were authorized, through fiscal year 2006, the General Fund contribution has averaged 20 percent of FAA’s total budget. About $2.6 billion was appropriated for fiscal year 2006 from the General Fund for FAA’s operations. This amount represents about 18 percent of FAA’s total appropriation. The National Civil Aviation Review Commission (Commission) issued a Congressional report in 1997 analyzing several issues, including alternative funding means to meet the needs of the nation’s aviation system. The Commission’s report identified a number of concerns with FAA’s funding structure as it existed at the time the Commission began its work. To address these concerns, the Commission made several unanimous recommendations, including that FAA’s revenues be more closely linked to the costs of services provided to support ATC activities, including capital investments. The Commission also recommended that General Fund revenues be used to fund aviation security and safety activities and government use of the air traffic system, and that GA operators continue to pay a fuel tax, although perhaps at a higher rate. Some stakeholders support the current excise tax system, stating that it has been successful in funding FAA, has low administrative costs, and distributes the tax burden in a reasonable manner. Other stakeholders, including FAA, state that under the current system, the disconnect between the revenues contributed by users and the costs they impose on the NAS raises revenue adequacy, equity, and efficiency concerns. Trends in, and FAA’s projections of, both inflation-adjusted fares and average plane size suggest that the revenue collected under the current funding system has fallen and will continue to fall relative to FAA’s workload and costs, supporting revenue adequacy concerns. Comparisons of revenue contributed and costs imposed by different flights provide support for equity and efficiency concerns. However, the extent to which revenue and costs are linked depends critically on how the costs of FAA’s services are assigned to NAS users. Thus, assessing the extent to which the current approach or any other approach aligns costs with revenues would require completing an analysis of costs, using either a cost accounting system or cost finding techniques to distribute costs to the various NAS users. FAA stated that it has made substantial progress in designing a cost accounting system, implementing it throughout its lines of business, and modifying it to determine costs by user group. Some stakeholders believe that maintaining the current funding structure for FAA is appropriate because it has been successful in funding FAA for many years, suggesting that there is no urgent reason to change it. According to these stakeholders, the revenues collected from users under the current funding system, along with General Fund revenues provided by Congress, have been sufficient for the United States to develop a safe and efficient aviation system. As the number of air travelers grew, so did revenues going into the Trust Fund. Even though revenues fell during the early years of this decade as the demand for air travel fell, they began to rise again in fiscal year 2004 (see fig. 5); FAA estimates that revenues will continue to increase. In addition, these stakeholders state that administrative costs of the current system are relatively low. Another argument put forward by some industry stakeholders and analysts for maintaining the current funding structure is that this structure provides a reasonable allocation of the funding burden between commercial aviation and GA. With the current funding structure, system users who are subject to the commercial taxes—including commercial airlines, air taxis, and many fractional ownership operations—contribute about 97 percent of the tax revenue that accrues to the Trust Fund. The remaining GA operators, including those who operate purely private corporate and individual aircraft, contribute about 3 percent. Representatives of the GA segment of the industry contend that collecting the bulk of the user- contributed revenues from the commercial segment is appropriate because the ATC system exists at its current size to accommodate the demands of commercial aviation and GA users should not be asked to contribute more than the incremental costs that result from also providing services to GA aircraft. Although the incremental costs are not precisely known, GA representatives have told us that they believe that the revenues currently collected from fuel taxes are a rough approximation of the incremental costs that FAA incurs from providing services to GA aircraft. According to FAA, all cost studies to date concluded that GA users pay less than the costs they impose on the system, while commercial aviation users pay more than the costs they impose on the system. The disconnect between sources of Trust Fund revenues and FAA costs under the current funding system raises concerns that the current system will not produce adequate revenue in the future to keep pace with FAA’s workload increases and, consequently, FAA’s costs. The principle of revenue adequacy requires a funding system to produce revenues commensurate with workload changes over time. However, under FAA’s current funding system, increases in FAA’s workload will not necessarily be accompanied by revenue increases because users are not directly charged for the costs they impose on FAA from their use of the NAS. Rather, Trust Fund revenues are primarily dependent on the prices of tickets (the domestic ticket tax) and the number of passengers on a plane (the domestic ticket tax, the domestic passenger segment tax, and the international passenger tax); neither of these factors are directly related to workload, which is driven by flight control and safety activities. Long-term industry trends and FAA forecasts of declines in air fares and the growing use of smaller aircraft support revenue adequacy concerns. To illustrate the disconnect between revenues and costs, table 1 provides an example of revenues generated by different aircraft making similar flights. The use of multiple flights by smaller aircraft to carry the same number of travelers as one larger aircraft increases FAA’s workload, but will not necessarily be accompanied by increased revenues from system users to fund FAA’s additional costs associated with the workload increase. This example shows the taxes that would be generated from transporting 105 passengers from Los Angeles to San Francisco by (1) one flight using a common narrow-body jet (Boeing 737), and (2) three flights using a common regional jet (CRJ-200). In this case, the narrow-body jet has the capacity to carry 132 passengers, while each regional jet has the capacity to carry 48 passengers. As the table shows, differences in FAA’s workload are not reflected in revenues. FAA states, all other factors being equal (e.g., time of flight), that the total ATC costs of the three regional jet flights would be about three times the cost of one narrow-body flight. Revenues from the three regional jet flights, however, total only about $37, or 3 percent, more than the revenue generated by the one narrow-body jet flight. Revenue increases are not linked to cost increases because, under the current system, revenues are primarily influenced by the number of passengers, the average price of tickets, and the amount of fuel used—not the costs imposed on FAA through the use of its services. The disconnect between revenues and workload can work both ways; increases in the number of passengers on planes (e.g., larger planes or higher load factors) or increases in fares can result in higher revenues relative to workload. In fact, load factors have increased over the past several years, and fares have increased over the past year. However, long- term trends and FAA’s projections for both domestic fares and plane size suggest that Trust Fund revenues have declined relative to FAA’s workload and will likely continue to do so for the next several years. Trends in average fares suggest that the Trust Fund is collecting less revenue relative to workload than in the past, and FAA’s projections suggest that this decline will continue. Since the passenger ticket tax is a percentage of the ticket price, reductions in the average ticket price result in lower ticket tax revenues relative to FAA’s workload. Domestic airfares, adjusted for inflation, have steadily declined over the past 25 years, from an average of $233 in 1981 to $148 in 2005 (see fig. 6). This reduction represents an average decline of about 1.9 percent per year. Even though there have been increases in fares over the past year, FAA projects average fares will continue to decline over time. In FAA’s most recent forecast, inflation-adjusted domestic yields—a proxy measure for fares— are projected to decline approximately 8.5 percent over the next 10 years. Trends in the average size of airplanes also suggest that the Trust Fund is collecting less revenue relative to workload than in the past, and FAA’s projections suggest that this decline will continue (see fig. 7). Since smaller planes carry fewer passengers and burn less fuel, reductions in average plane size mean lower ticket tax, segment tax, and fuel tax revenue accrues to the Trust Fund relative to FAA’s workload. This decline in the average number of seats per aircraft is the result of airlines’ moving toward a substantially greater reliance on regional and narrow-body jets. Scheduled capacity (available seat miles) increased 29 percent from 1996 through 2005. During this time, wide-body jet capacity fell 42 percent, narrow-body jet capacity grew 35 percent, and regional jet capacity grew over 2900 percent. As a result, regional jets accounted for nearly 10 percent of scheduled capacity in 2005, up from less than 1 percent in 1995. In addition to projecting growth in commercial flights, FAA is projecting substantial growth in GA traffic, which will also add to FAA’s workload. Some aviation stakeholders have expressed concerns that the current approach to collecting funds from users through excise taxes creates inequities because the revenue contributions of different flights are not directly linked to the costs of the services that these flights receive from FAA. As noted, factors that influence the revenue contribution that a commercial flight makes to the Trust Fund are the number of passengers, the average price of tickets, and the amount of fuel used. None of these factors, however, are directly related to the cost of the ATC services that a flight receives from FAA. Table 2 shows FAA’s estimates of the revenue contributions made by various flights. Since FAA estimates that similar flights impose similar costs on the agency, the substantial differences in the revenue contributions of these flights raise issues of fairness. One equity issue is that similar commercial flights may contribute very different amounts of revenue. As shown in this example, a 767 flight contributes more than twice as much as two similar 737 flights. There is also a difference between the contributions for the two similar 737 flights; one flight contributes 14 percent more than the other flight. Concerns also exist about the fairness of the distribution of the funding burden between commercial airlines and GA operators. Domestic commercial passenger flights, and some flights typically considered GA flights that carry commercial passengers, are subject to, among other potential excise taxes, the passenger ticket tax, the passenger segment tax, the cargo/mail tax, and the fuel tax. GA flights (excluding those that carry commercial passengers) are subject only to a fuel tax. As a result, the revenue contributions of similar commercial and GA flights may be substantially different. For example, the taxes that the Trust Fund would receive from two different types of business jet flights would be substantially less than the taxes received from similar commercial flights (see table 2). Although the commercial and GA flights might receive the same services from FAA, raising equity concerns because of the large difference in revenue contribution, there is debate over whether GA and commercial flights should be assigned the same costs for similar flights because parties disagree on how to assign the fixed costs associated with the ATC system. Representatives of the commercial aviation industry favor assigning those costs to all system users in proportion to their use of the system. Representatives of GA, on the other hand, state that the system exists at its present size to serve the needs of the commercial aviation industry and that GA should be assigned only the incremental costs of serving GA (i.e., those costs that would not otherwise exist). Without a consensus on how to assign ATC costs to users, it is not possible to assess the extent to which the current approach or any other results in a distribution of the funding burden between commercial airlines and GA operators that approximates the distribution of costs attributable to those groups. Some stakeholders have also raised concerns that the current funding system does not provide aircraft operators with incentives to use FAA services in the most efficient manner. For users to make efficient decisions about their use of the NAS, their price for using the system (the taxes or charges they pay) should accurately reflect the costs their use imposes on the system. These prices, along with other factors influencing supply and demand, will influence users’ decisions about the type, size, and number of aircraft to operate, and when and where to operate them. Given the importance of some of these other factors to users’ decisions about using the NAS, the influence of prices charged for FAA’s services on these decisions may be comparatively small for some users. As discussed previously, FAA states that under the current funding system the taxes collected from users do not accurately reflect the costs those users impose on the system; some flights likely pay more than the costs they impose, while others likely pay less. These price differences suggest that the current funding structure creates incentives for inefficient use of the NAS. Users who pay more in taxes than the costs they impose may make less than optimal use of the system, while those who pay less than the costs they impose may make more than optimal use of the system. An airline’s decision about how many flights to offer in a given market illustrates how the current system does not provide incentives for efficient use of the system. In this example (the same one used for the revenue adequacy discussion), an airline is deciding how many daily flights it should provide for the Los Angeles to San Francisco market (see table 3). It estimates that the market demand at the fare it is charging totals 105 passengers per day, and it faces the choice of providing the market with one daily flight with a narrow-body jet (Boeing 737), or three daily flights with a regional jet (CRJ-200)—all flight choices are assumed to depart during peak periods. In this scenario, the revenue collected from the three regional jet flights—$1,215—is about 3 percent more than the revenue collected from the one narrow-body jet flight—$1,178. FAA states however, that each flight would impose similar costs on the agency, so FAA’s costs would be roughly 3 times more to handle the three regional jet flights than to handle the one medium jet flight. In this example, however, there is little financial incentive ($37) for the airline to limit its imposition of additional costs on FAA by using one flight instead of three flights. This situation is made worse during times when the NAS is congested. There are two issues associated with congestion. The first is plane size; if all other factors are equal, such as demand for air travel, it is more efficient to serve congested airspace with larger planes because they can move more passengers per flight. Second, when congestion is a factor, efficiency requires consideration of the delay costs imposed on other system users. Charging similar flights equally, regardless of plane size, and incorporating congestion costs, would create financial incentives to improve efficiency. Alternative funding options for collecting revenues from NAS users present both advantages and disadvantages. The degree to which alternative funding options could address concerns about the current excise system ultimately depends on the extent to which the contributions required from users actually reflect the costs they impose on the system. Given the diverse nature of FAA’s activities, a combination of alternative options may offer the most promise for linking revenues and costs. Switching to any alternative funding option would raise administrative and transition issues. For example, any cost-based funding system would require FAA to complete the appropriate cost analysis using either a cost accounting system or cost finding techniques. Some stakeholders who support the adoption of direct user charges also support a change in FAA’s governance structure—for example, commercializing air navigation services—but we found no evidence that the adoption of direct charges would require a governance change. The six funding options considered here include two that would modify the current excise tax structure and four that would adopt more direct charges to users. Without more detailed information and an understanding of the costs different flights impose on the NAS, any assessment of the current system or alternative funding options is only preliminary. The degree to which alternative funding options could address revenue adequacy, equity, and efficiency concerns, relative to the current system, ultimately depends on the extent to which the contributions required from users actually reflect the costs they impose on the system. More precise assessments of the current or alternative funding options are possible only if cost finding techniques are used throughout FAA. The two options we reviewed that would modify the current excise tax structure are relying solely on a fuel tax and increasing the passenger segment tax to replace the passenger ticket tax. One possible modification to the current system would be to increase the current aviation fuel taxes—which levy a specific amount per gallon of fuel—to replace the revenue lost by eliminating the remaining excise taxes and charges. Advocates of reliance on a fuel tax funding system state that it is appealing compared to the current system because there is a correlation between the time a plane spends in the system and the amount of fuel a plane uses. To the extent that time in the system is related to cost, this relationship creates at least a partial link between revenues and costs, which could partially address the revenue adequacy, equity, and efficiency concerns about the current system. In addition, advocates of the fuel tax state that a fuel tax is inexpensive and simple to administer. Under the current system the Internal Revenue Service (IRS) is responsible for collecting fuel taxes at the point of sale, and these funds are then deposited to the Treasury, which then credits the Trust Fund. FAA has no responsibility for collecting the revenue. Thus, transitioning to an all-fuel- tax funding system would be relatively easy, since the administrative system is already in place. Furthermore, the tax is easy for consumers to understand, and compliance is simple and inexpensive. From a revenue adequacy perspective, fuel taxes compare favorably with other existing excise taxes because they are more directly linked to workload. Thus, all things being equal, increases in workload over time would likely result in fuel tax revenue increases. Nonetheless, two factors that lead to lower fuel consumption will erode the ability of a fuel tax to generate revenue over time. First, while the incentive created through the tax to conserve fuel will promote more efficient use of the system, it will lead to lower fuel consumption, which will reduce revenues. Second, technological advances that increase the fuel efficiency of airplanes will reduce fuel consumption relative to FAA’s workload, leading to lower revenues relative to FAA’s workload; the new 787 aircraft and a recent effort to outfit planes with winglets are examples of these advances. Thus, it is likely that the fuel tax rate would have to be raised from time to time to be adequate in the long run. The extent to which a fuel tax would address equity issues appears to be limited. Although FAA states that there is a correlation between the time a plane spends in the NAS and fuel consumption, the extent to which fuel consumption correlates with costs imposed on FAA has not been established. First, there may be a relationship between time in the system and en-route control costs, but the relationship between time in the system and the costs of other FAA activities, such as terminal costs, is not obvious. Second, even if the fuel tax were limited to funding en-route costs, the connection between fuel consumption and those costs appears to be incomplete. For example, since heavier planes burn more fuel per mile than lighter planes, they would be required to contribute more for spending the same amount of time in the system. As with equity issues, the potential for a fuel tax to address efficiency issues appears limited because the connection between revenues and costs is incomplete. A fuel tax can create an incentive for operators to minimize their fuel consumption (e.g., by flying at off-peak times to avoid congestion delays) and, therefore, their time in the NAS. To the extent that time in the system correlates with costs imposed, this incentive can lead to improved efficiency. However, any relationship between time in the system and costs imposed on FAA appears to be limited to en-route control costs. A second option that represents a modification of the current system is to increase the current passenger segment tax to replace revenues lost by eliminating the current passenger ticket tax. Under this option, all other current excise taxes would remain unchanged, implying no change to revenues collected from cargo carriers and GA operators. This option would likely increase the tax differential between passengers traveling on one-stop (or more than one-stop) flights and those traveling on nonstop flights on the same route. As a result, there might be a shift in travelers’ demand toward more nonstop service, which might, in turn, lead airlines to operate more nonstop service. Because there is a partial link between the number of segments an airline operates and the cost of the services FAA provides to that carrier, this option might have some advantages over the present tax structure in terms of revenue adequacy, efficiency and equity. However, because there is no link to the cost of some of the other services that FAA provides, these advantages are limited. Compared to the present funding structure, this option might address concerns about revenue adequacy over time, but many of the concerns associated with the current system would likely remain. One way in which a passenger segment tax might better correlate to FAA’s workload is that commercial flights that include a stop require more terminal services from FAA than nonstop flights, and taxes based on the number of passenger segments traveled will increase as the number of stops increases. In addition, the current passenger segment tax is indexed to the Consumer Price Index so that it is adjusted each year to account for inflation, which preserves the purchasing power of the revenues collected. However, other services that FAA provides could increase without any increase in passenger segment tax revenues. For example, if the average distance of commercial flights increases, the cost of providing en-route services will rise, but the passenger segment taxes paid will not rise because they are not based on distance traveled or time in controlled airspace. Furthermore, passenger segment taxes apply only to commercial flights, so they have no advantage over ticket taxes in providing revenue adequate to fund cost increases associated with providing services to cargo and GA aircraft. In addition, there would be no improvement in providing adequate revenue for safety and security expenditures. Compared to ticket taxes, higher flight passenger segment taxes have the potential to increase equity by better aligning revenues with costs, and they create some additional incentives for efficient use of FAA services. However, these effects are likely to be limited because the tax revenues are aligned only to some cost elements and the tax applies only to commercial aircraft. With increased passenger segment taxes, the difference in the amount of taxes commercial airlines would have to pay for one-stop service compared with nonstop service would be greater. This greater difference in taxes might represent an improvement in equity compared to the present funding system because one-stop flights require more terminal and approach services from FAA than nonstop flights. This greater difference in taxes could also create an incentive to provide more nonstop service. Substituting nonstop for one-stop service could reduce the airlines’ need for FAA’s terminal and approach services. However, this incentive could be quite small relative to other factors that influence airlines’ service-offering decisions, so the effect on efficiency could also be quite small. In addition, airlines would have no additional incentive to be efficient in their use of en-route services because the passenger segment tax is not linked to time in controlled airspace, and there would be no change from the current structure in incentives for cargo and GA operators. Administrative and transition issues would be minimal, since this option would require only a change in the current tax per flight segment and the elimination of the passenger ticket tax. The four funding options we reviewed that would involve more direct charges to users include weight/distance charges, en-route charges, flight segment charges, and certification charges. Charges based on weight and distance traveled are used by a number of foreign air navigation service providers and are supported by the International Civil Aviation Organization. As suggested by the name, this option would base charges to users on the weight of the plane and the distance it travels within the NAS. According to their advocates, weight/distance charges are more appealing than the current system because they would establish a more direct relationship between revenues and costs by incorporating distance into the formula, thereby creating an incentive to limit excess use of FAA’s ATC en-route services. In addition, advocates say, weight/distance charges would strike a balance between basing charges on the ability-to-pay principle and more directly linking costs and revenues by incorporating both weight and distance in the distribution of costs among users. A weight/distance charge, relative to the current funding system, would be likely to improve the revenue adequacy of the system. Revenue adequacy is addressed by the incorporation of a cost component into the weight/distance formula. Generally, air navigation service providers that use a weight/distance formula regularly adjust the cost component to ensure that revenues match costs. For example, FAA’s counterpart in France—la Direction Générale de l’Aviation Civile—annually adjusts the cost component of its weight/distance formula on the basis of en-route charges. This adjustment ensures that revenues not only cover costs, but also do not exceed costs. As with the fuel tax, the extent to which a weight/distance charge would address equity issues appears to be limited. While there may be a relationship between the distance a plane travels in the NAS and the costs it imposes, the introduction of the weight component into the formula weakens any such connection. For example, since heavier planes would be charged more than lighter planes, they would be required to contribute more for traveling the same distance in the system, even though they may not impose greater costs on the ATC system. If a relationship between weight and distance in the system and costs imposed can be established, it is likely to be limited to en-route control costs. There is no obvious relationship between the weight/distance formula and other FAA activities—terminal control services and safety activities. Since the connection between revenues and costs is incomplete because of the weight component, the potential for a weight/distance charge to address efficiency issues also appears limited. The distance component of a weight/distance charge creates an incentive for operators to minimize their use of the NAS. To the extent that distance in the system correlates with costs imposed, this incentive could improve efficiency. However, the correlation between distance and costs imposed is limited by the introduction of the weight component. Furthermore, the relationship between distance in the system and the costs imposed on FAA is likely to be limited to en-route control costs, excluding consideration of the costs associated with terminal control and safety activities. Implementing a weight/distance charge would also involve significant administrative and transition issues. FAA would have to determine how to administer a weight/distance charging system for which it does not currently have the organizational capacity. FAA stated that one option would be to contract the billing out to a private party, much as European Union countries such as France contract out their billing to Eurocontrol. En-route charges would be based on the time users spend in the NAS or the distance they travel through the NAS. According to their advocates, en- route charges are more appealing than the current system because they would create a more direct relationship between revenues and costs. Therefore, compared to the current system, advocates say en-route charges would (1) better ensure that revenues are adequate to cover costs over time, (2) address equity issues, and (3) create incentives for efficient use of the current system. An en-route charge, relative to the current funding system, would be likely to improve the revenue adequacy of the system. As with weight/distance charges, en-route charges could address revenue adequacy concerns by incorporating a cost component into the charging formula that could be regularly adjusted to reflect any changes in costs. This approach could ensure, over time, that revenues match costs. As with other funding options discussed here, the ability of en-route charges to address equity and efficiency issues raised by the current system appears to be limited. According to FAA, there is a strong relationship between time and distance in the system and en-route costs imposed by users. Thus, if en-route charges were limited to funding en- route control costs, they might address equity issues raised by the current system by equating charges to costs imposed, depending on how costs are assigned. Furthermore, en-route charges for en-route control would create clear financial incentives to use the system more efficiently; less use of the system would lead to proportionately lower charges. However, there is no obvious relationship between time or distance in the system and other FAA activities—terminal control services and safety activities. As a result, if en-route charges were used to fund all FAA activities, their ability to address equity and efficiency issues is unclear. Implementing en-route charges would also involve significant administrative and transition issues. FAA would have to develop the organizational capacity to administer and collect en-route charges, which would include completing the appropriate cost analysis using either a cost accounting system or cost finding techniques. Flight segment charges to users would be based on the departures and landings that aircraft make at various airports throughout the NAS. According to their advocates, flight segment charges are more appealing than the current system because they would establish a more direct relationship between revenues and costs. Therefore, compared to the current system, advocates say that flight segment charges would (1) better ensure that revenues are adequate to cover costs over time, (2) address equity issues, and (3) create incentives for efficient use of the current system by directly connecting charges with costs imposed by users. A flight segment charge, relative to the current funding system, would be likely to improve the revenue adequacy of the system. As with weight/distance charges, flight segment charges could address revenue adequacy concerns by incorporating a cost component into the charging formula that could be adjusted regularly to reflect any changes in costs. This approach could ensure that, over time, revenues match costs. As with other funding options discussed here, the ability of flight segment charges to address equity and efficiency issues raised by the current system appears to be limited. FAA states that there is a strong relationship between departures and landings in the system and costs imposed by flights for terminal control handled by TRACONs. Thus, if flight segment charges were limited to funding terminal control costs, they might address equity issues raised by the current system by equating charges to costs imposed, depending on how costs were assigned. Furthermore, flight segment charges for terminal control would create clear financial incentives to use the system more efficiently: less use of the system would lead to proportionately lower charges. However, there is no obvious relationship between flight segments and other FAA activities—en-route control and safety activities. As a result, if flight segment charges were used to fund all FAA activities, their ability to address equity and efficiency issues would be limited. Implementing flight segment charges would involve administrative and transition issues similar to those associated with en-route charges. FAA would have to develop the organizational capacity to administer and collect flight segment charges and complete the appropriate cost analysis using either a cost accounting system or cost finding techniques. Certification charges to users would cover specific safety services provided by FAA, such as certificates for air worthiness, air operators, and air agencies; registration for air personnel, aircraft, and medical personnel; designees and delegations; and international training. According to their advocates, certification charges would be more appealing than the current system because they would establish a direct relationship between revenues and costs, which would address the revenue adequacy, equity, and efficiency concerns associated with the current system. Certification charges have the potential to fulfill revenue adequacy requirements for safety costs over time because they are directly linked to workload; charges would be assessed for each certificate issued. Thus, as workload changed over time (increasing or decreasing), so would the revenue from certification charges. In addition, any certification system would likely have the flexibility to adjust charges as costs changed. Certification charges, however, could not support all of FAA’s funding requirements, so this option would have to be used in combination with other revenue sources. According to FAA officials, there is a clear relationship between certification charges and the specific safety activities for which users would be charged. Thus, if certification charges were limited to funding the associated safety costs, they would address equity issues raised by the current system by equating charges to costs imposed; this equity improvement, however, would be limited to funding for safety activities. Furthermore, certification charges would likely create financial incentives to use the system efficiently, since charges would increase in proportion to use. FAA raises the concern that imposing certification charges for safety services would adversely affect safety because such charges would create incentives to avoid the use of safety services and, in some cases, ATC services. Our review of available data from five air navigation service providers in other countries found that since their air traffic control services were commercialized and charges were implemented, the safety of the services remained the same or improved. For example, data from New Zealand and Canada show fewer incidents of loss of separation (the distance required between planes) since commercialization. Implementing certification charges would involve administrative and transition issues similar to those associated with en-route and flight segment charges. FAA would have to develop the organizational capacity to administer and collect certification charges and complete the appropriate cost analysis using either a cost accounting system or cost finding techniques. Using a combination of workload-related taxes or charges to fund FAA might best address the revenue adequacy, equity, and efficiency concerns associated with the current funding structure, given that the costs of FAA’s ATC and safety activities are driven by different factors. No single option that we reviewed creates a direct link between revenues and all components of FAA’s activity costs. Fuel taxes, weight/distance charges, or en-route charges based on time or distance spent in the NAS could be used to create a more direct link with FAA’s costs of providing en-route ATC services. A segment tax for passengers or a flight segment charge could be used to create a more direct link with the costs of FAA’s terminal services. Certification charges could be used to create a more direct link with the costs of FAA’s various safety-related activities. Thus, some combination of options, such as en-route charges to fund en-route costs, flight segment charges to fund terminal control costs, and certification charges to fund some safety costs, might best address concerns with the current system by providing a better link between revenues and costs than any of these options used separately. According to one stakeholder, however, the administrative expense of using multiple funding options might outweigh the benefits of such an approach. According to FAA, other air navigation service providers, such as those in the European Union, have been able to administer direct charges without incurring excessive administrative costs. In discussing alternative funding options, some stakeholders have stated that if user charges are adopted, users should have more input into FAA’s operation, citing the “user pays, user says” principle. To many stakeholders, this principle implies that the adoption of direct user charges would require a change in FAA’s governance structure that could limit congressional influence on the agency while expanding the influence of airlines and other users. Many stakeholders support such a change, pointing out that many countries that rely on direct charges to fund aviation activities have commercialized their air navigation service providers. We did not find any evidence that a change in FAA’s governance structure would be required if direct charges were adopted. Federal law provides general authority for federal agencies to institute user charges except when otherwise prohibited. In FAA’s case, Congress has specifically prohibited the agency from instituting any new user charges under this general authority in every DOT appropriation act since 1998. Furthermore, under the current funding system, users already provide most of the revenue used to fund FAA programs through excise taxes. Adopting direct charges would change the manner in which revenues are collected from users, but would not necessarily change the aggregate contribution from users. Since users pay most of FAA’s program costs now, it is unclear what additional role users should play in FAA’s decision-making under an alternative system. Recent reforms in France’s Direction Générale de l’Aviation Civile illustrate how a government agency has moved toward a cost-based system of charges to fund the air navigation services it provides without changing the underlying governance structure. The French organization’s activities fall into two broad divisions —safety and regulation, and ATC. Safety and regulation are funded through a combination of general government support and specific user charges. For example, there are charges for pilots’ licenses, medical certificates, inspections, and aircraft registration. ATC activities are split into two categories—en-route control and terminal control. For en-route control, France must abide by the European Union’s regulations, which are based on principles established by the International Civil Aviation Organization. This approach incorporates a weight/distance formula that is used to determine charges for specific aircraft based on their activity. Although the formula distributes charges across aircraft differently by incorporating weight as a factor, the amount of the charges is based on cost data that are verified by the European Union. Eurocontrol actually bills users of the system; all European Union countries collect en-route charges through this organization. Terminal control charges are not directly based on cost factors, but are billed along with the en-route control charges through Eurocontrol. Allowing FAA to use debt financing for capital projects have advantages and disadvantages. Many stakeholders have identified the use of debt financing—such as bonds—as a means of funding FAA capital projects, such as components of NGATS or existing ATC facilities and equipment. Some stakeholders believe debt financing is attractive because it could provide FAA with a stable source of revenue to fund capital development and, at the same time, spread the costs out over the life of a capital project as its benefits are realized. If Congress approved the use of debt financing for FAA, the agency could borrow through the Treasury or directly from the private capital market, depending on what authority Congress provided. Debt-financing raises significant concerns, however, because it encumbers future resources and because expenditures from debt proceeds may not be subject to the congressional oversight that appropriations receive. In addition, debt financing is subject to federal budget scoring rules and raises issues associated with borrowing costs that are particularly important in light of the federal government’s long- term fiscal imbalance. According to its supporters, debt financing has a number of advantages, one of which is that it could provide FAA with a stable source of revenue to fund capital development. FAA officials state that the uncertainty associated with the appropriation process makes planning for large, complex, and expensive ATC systems difficult. Another advantage cited is that debt financing would allow the costs of capital projects to be repaid as the benefits are received, better aligning costs and benefits. Finally, supporters of debt financing, including an investment firm, state that the private capital market may offer disciplinary mechanisms that may encourage FAA to manage itself more efficiently. The discipline occurs because, to receive funding for projects, FAA would need to adhere to bond covenants, which are rules that govern how FAA will pay obligations. One investment firm noted, however, that projects could be overcapitalized, or “gold plated,” if FAA were given the authority to borrow without caps on the number and costs of projects it funds. For example, a significant amount of debt could be issued for projects with minimal marginal benefits to users. As a result, an investment firm noted, there may need to be a governing board with multiple aviation stakeholders, including airlines, airports, and air traffic controllers, to determine which capital projects are needed and how they will be funded. Treasury officials also question whether the private capital market will provide any market discipline to FAA debt obligations because investors may perceive that the obligations are backed by the federal government, and not just agency revenues. Treasury officials further noted that they could perform credit analyses similar to those done by private investment firms, which, when combined with statutory borrowing caps and other credit terms and conditions, would serve to protect the financial interests of the general taxpayer. To borrow from the Treasury, FAA would need borrowing authority from Congress. There are various ways Congress can provide borrowing authority, each with different legal, financial, and structural implications. For example, some government entities generate their own revenue to pay for borrowing costs, whereas others pay with appropriations. Some government entities with borrowing authority are federal agencies, such as the Bonneville Power Administration (BPA), while others are independent establishments, such as the U.S. Postal Service. Once borrowing authority is granted, the Treasury sets the terms and conditions for borrowing. FAA could borrow from the Treasury, using revenue options such as taxes, user fees, or appropriations to repay the debt, depending on the type of bond. Figure 8 describes the process for borrowing from the Treasury. In borrowing from the private capital market, FAA could issue general revenue (GR) or general obligation (GO) bonds. Both types of bonds would require FAA to pay interest and principal to bond holders, but the revenue sources used to make these payments would differ. A GR bond requires taxes or user fees to pay the interest and principal, while a GO bond uses expected appropriations. Several nonfederal government entities currently borrow from the private capital market using GR and GO bonds. In aviation, most commercial airports issue GR bonds for airport capital improvements that are backed by general revenues from the airport, including aircraft landing fees, concessions, and parking fees, for airport capital improvements. In surface transportation, some states issue grant anticipation revenue vehicle (GARVEE) bonds backed by anticipated federal apportionments to fund highways. However, the eligibility of a GARVEE bond for reimbursement with federal apportionments does not constitute a commitment by the federal government to provide for paying the principal or interest on the bond. The Department of Transportation, which oversees the GARVEE program, reimburses the state for debt service expenses as part of the annual federal-aid obligation authority. Figure 9 describes the process for borrowing from the private capital market. For FAA to borrow from the private capital market, Congress would need to give the agency statutory authority. Depending on how Congress writes the statute, FAA could use any revenue option—taxes, user fees, or appropriations—to secure the bond. According to some representatives of investment banks and Treasury officials, no organizational changes for FAA, such as a change to a government corporation or corporate entity, would be needed. Currently, some government corporations borrow from the private capital market, including the Tennessee Valley Authority (TVA). TVA is an independent, wholly owned federal corporation established by the Tennessee Valley Authority Act of 1933 that sells bonds in the private capital market to finance its capital improvements for power programs. TVA pays for its operations and debt service with revenues from its energy sales. Since TVA first issued bonds, Moody’s Investors Service and Standard & Poor’s have assigned TVA’s bonds their highest credit rating— Aaa/AAA. TVA does not receive a direct federal guarantee, although the interest rate charged by the private capital market suggests that there is an implied federal guarantee. Debt financing is subject to federal budget scoring rules and raises issues regarding borrowing costs that are particularly important in light of the federal government’s long term structural fiscal imbalance. How the borrowing authority is carried out will affect both budget scoring and costs. When an agency uses borrowing authority to finance a capital project, budget authority and obligations are recorded in the budget when the investments are made. Current budget scoring rules require that budget authority and obligations for the full cost of capital projects be scored upfront in the year that the obligations are made. Over time, the outlays will equal the budget authority and obligations that were scored upfront. As an example, if FAA borrowed $5 million with a 10 year bond to purchase air traffic control equipment, the $5 million would be scored as budget authority and obligations in the year or years in which FAA signed the contract or contracts to purchase the equipment, and not distributed annually over 10 years. Since this budget treatment is the same as if appropriations were obtained, there is little scoring incentive for an agency to borrow. Among the negative consequences of not scoring all government activities in the year in which obligations are made, according to CBO, is that the federal government’s obligations are understated. A Treasury official said the Treasury is supportive of budget scoring, noting that if the borrowing is for a purely governmental purpose, then that activity should be scored according to federal budget scoring rules. We have also reported that up- front budget scoring for capital projects should be maintained, since the budget should reflect the government’s commitments up front. If FAA was granted borrowing authority, the associated costs would likely be higher if the agency borrowed directly from the private capital market instead of through the Treasury. According to Treasury and representatives of investment firms, the federal government’s costs associated with debt financing for FAA’s capital projects would likely be lower if FAA borrowed through the Treasury than if FAA borrowed directly from the private capital market because the Treasury would likely be charged a lower interest rate to borrow money. Interest rates charged to FAA would likely be higher because bonds issued by FAA would likely be viewed as a greater credit risk compared to Treasury bonds because Treasury’s bonds are backed by the full faith and credit of the U.S. government, whereas FAA debt would not be. In addition, if FAA borrowed directly from the private capital market, the transaction costs of borrowing would likely be higher than if FAA borrowed through the Treasury; investment banks that serve as debt underwriters charge fees for these services, while the Treasury would charge a minimal administrative fee, if any. Treasury officials told us that it is the agency’s long-standing policy that all debt issued by federal entities, including FAA, should be issued solely to the Treasury because centralized financing of all such debt through the agency is the least expensive, most efficient means of financing this debt. The costs to the government associated with funding FAA’s capital spending through appropriations would be comparable to the costs of borrowing through the Treasury. The costs of borrowing from the private sector are based, in part, on how risky the revenue is that will be used for bond interest payments. Although all revenue options—taxes, user fees, and appropriations—can be used to repay borrowings, each option has a different risk profile. The Treasury noted that if FAA were to borrow from the private capital market against revenues that were subject to appropriations, there would most likely be a risk premium added to the credit rating to compensate for the risk that appropriations may not be provided. This risk premium would make borrowing more expensive. However, representatives from investment firms we interviewed noted that FAA may receive a high credit rating given that ATC services are essential and FAA has a monopoly in providing them. If a capital project has a high degree of “essentiality,” then it is assumed that the government will pay for the project through appropriations if that is the revenue source. Representatives of an investment firm we interviewed also noted that FAA may receive an implied federal guarantee because it is a federal agency. However, representatives of another investment firm we interviewed also said that many of FAA’s assets may have a low degree of marketability. That is, lenders may have difficulty selling an asset in the market in case of a bond default because there may be few willing buyers in the market for it. Borrowing costs are particularly important in light of the federal government’s long-term fiscal imbalance. As the baby boom generation ages, mandatory federal commitments to health and retirement programs will consume an ever-increasing share of the nation’s gross domestic product and federal budgetary resources, placing severe pressures on all discretionary programs, including those that fund defense, education, and transportation. Our simulations show that by 2040, revenues to the federal government might barely cover interest on the debt—leaving no money for either mandatory or discretionary programs—and that balancing the budget could require cutting federal spending by as much as 60 percent, raising taxes by up to 2½ times their current level, or some combination of the two. Accordingly, any program or policy change that may increase costs requires sound justification and careful consideration before adoption. We previously reported that agencies with authority to borrow were financing a large portion of their programs with debt and were repaying their debt with appropriations or new borrowing, rather than through revenue collections. As a result, we recommended that only those agencies that would, in all likelihood, be able to repay their borrowing through revenue collections be granted authority to borrow. We provided a draft of this report to DOT and Treasury for review and comment. We received comments from DOT through an e-mail from FAA’s Director of the Office of Aviation Policy and Plans on September 11, 2006, and from Treasury through an e-mail from the Deputy Assistant Secretary of Government Financial Policy on September 8, 2006. Neither DOT nor Treasury explicitly agreed or disagreed with our observations, and both raised a number of concerns. DOT stated that, in its opinion, although a change in FAA’s governance may not be statutorily required, it may be important as a matter of policy. DOT stated that because air navigation service providers are by nature monopoly providers, users need assurance that their concerns are taken into account in cost control and investment decisions, particularly under a system that more closely ties users’ contributions to the costs of the system. DOT stated that an alternative governance mechanism, along with user fees, could give system users a structured advisory role in how moneys are spent, costs are allocated, and charges are set to recover those costs, while still retaining the inherently governmental decision-making authority within FAA and DOT. In addition, DOT maintained that a governance mechanism specifically designed to give users input into investment decisions and cost recovery would add a valuable layer of discipline in optimizing the system to accommodate users’ needs most efficiently. In contrast, according to DOT, a system in which FAA/DOT could charge fees to cover costs with no meaningful stakeholder involvement would be much less attractive to the stakeholders. Finally, DOT stated, such an arrangement is fully consistent with the position of the International Civil Aviation Organization, which calls for user charges to be set in consultation between the service provider and the user community. DOT may want to encourage Congress to consider the issue of governance structure. However, we did not include an analysis of governance issues in the scope of our review; therefore, we did not provide a more detailed discussion of the issue in this report. DOT stated that our discussion of the need to analyze FAA’s costs implied FAA has not developed any cost accounting or cost allocation systems. Although we agree that FAA has made progress in implementing a cost accounting system, its current accounting system is not able to provide the information required for a cost allocation analysis. Therefore, in our view, our report does not mischaracterize the status of FAA’s cost accounting system by stating that an analysis of the extent to which the current funding approach, or alternative funding approaches, aligns costs with revenues would require the completion of a cost accounting system or the use of cost finding techniques. Our point is that this capability would be needed to operate under a cost-based user charge system. DOT stated that it believes user fees would provide greater revenue stability than taxes because user fees could be set up to be adjusted periodically without changes in the law, thus providing greater flexibility in aligning revenues to cover costs. Nonetheless, we continue to believe that revenue stability is not likely to vary much across the funding options. Significant decreases in the demand for air travel would decrease revenue regardless of whether the current funding structure is maintained or any of the options are adopted. Furthermore, increasing direct user charges while air travel demand was falling would increase costs for aircraft operators at the same time as their revenues were declining and might be no easier than increasing excise taxes. DOT also provided some clarifying and technical comments, which we incorporated where appropriate. According to Treasury, GAO raised several critical issues, but did not provide any analysis that would help policymakers judge reform options. Specifically, Treasury expressed concern that we did not (1) provide a more comprehensive discussion of FAA costs and cost shares, including any available cost information that provides insight into the issue, (2) evaluate FAA’s efforts to implement cost accounting, and (3) state whether FAA’s cost accounting program is likely, when completed, to generate cost information that is useful in determining a fair and efficient distribution of costs among users. We agree with Treasury that a more detailed analysis of FAA costs and cost shares should be conducted to inform the FAA reauthorization debate, and that this information would improve the analysis of specific alternative funding options. FAA’s current accounting system is not able to provide the information required for a cost allocation analysis. We believe that using partial cost information, as suggested by Treasury, would not be appropriate. Moreover, conducting a comprehensive cost analysis was beyond the scope of this report. Treasury also said that our report repeats claims made by interest groups without evaluating them, giving the sense that each argument is equally valid, even though policymakers need some way to evaluate them. This was not the objective of the report. We provided a basis for evaluating the current and alternative funding options by outlining criteria, including revenue adequacy, equity, and efficiency, and discussing the implications of these criteria with respect to specific funding options. Treasury raised concerns that a number of statements were attributed to “some stakeholders,” rather than the specific groups or individuals that made the statements, noting that attribution helps the reader evaluate the statements. In response, we added some attribution as appropriate. Treasury also noted its long-standing policy that all debt issued by federal entities, including FAA, should be issued solely to the Treasury, because centralized Treasury financing of all such debt is the least expensive, most efficient means of financing this debt. Treasury further maintained that market discipline would not be applied to FAA debt obligations issued directly to the private capital market because investors would perceive the obligations were backed by the federal government. We added language to the report to clarify Treasury’s position on these issues. Treasury also provided some clarifying and technical comments, which we incorporated where appropriate. As agreed with your offices, unless you announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees; the Secretary of Transportation; the Administrator, FAA; the Secretary of the Treasury; and the Director, OMB. Copies will also be available to others upon request and at no cost on GAO’s Web site at www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. To accomplish all of our objectives, we reviewed relevant research, including GAO products, academic research, congressional testimony, industry group publications, and stakeholders’ responses to questions FAA asked them about its funding. We also interviewed officials from government agencies, including the Federal Aviation Administration (FAA), the Office of Management and Budget (OMB), the Congressional Budget Office (CBO), and the Department of the Treasury (Treasury); representatives of aviation industry groups, including the Air Transport Association, the Aircraft Owners and Pilots Association (AOPA), and the National Business Aviation Association; and academic and financial experts. In addition, as discussed in the following paragraphs, we performed further work to accomplish each objective. To assess the advantages and concerns that have been raised about the current approach to collecting revenues from national airspace system (NAS) users to fund FAA and the extent to which the available evidence supports the concerns, we examined FAA budget data, Airport and Airway Trust Fund (Trust Fund) revenue data, FAA forecasts, data reported to the Department of Transportation (DOT) on aircraft size and airfares (DOT Form 41 data), and FAA aviation activity data. We used data on tax revenues associated with different types of flights to assess the link between increases in FAA’s workload and increases in Trust Fund revenue. We obtained the FAA budget, Trust Fund, forecast, and aviation activity data from FAA. To assess the reliability of these data, we interviewed knowledgeable officials and reviewed the quality control procedures FAA applies to these data, and subsequently determined that the data were sufficiently reliable for our purposes. We obtained the DOT Form 41 data from BACK Aviation Solutions, a private contractor that provides these data to interested parties. We used these data to examine trends in aircraft size and airfares because of their impact on the relationship between Trust Fund revenues and FAA’s workload. To identify potential alternative funding options for FAA and criteria for comparing these options, we obtained information on the experience of foreign air navigation service providers by reviewing relevant GAO reports and other literature and interviewing officials at Eurocontrol and France’s FAA counterpart, la Direction Générale de l’Aviation Civile. We also interviewed representatives of Air France, AOPA-France, the International Air Transport Association, the Association of European Airlines, and Aéroports de Paris. Through our literature review and these interviews, we identified longer-run revenue adequacy, equity, efficiency, and administrative considerations as appropriate criteria for assessing the current and alternative funding options. We considered both modifications to the current excise tax structure and various forms of direct charges for FAA services as possible alternatives to the current tax structure. In selecting options for analysis, we considered whether there was a link between the option and some element of FAA’s workload. To identify the advantages and disadvantages of authorizing FAA to use debt financing for capital projects, we reviewed the borrowing authorities of other U.S. governmental entities, including the Tennessee Valley Authority and the Bonneville Power Administration. We conducted our work from May 2005 through August of 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, the following individuals made key contributions to this report: Ashley Alley, Christine Bonham, Jay Cherlow, Tammy Conquest, Colin Fallon, Carol Henn, David Hooper, Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman.

The Federal Aviation Administration (FAA), the Airport and Airway Trust Fund (Trust Fund), and the excise taxes that support the Trust Fund are scheduled for reauthorization at the end of fiscal year 2007. FAA is primarily supported by the Trust Fund, which receives revenues from a series of excise taxes paid by users of the national airspace system (NAS). The Trust Fund's uncommitted balance decreased by more than 70 percent from the end of fiscal year 2001 through the end of fiscal year 2005. The remaining funding is derived from the General Fund. This report focuses on the portion of revenues generated from users of the NAS and addresses the following key questions: (1) What advantages and concerns have been raised about the current approach to collecting revenues from NAS users to fund FAA, and to what extent does available evidence support the concerns? (2) What are the implications of adopting alternative funding options to collect the revenues contributed by users that fund FAA's budget? (3) What are the advantages and disadvantages of authorizing FAA to use debt financing for capital projects? This report is based on interviews with relevant federal agencies, including FAA, the Office of Management and Budget, and the Congressional Budget Office. GAO also obtained relevant documents from these agencies, other key stakeholders, and academic and financial experts. Some stakeholders support the current excise tax system, stating that it has been successful in funding FAA, has low administrative costs, and distributes the tax burden in a reasonable manner. Other stakeholders, including FAA, state that under the current system there is a disconnect between revenues contributed by users and the costs they impose on the NAS that raises revenue adequacy, equity, and efficiency concerns. Trends and FAA projections in both inflation-adjusted fares and average plane size suggest that the revenue collected under the current funding system has fallen and will continue to fall relative to FAA's workload and costs, supporting revenue adequacy concerns. Comparisons of revenue contributed and costs imposed by different flights provide support for equity and efficiency concerns. The extent to which revenues and costs are linked, however, depends critically on how costs are allocated. Thus, to assess the extent to which the current approach or other approaches aligns costs with revenues would require completing an analysis of costs, using either a cost accounting system or cost finding techniques to assign costs to NAS users. The implications of adopting alternative funding options to collect revenue from NAS users and address concerns about the current excise tax system vary depending on the extent to which users' revenue contributions reflect the costs those users impose on FAA. This report considers six selected funding options, including two that modify the current excise tax structure and four that adopt more direct charges to users. Given the diverse nature of FAA's activities, a combination of alternative options may offer the most promise for linking revenues and costs. Switching to any alternative funding option would raise administrative and transition issues. Some stakeholders who support the adoption of direct user charges also support a change in FAA's governance structure, but GAO found no evidence adoption of direct charges requires this. Authorizing FAA to use debt financing for capital projects would have advantages and disadvantages. Some stakeholders identify debt financing as attractive because it could provide FAA with a stable source of revenue to fund capital developments, while at the same time spreading the costs out over the life of a capital project as its benefits are realized. Debt financing raises significant concerns, however, because it encumbers future resources, and expenditures from debt proceeds may not be subject to the congressional oversight that appropriations receive. Concerns regarding borrowing costs, oversight, and encumbering future resources are particularly important in light of the federal government's long-term structural fiscal imbalance. The Departments of Transportation and Treasury provided comments and technical clarifications on a draft of this report which we have incorporated or responded to as appropriate. DOT's comments focused on governance reforms required to adopt a user fee approach, and whether we accurately described the status of FAA's accounting system. Treasury's raised concerns about the level of analytical development for the options and associated issues. Data was not available to conduct the analysis Treasury suggested, and we agree necessary. However, we believe the report provides useful information to facilitate debate on the options.

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On January 6, 1993, the Institute of Medicine published a report that discussed secret U.S. chemical weapons programs during World War II. The report found that an estimated 60,000 military personnel participated as human experimental subjects in tests of exposure to mustard agents and lewisite and unknown numbers of additional servicemembers may have been exposed to these substances through their participation in the production, transportation, and/or storage of these chemical substances. On February 18, 1993, we issued a report that found VA lacked information about individuals who were exposed during secret DOD chemical tests. After Members of Congress, the President of the United States, and the Secretary of Defense exchanged a series of letters about this issue in 1993, the Deputy Secretary of Defense issued an agencywide memo that released all individuals from any nondisclosure restrictions that might have been placed on them, tasked the secretaries of the military departments to undertake efforts to declassify and provide to VA as soon as possible information about individuals who were potentially exposed, and directed OUSD (P&R) to establish a task force to monitor the status of DOD’s efforts. As a result, OUSD (P&R), the military services, and VA developed the Chemical Weapons Exposure Study Task Force to identify DOD personnel exposed to chemical substances during testing, training, transport, production, and storage. By conducting site visits and other research efforts, the task force identified approximately 6,400 servicemembers and civilians who were potentially exposed to mustard, lewisite, and other chemical substances. The office created a database with information about these individuals (hereafter referred to as OUSD (P&R) database) and, according to OUSD (P&R), sent certificates of commendation to more than 700 individuals for whom it could find contact information. In addition to its own research, OUSD (P&R), on behalf of the task force, issued a task order for a contractor to analyze, extract, and develop a database of information on all volunteers and/or other subjects potentially exposed to live chemical or biological substances. The contractor developed a database and issued a series of reports that identified the locations of human exposures to chemical substances, including those resulting from tests and a variety of other activities such as transportation, production, storage, and disposal. Congress continued to look into this issue during 1994 through a series of hearings and a staff report that was prepared for the U.S. Senate’s Committee on Veteran Affairs. The issue of servicemembers being used as human subjects during DOD’s chemical and biological tests received high-level attention again in 2000, when the acting Secretary of Veterans Affairs wrote a letter to the Secretary of Defense requesting assistance in obtaining information about a series of then-classified chemical and biological tests under DOD’s Project 112 program. OASD (HA) officials consequently initiated some actions to identify potentially exposed individuals. Subsequently, DOD, VA, and Congress exchanged a series of correspondence about the need to identify individuals who were potentially exposed during these tests. Eventually, the Defense Authorization Act for FY 2003 required DOD to submit to Congress and the Secretary of Veterans Affairs a comprehensive plan for the review, declassification, and submittal to VA of all DOD records and information on Project 112 that are relevant to the provision of benefits by the Secretary of Veterans Affairs to members of the armed forces who participated in that project. During this effort, DOD identified 5,842 servicemembers and estimated that 350 civilians had been potentially exposed during Project 112 tests, and this information was entered into a Project 112 database. The act further required the Comptroller General to evaluate the plan and its implementation. The Defense Authorization Act for FY 2003 also required DOD to work with veterans and veterans service organizations to identify DOD projects or tests outside of Project 112 that may have exposed members of the armed forces to chemical or biological substances. In June 2004, we reported that DOD had not yet begun its investigation to identify such projects or tests and recommended that the Secretary of Defense direct the appropriate office(s) to finalize and implement a plan for identifying DOD projects and tests conducted outside of Project 112 that might have exposed servicemembers to chemical or biological substances and ensure that the plan addresses the scope, reporting requirements, milestones, and responsibilities for those involved in completing this effort. According to an OASD (HA) official, OASD (HA) made an informal agreement with OUSD (AT&L) to undertake this effort since OASD (HA) did not have the resources to conduct an investigation itself or to fund a contractor to do the research. In September 2004, OUSD (AT&L)’s chemical and biological defense office issued a task order to fulfill this provision of the legislation. The research being done as a result of this task order is ongoing as of December 2007. In June 2003, after having identified several thousand servicemembers and hundreds of civilians as having been potentially exposed to chemical or biological substances during Project 112, DOD stopped actively searching for additional individuals. According to a knowledgeable DOD official, this decision was made without a sound and documented cost-benefit analysis. The Defense Authorization Act for FY 2003 required DOD to review records and information necessary to identify members of the armed forces who were or may have been exposed to chemical or biological substances as a result of Project 112. Subsequently, in June 2003, DOD issued a report to Congress that stated that 5,842 servicemembers and an estimated 350 civilians might have been exposed during Project 112 tests. The report also indicated that DOD had ceased its active search for individuals potentially exposed during Project 112 tests and that it would investigate any new information that may be presented as well as share any additional or changed information with VA and the public. In 2004, we reported that DOD performed a reasonable investigation of servicemembers who were potentially exposed to the substances used during Project 112 tests. However, we found that DOD had not exhausted all possibilities for identifying additional servicemembers and civilian personnel who had been potentially exposed. Therefore, we recommended that DOD determine the feasibility of addressing these unresolved issues. In response to our recommendation, DOD determined continuing an active search for individuals had reached the point of diminishing returns, and reaffirmed its decision to cease active searches. This decision was not supported by any objective analysis of the potential costs and benefits of continuing the effort. Instead, this decision was made by officials in OASD (HA) who had a working knowledge of Project 112 tests and the contents of chemical and biological test record repositories. These officials concluded that the record repositories that had been searched contained the majority of Project 112 documents; therefore, they believed that the bulk of exposures related to Project 112 tests had already been identified. Furthermore, the officials decided that the application of resources necessary to continue searching for Project 112 exposures would result in a diminishing return on their investment. The Office of Management and Budget has stated that a good cost-benefit analysis should include a statement of the assumptions, the rationale behind them, and a review of their strengths and weaknesses. This could include a full accounting of information known, related costs, benefits, and challenges of continuing to search for additional Project 112 participants. Moreover, our prior work has shown that there are elements integral to a sound cost-benefit analysis. For example, the analysis should include a thorough evaluation of the social benefits and costs of investments, identify objectives to ensure a clear understanding of the desired outcome, and include a list of the relevant impacts to ensure that all aspects are considered. DOD could not provide us with a quantitative analysis based on objective data or any documented criteria because OASD (HA) was not required to provide any support or basis for the decision. Since DOD’s June 2003 report to Congress and its decision to cease actively searching for additional exposures, additional individuals who may have been exposed as a result of Project 112 tests have been identified through various non-DOD sources, as shown in table 1. For example, the Institute of Medicine conducted a study on the long-term health effects of participation in the shipboard hazard and defense tests that were conducted as a subset of Project 112. This study identified 394 individuals who had been potentially exposed and who were previously unknown to DOD. According to DOD and Institute of Medicine officials, the additional names were discovered when the Institute of Medicine applied a more inclusive methodology in its research. In addition, our previous work in 2004 reported that DOD did not exhaust all possible sources of information during its investigation of Project 112 and our own research for that report resulted in the identification of 39 additional potentially exposed servicemembers. For example, DOD had limited success in identifying exposures during land-based tests because it was unable to find documentation, and it did not specifically search for individual civilian personnel in its investigation because it considered them to be outside of its scope. Furthermore, DOD officials have told us that veterans who participated in Project 112 tests have contacted DOD on their own initiative in search of information and documentation related to their exposures, which has resulted in 165 additional veterans being identified as having been potentially exposed during these tests. DOD’s current effort to identify individuals who may have been exposed to chemical or biological substances during activities outside of Project 112, discussed in the following section of this report, has also resulted in the discovery of information related to Project 112 tests. Specifically, the DOD contractor has found evidence that individuals who DOD already knew were potentially exposed to substances during at least one known Project 112 test were also potentially exposed during other Project 112 tests. In light of the increasing number of individuals who have been identified since DOD ceased actively searching, until DOD makes a sound and documented decision regarding the cost and benefits of actively searching for individuals potentially exposed during Project 112 tests, Congress and veterans may continue to question the completeness and accuracy of DOD’s effort. Although DOD has taken action to identify individuals who were potentially exposed during chemical or biological tests outside of Project 112, we identified several shortcomings in the current effort. Specifically, we found that DOD’s approach was hampered by (1) a lack of clear and consistent objectives, scope of work, and information needs; (2) management and oversight weaknesses; (3) a limited use of the work of other entities that previously identified exposed individuals; and (4) a lack of transparency in DOD’s efforts. In response to the Defense Authorization Act for FY 2003 and our May 2004 recommendation that DOD finalize and implement a plan to identify individuals who were potentially exposed during tests conducted outside of Project 112, DOD issued a task order in September 2004. The task order identified four sets of tasks that the contractor was to undertake to accomplish the task order’s objectives within 3 years—perform literature searches, conduct and review on-site data collections, data mine existing databases, and augment a database maintained by the contractor. The contractor has issued monthly reports on its work to OUSD (AT&L)’s chemical and biological defense office, which indicate that the contractor has taken action on each of these tasks. OUSD (AT&L)’s chemical and biological defense office and the contractor have agreed that the on-site reviews will be conducted at a total of 18 sites that were identified and prioritized based on established criteria, such as relevance and number of documents expected to be present. As of October 2007, the contractor has completed on-site data collection at 5 of these 18 sites, and as of December 2007 was collecting data at 3 additional sites. During its site visits, the contractor’s staff searches a variety of documents for information that pertains to human exposure to chemical or biological substances. The documents that are identified as having relevant information are then scanned into an electronic file and the information from those documents—such as the individual’s name, the substance to which the subject was exposed, and the activity that resulted in the exposure—is entered into a database. The contractor conducts a quality assurance review before this information is delivered to OASD (HA) officials. OASD (HA) officials told us that they perform a detailed review of this information, query the contractor to resolve errors or inconsistencies, and make modifications to the information provided by the contractor if they have received or read other information that they believe could add contextual sophistication. Once OASD (HA) officials complete their review of the information, it is added to the DOD chemical and biological test database that they maintain (hereafter referred to as the OUSD (AT&L) task order database). While the database information is not provided to OUSD (AT&L)’s chemical and biological defense office, the contractor’s monthly report to this office includes the number of identified individuals that the contractor has provided to OASD (HA). The task order identified specific locations for the contractor to review and was supposed to be completed in September 2007; however, the contractor was unable to complete its work within the 3-year schedule and has subsequently received a 3-year extension. This task order is valued at almost $4.5 million, and the estimated value of the extension is between $2.5 million and $3.7 million. Based on the project’s June 2007 concept of operations plan, which DOD developed as a result of this review, the contractor is expected to meet the project’s objectives and complete collection and analysis of information obtained from 18 data collection sites by September 2010. Since the remaining sites have been prioritized based on expected level of information and other criteria, DOD officials believe that the remaining data collection efforts could be completed more quickly. DOD’s current effort to identify individuals potentially exposed to chemical or biological substances lacks clear and consistent objectives, scope of work, and information needs, which affects DOD’s ability to know whether it has accomplished the project’s goals. First, the objectives of DOD’s current effort are inconsistent. The Defense Authorization Act for FY 2003, which was the genesis for DOD’s current effort, directed the Secretary of Defense to identify DOD projects or tests outside of Project 112 that may have exposed members of the armed forces to chemical or biological substances. However, the focus of the current effort has expanded to include other exposures, including those resulting from immunizations, transportation, storage, and occupational accidents. This occurred because the documents that are guiding this effort, including the project’s September 2004 statement of work and its June 2007 concept of operations plan, have been used interchangeably to define the scope of the work. We identified a difference of opinion between DOD and VA regarding the overall focus of the contractor’s research efforts. Officials in OUSD (AT&L)’s chemical and biological defense office stated that they believe the contractor should focus only on identifying participants in DOD tests since the Defense Authorization Act for FY 2003 was the genesis of this task order, and they believe that the primary interest is in individuals who were not aware of their exposures or are unable to report their exposures due to the classified nature of the tests. They also believe that individuals accidentally exposed at a work location might be protected under occupational health regulations and statutes. However, VA officials stated that they would prefer that DOD provide information on all exposures, including those not associated with DOD tests, since VA is responsible for adjudicating all claims by servicemembers, regardless of how they were exposed. The contractor conducting the search has included all types of exposures in its research, which according to DOD and contractor officials is based on VA’s stated preferences. Second, the scope of DOD’s current effort is unclear. Specifically, while the Defense Authorization Act for FY 2003 directed DOD to identify only members of the armed forces, the task order’s 2004 statement of work and the June 2007 concept of operations plan state that the objective of the project is to collect information on all servicemembers and civilian personnel who might have been exposed from 1946 to present. However, DOD’s current effort has not included an active search of civilian personnel. Instead, at the direction of DOD, the contractor is collecting information on civilians who may have been exposed to chemical or biological substances when it comes across those names while searching for servicemembers. DOD officials stated that they focused their efforts on servicemembers because VA has actively requested information about servicemembers from DOD for years and the department has not received any inquiries about the civilians. At the time of our review, the contractor had collected information on approximately 700 civilian personnel who were potentially exposed to chemical or biological substances. Third, the amount and type of information that the contractor needs to collect for this effort has been expanded from the original task order requirement. The task order specifies that the information to be collected should identify potential human exposure events, the names of test programs, chemical and biological substances involved, and the names of volunteers or participants. However, DOD has expanded the information that the contractor should collect, which may be lengthening the time for the contractor to complete its work. For example, in February 2007, officials from one of the repository sites provided the contractor a CD with names and exposure information for 2,300 individuals who were exposed to a series of biological tests at Fort Detrick, Maryland, known as Operation Whitecoat. However, as of October 2007, the contractor had not provided DOD with these names because it was adding information, such as the test objective and summary, and exposure and treatment information. Since most of these 2,300 individuals had been previously aware of their exposures due to Fort Detrick’s independent outreach efforts, a DOD official who has worked with these individuals has stated that it is unclear how much additional information the contractor needs to collect about this group. While OASD (HA) officials have said that the additional information has been helpful for their needs, they and VA officials have also acknowledged that the identity of the chemical or biological substance to which an individual was potentially exposed is the most pertinent information. Without consistent guidance about the objectives, scope of work, and information necessary to meet DOD’s goals and objectives, DOD’s current effort might not produce the desired results. After discussing this issue with DOD officials, in December 2007 officials in OUSD (AT&L)’s chemical and biological defense office stated that they plan to revise the task order’s statement of work, concept of operations plan, and a DOD implementation plan to clarify the scope of work and the focus of the research to servicemembers—the original focus as identified in the Defense Authorization Act for FY 2003. Until recently, DOD’s current effort has lacked adequate oversight of the contractor activities and results. We have previously reported that providing effective oversight is essential and, at times, DOD’s oversight was wanting, as it did not always task personnel with oversight duties or establish clear lines of accountability. While OUSD (AT&L)’s chemical and biological defense office established three different points of contact throughout the life of the task order who participated in meetings when the work started in 2004 and assisted the contractor undertaking the effort in accessing repository sites when requested, these points of contact were not performing active oversight activities nor were they designated as the project manager for this effort. During our review, officials in OUSD (AT&L)’s chemical and biological defense office realized that their predecessors had not selected a project manager and selected one of the office’s civilian employees to oversee the effort. We also found that DOD had not visited any of the repository sites where the contractor had proposed or completed its research to ensure that the work was effectively and efficiently meeting the task order’s objectives. We visited the three repository sites where the contractor was conducting its work during our review. At one location, a knowledgeable DOD official expressed concerns to us that the contractor’s presence and research in one of the site’s libraries might not be needed. However, since officials in OUSD (AT&L)’s chemical and biological defense office had not visited the site or met with site officials, they were unaware of these concerns and therefore were unable to decide whether the contractor should be conducting work at that particular site or whether the research funds and time should be spent at a site that they believe might provide more relevant information. In addition, until June 2007, OUSD (AT&L)’s chemical and biological defense office had not regularly evaluated the effectiveness or efficiency of the contractor’s work. For example, at the time of our review, officials in OUSD (AT&L)’s chemical and biological office told us that they did not know the extent to which each of the task order’s four tasks was meeting its objective to identify servicemembers and civilians who were potentially exposed to chemical or biological substances during testing and other activities. Therefore, DOD was not in a position to determine whether the task order needed to be modified to focus DOD’s resources and the contractor’s research efforts to those tasks that will best meet its objectives. Further, while the contractor had implemented its own quality assurance/quality control process that was approved by OUSD (AT&L)’s chemical and biological defense office, the office had not taken any action to independently assess the accuracy and characterization of the information that the contractor was providing to the OASD (HA), which maintains DOD’s databases of potentially exposed individuals. As a result, officials in OUSD (AT&L)’s chemical and biological defense office, who are responsible for overseeing the contractor’s efforts, have limited knowledge about the accuracy and characterization of the information that was being collected. Review and assessment of the contractor-provided data by the project manager are important because we identified potential problems with the accuracy of that information. For example, our work indicated that there are discrepancies between the number of individuals reported by the contractor in its monthly reports to OUSD (AT&L)’s chemical and biological office and the number of individuals that exist in OASD (HA)’s database that could not be adequately explained. In addition, at the time of our review, the characterization in the contractor’s monthly reports provided to OUSD (AT&L)’s chemical and biological defense office that all of these individuals were potentially exposed during chemical or biological tests gave the wrong impression to the project manager. For example, while the contractor has characterized the individuals it has identified as having been involved in DOD’s chemical and biological “tests”, an unknown number of these exposures resulted from immunizations, transportation, occupational, and storage accidents. This number also includes individuals who might have been associated with the tests but who were not exposed to any substances, such as those who participated in physical exercises to test the durability of chemical and biological suits or who could have been part of a test control group. OASD (HA) officials were able to identify at least 1,800 names in the database that were not exposed to any substances, which leaves about 7,100 names in the database that have been potentially exposed to chemical or biological substances, as shown in table 2. DOD and contractor officials stated that they have included these names in the database so that they could appropriately respond to these individuals’ concerns if they contact DOD or VA. Specifically, according to DOD, including these names in the database enables the department to refute any claims by individuals who participated in tests where they were not exposed to any chemical or biological substances. We identified a variety of factors affecting the ability of OUSD (AT&L)’s chemical and biological defense office to provide oversight, including a lack of consistent leadership, inadequate internal controls, a shortage of personnel, and a lack of defined roles and responsibilities. For example, the position that was identified as the office’s point of contact for the task order is a 1-year position. Consequently, the contractor has had to work with three different individuals during the first 3 years of the task order. The official holding this position during our review requested and was granted a 2-year extension in this position, and thus he has been able to implement a number of internal controls to improve the oversight and accountability of this project. In addition, until September 2007, the respective roles and responsibilities of OUSD (AT&L)’s chemical and biological defense office and OASD (HA) had not been clearly identified. In September 2007, in response to our review, OUSD (AT&L)’s chemical and biological defense office and OASD (HA) signed an implementation plan that identified their respective roles and responsibilities. In planning, executing, and evaluating DOD’s current effort, OUSD (AT&L)’s chemical and biological defense office did not fully leverage the work of other entities that had previously identified exposed individuals. Multiple DOD and non-DOD organizations have conducted a variety of independent efforts since the early 1990s, through which they have identified thousands of individuals who were potentially exposed during chemical or biological tests. These entities possess specific information about the tests—to include the location of test records—and the personnel conducting the work developed institutional knowledge. While OUSD (AT&L)’s chemical and biological defense office leveraged Project 112 information from the OASD (HA), it did not leverage information available from other DOD and non-DOD sources. For example, between 1993 and 1997, the joint DOD-VA task force identified approximately 6,400 individuals who were potentially exposed to sulfur mustard, lewisite, and other chemical substances. OUSD (P&R) led the effort by using some of its own personnel to conduct the research and visit several repository sites in addition to issuing a task order for a contractor—the same contractor DOD is currently using to research and identify tests and exposures—to develop a database containing information on the location, chemicals tested, and dates of the chemical weapons research program. During this period, OUSD (P&R) personnel involved with the research became very knowledgeable about the issues, collected boxes of information, and issued various reports. OUSD (P&R) officials transferred the names of the individuals who were identified to OASD (HA) officials in April 2005. According to OUSD (P&R) officials, however, officials in OUSD (AT&L)’s chemical and biological defense office had not met with any of the personnel with institutional knowledge or examined any of the documents that OUSD (P&R) still maintained. Since OUSD (P&R)’s reports identified locations of exposures, officials in OUSD (AT&L)’s chemical and biological defense office could have used this information as another source to help validate and prioritize the repository sites proposed by the contractor for its current effort, and to eliminate potential redundancy. Furthermore, as a result of independent research efforts by the Institute of Medicine about the health effects of DOD chemical tests using human subjects, the organization developed a database that contained the names and addresses of more than 4,000 servicemembers who were potentially exposed to chemical substances during a series of tests at Edgewood, Maryland. However, OUSD (AT&L)’s chemical and biological defense office was not aware of this database since the office had not coordinated with the organization. Institute of Medicine officials told us that they believe the names and contact information in this database could help DOD with its efforts since the names were collected from the same locations where the contractor for DOD’s current effort is doing its research. Subsequent to our September 2007 meeting with the Institute of Medicine, its officials contacted OASD (HA) to establish the protocols to transfer the names of identified individuals to DOD so that it can determine whether these individuals are already included in any of DOD’s databases. Without communicating and coordinating with DOD and non- DOD organizations that have previously conducted similar efforts, DOD’s current effort will not be able to take advantage of existing information so that it can focus its resources on the areas where information is missing. DOD’s current effort lacks transparency since it has not worked with veterans, and it has not kept Congress and veterans service organizations fully informed about the status of its efforts. Although DOD officials conducted outreach to veterans during its Project 112 research effort and the Defense Authorization Act for FY 2003 required DOD to work with veterans and veterans service organizations to identify projects and tests outside of Project 112 that may have exposed members of the armed forces to chemical and biological substances, DOD has not included veterans and veterans service organizations during its current effort. DOD also has not kept Congress, veterans, and the public informed on the status of its current effort as it did during its Project 112 investigation. Specifically, in 2002, DOD established a public internet site to provide interested persons with information on what happened during those tests that might have affected the health of those who served. The internet site included a status report on DOD’s efforts so that veterans and others could monitor the progress, and it also contained reports, documents, and links to related internet sites. The internet site, which was operated by OASD (HA), has not been updated with information about DOD’s current effort to identify individuals outside of Project 112. Representatives from a veterans service organization that has pursued information regarding DOD’s use of servicemembers as human subjects told us they were not aware of DOD’s current effort and they believe DOD has not been transparent and forthcoming with the information that it has obtained. These officials stated that the continuous lack of collaboration and transparency has negatively affected the level of trust veterans and the veterans service organization have in DOD regarding its commitment to fully identify and disclose information regarding these tests. The representatives stated that it is imperative for DOD to be as transparent as possible so that Congress, veterans, and the public have reason to believe the cloak of secrecy regarding these tests has been lifted and individuals who were potentially exposed could receive appropriate medical care and benefits. DOD officials acknowledged the importance of keeping veterans informed so that they know that these tests are no longer classified, they are entitled to a medical screening for long-term health effects, and they can assist in DOD’s efforts to identify other individuals who might have been exposed. Until DOD is more transparent about its efforts to identify individuals who were potentially exposed during these previously classified tests, Congress, veterans, and the public could have reason to believe that the cloak of secrecy has not been lifted and not realize the reasonableness, effectiveness, success, and challenges of DOD’s current effort. DOD and VA have had limited success in notifying individuals who were potentially exposed to chemical and biological substances during Project 112 tests or testing that occurred outside of Project 112 due to several factors. First, DOD has inconsistently transmitted information about identified servicemembers to VA. Second, VA has not used all available resources to obtain contact information for servicemembers who were identified as having been potentially exposed. Finally, DOD has not taken any actions to notify civilians who have been identified. While DOD and VA have a process in place to share the names of servicemembers who are identified as having been potentially exposed to chemical and biological substances, the transmission of information between the two agencies has been inconsistent. To date, DOD has provided information to VA as agreed upon through an informal arrangement. Under the arrangement, DOD generally provides VA with the servicemember’s name, as well as any information related to the potential exposure that DOD uncovered during its investigation, such as the chemical or biological substance that was used, the dosage of the chemical or biological substance, and the date of the exposure. As of October 2007, DOD had used this process to transmit to VA approximately 20,700 names of servicemembers who had been potentially exposed to chemical or biological substances. The informal arrangement between DOD and VA did not establish a schedule for the exchange of information, so DOD provides newly acquired exposure information to VA in batches of varying size and at inconsistent intervals. When we began our work we found that DOD had not provided VA with any updates after September 2006 even though, as of June 2007, DOD had added approximately 1,800 additional servicemember names to its chemical and biological exposure database. Subsequent to our inquiries, however, DOD provided VA with an update in September 2007. According to DOD officials, regular updates to VA have been delayed because of a number of factors, including competing priorities such as current military operations, lack of personnel, database management issues, and lack of an impetus to take a proactive approach. Although limited personnel and competing priorities might be valid issues, until DOD provides regular updates of identified servicemembers to VA in a timely manner, VA will be unable to notify identified veterans about their potential exposure to chemical or biological substances. VA has not used certain available resources to obtain contact information for and to notify veterans who were identified as having been potentially exposed to chemical or biological substances. To notify veterans who were potentially exposed to chemical or biological substances during DOD tests, VA matches the list of potentially exposed veterans it obtains from DOD against its own database of veterans to find either contact information or a Social Security number. If no Social Security number is located, VA matches the available veterans’ information to information contained in the National Personnel Records Center. Once a Social Security number is obtained, VA usually uses a private credit bureau and on occasion has used the Internal Revenue Service database to obtain contact information for the veteran. In responding to a draft of this report, VA notes that it uses the credit bureau for a variety of reasons, including its up-to-date data transmissions from the Social Security Administration, expedience in responding, and general accuracy of information. As shown in table 3, as of December 2007, VA had obtained contact information for and sent notification letters to 48 percent of the names that DOD provided to them and that they may be able to contact. VA officials noted that while the total number of notification letters sent is 48 percent of the number of names that DOD has provided to them and that they may be able to contact, it represents all of the individuals for whom they were able to obtain contact information. A number of factors beyond VA’s control have impeded its ability to notify veterans of their potential exposure to chemical or biological substances. For example, some records have been lost or destroyed, and existing documentation contains limited information and often does not identify names of participants, while others were not turned in by the scientists who were conducting the research. When the records can be found, they do not necessarily identify the participants, but may instead refer to control numbers that were issued to the participants, which cannot be cross-referenced to other documents for identification. For those records that do include identification of participants, the information may contain only the participants’ initials, nicknames, or only first or last names. Also, since a number of these records do not include the participant’s military service number or social security number, it is difficult to determine the exact identity of these individuals. Further, the contact information that VA is able to obtain may not be accurate. For example, more than 860 notification letters have been returned as undeliverable to VA. However, VA is not using other available resources to obtain contact information to notify veterans. For example, while VA told us that it was using a company that is able to provide current contact information as a source, it had not coordinated with the Social Security Administration to obtain contact information for veterans receiving social security benefits or to identify deceased veterans using the agency’s death index and had not regularly used the Internal Revenue Service’s information. VA officials acknowledged that they had not directly used the death index and that a memorandum of understanding with the Social Security Administration might facilitate a new way to accomplish this. However, they noted the credit bureau receives weekly updates from the Social Security Administration’s death index. VA officials also acknowledged that it planned to make more frequent use of IRS databases. Until VA implements a more effective process to obtain contact information for veterans, some veterans will remain unaware of their potential exposure or the availability of health exams and the potential for benefits directly related to an exposure. DOD has not taken any actions to notify civilians who have been identified as having been potentially exposed during Project 112 tests and other chemical and biological tests, due in part to a lack of specific guidance defining the requirements to notify civilians. The Defense Authorization Act for FY 2003 required DOD to identify its tests or projects that may have exposed members of the armed forces to chemical or biological substances, but did not specifically address civilian personnel who may have been affected by these tests. However, in our 2004 report we recommended that DOD address the appropriateness of and responsibility for reporting new information, such as the identification of additional potentially exposed servicemembers, civilian employees, contractors, and foreign nationals who participated in the tests. In its response to our report, DOD concurred with our recommendation and stated that it would determine the appropriate reporting channels for civilian employees, contractors, and foreign national participants who were identified as being potentially exposed. However, DOD has not taken any action with the approximately 1,900 civilian names that it maintains, as shown in table 4. Instead, DOD has focused its efforts on the identification and notification of servicemembers who were potentially exposed. DOD officials stated that they have focused on identifying and notifying servicemembers since the primary impetus for their efforts to identify and notify individuals who may have been exposed has been requests for information from veterans and VA. OASD (HA) has not acted in part because it is unclear whether it is required to notify civilians or transmit civilian exposure information to another agency for notification. During our review, DOD and Department of Labor officials stated that they were unaware of a requirement for them to notify civilians of their potential exposure. However, our April 2005 report about civilian and contractor exposures to chemical substances in Vietnam identified compensation programs that might be available for civilians who were exposed during these chemical and biological tests if they come forward and present evidence that they were potentially exposed. Specifically, federal employees can file claims for workers compensation with their employing agency, which refers the claims to the Department of Labor under the Federal Employees Compensation Act. Employees who work under contract to the U.S. government can file workers compensation claims through their employers with the employers’ insurance carrier. Without an effort to develop and provide guidance for notifying civilians, those civilians who have been identified may not be aware of their potential exposure. Since World War II, potentially tens of thousands of military personnel and civilians have been exposed to chemical or biological substances during previously classified DOD tests. As this population becomes older, it will become more imperative for DOD and VA to identify and notify these individuals in a timely manner because they might be eligible for health care or other benefits. While DOD has concluded that continuing an active search for individuals potentially exposed during Project 112 has reached a point of diminishing returns, it has not conducted an informed cost- benefit analysis, which could guide DOD in identifying the extent to which it might need to take additional actions. Without conducting a sound and documented cost-benefit analysis that includes a full accounting of information known and the challenges associated with continuing to search for Project 112 participants, DOD will not be in a position to make an informed and transparent decision about whether any of the remaining investigative leads could result in meaningful opportunities to identify additional potentially exposed individuals. Furthermore, until DOD conducts such an analysis, Congress, veterans, and the public may continue to question the completeness and accuracy of DOD’s efforts. Moreover, while DOD has undertaken efforts to identify and notify individuals who were potentially exposed during tests outside of Project 112, the department has not worked with veterans and veterans service organizations during its current effort as required by the Defense Authorization Act for FY 2003, and it has not coordinated its efforts with other DOD and non-DOD organizations. Until DOD and VA undertake more effective and efficient efforts to identify and notify potentially exposed individuals—including consistent guidance about the scope of work, such as clearly defined goals and objectives and agreement on the type and amount of information that is necessary to collect; effective internal controls and oversight practices; coordination with other entities to leverage existing information; regular updates to VA; and utilization of all available resources—Congress, veterans, and the public may continue to question DOD and VA’s commitment to this effort. Furthermore, in the absence of transparency about these previously classified tests and DOD’s efforts to identify individuals who were potentially exposed, Congress, veterans, and the public could have reason to believe that the cloak of secrecy has not been lifted and may not understand the success and challenges of DOD’s current effort. While DOD and VA have developed a process for notifying servicemembers who were potentially exposed, it is unclear whether DOD or any other agency, such as the Department of Labor, is required to notify potentially exposed civilians who are identified. Therefore, without specific guidance that defines the requirements, roles and responsibilities, and mechanisms to notify civilians who have been potentially exposed to chemical or biological substances, these individuals might continue to be unaware of their circumstances. We are suggesting the Congress consider the following two matters: To provide greater transparency and resolve outstanding questions related to DOD’s decision to cease actively searching for the identification of individuals associated with Project 112, Congress should consider requiring the Secretary of Defense to consult with and address the concerns of VA, veterans, and veterans service organizations; to conduct and document an analysis that includes a full accounting of information known, and the related costs, benefits, and challenges associated with continuing the search for additional Project 112 participants; and to provide Congress with the results of this analysis. Our draft report addressed this recommendation to the Secretary of Defense; however, because DOD disagreed, we elevated this to a matter for congressional consideration. To ensure that civilians who were potentially exposed to chemical or biological substances as a result of tests conducted or sponsored by DOD are aware of their circumstances, Congress should consider requiring the Secretary of Defense, in consultation with the Secretary of Labor, to develop specific guidance that defines the requirements, roles and responsibilities, and mechanisms to notify civilians who have been potentially exposed to chemical or biological substances. To ensure a sound and documented process for DOD’s decision regarding the identification of individuals associated with Project 112, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness to conduct and document an analysis that includes a full accounting of information known, and the related costs, benefits, and challenges associated with continuing the search for additional Project 112 participants, and to provide Congress with the results of this analysis. In developing the analysis, DOD should consult with and address the identified concerns of VA, veterans, and veterans service organizations. To ensure that DOD’s current effort to identify individuals who were potentially exposed during chemical and biological tests outside of Project 112 are more efficient, effective, and transparent, and to ensure that its databases contain accurate information, we recommend that the Secretary of Defense direct the Office of Under Secretary of Defense for Acquisition, Technology, and Logistics to take the following four actions: in coordination with the Office of the Under Secretary of Defense for Personnel and Readiness and the Secretary of Veterans Affairs, modify the guidance about the scope of work for its current effort, such as the statement of work and concept of operations plan, to clearly define consistent, reasonable, and acceptable goals and objectives, and the type and amount of information that will need to be collected to meet these goals and objectives; implement effective internal controls and oversight practices, such as periodic site visits, regular assessments of the contactor’s efforts, and quality assurance reviews of the information provided by the contractor; coordinate and communicate with other entities that previously identified exposed individuals to leverage existing information, including institutional knowledge and documents; and make its efforts transparent with regular updates to Congress, the public, and veterans service organizations. To ensure that DOD has taken appropriate action in its efforts to notify servicemembers who were potentially exposed, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness to take appropriate action to address the factors—such as competing priorities and database management weaknesses—affecting DOD’s ability to forward the names of potentially exposed individuals to VA in a timely and effective manner. To ensure that all veterans who have been identified as having been potentially exposed to chemical or biological substances have been notified, we recommend that the Secretary of Veterans Affairs take steps to increase its use of available resources, such as the Internal Revenue Service, to implement a more efficient and effective process for obtaining contact information for living veterans. We requested comments from DOD, VA, and the Department of Labor on a draft copy of this report. DOD generally agreed with five recommendations, but disagreed with the first recommendation to conduct and document a cost-benefit analysis associated with continuing the search for additional Project 112 participants, and to provide Congress with the results of this analysis. VA agreed with one recommendation and partially agreed with another recommendation that pertained to its activities. The Department of Labor did not provide us any comments. Because DOD disagreed with the recommendation to conduct and document a cost-benefit analysis associated with continuing the search for additional Project 112 participants and has not adequately addressed our May 2004 recommendation to determine the feasibility of addressing unresolved issues associated with Project 112, we added a Matter for Congress to consider directing the Secretary of Defense to conduct such an analysis. DOD and VA also provided technical comments, which we incorporated as appropriate. DOD’s and VA’s comments are reprinted in appendices II and III, respectively. DOD agreed to and has in some cases begun taking action to respond to five of the recommendations. Specifically, DOD stated that it has already coordinated on updating program goals and objectives for the identification of individuals who were potentially exposed during chemical and biological tests outside of Project 112 and is revising the statement of work, implementation plan, and concept of operations to ensure consistent guidance and deliverables. DOD also stated that it has taken steps to increase oversight of the project and has established an implementation plan with OASD (HA) delineating oversight responsibilities. In addition, DOD stated that it will take steps to determine if other organizations are conducting similar work to identify potentially exposed individuals and will coordinate and leverage all available information. The department also stated that it will expand its current efforts to update the public and make efforts more transparent. Finally, DOD and VA are in the process of discussing short-term and long-term improvements necessary for improving the transfer of information to VA in a timely and effective manner. We believe these are positive steps that, when completed, will address the intent of our recommendations. DOD did not agree with the first recommendation to conduct and document an analysis that includes a full accounting of information known, and the related costs, benefits, and challenges associated with continuing the search for additional Project 112 participants, and to provide Congress with the results of this analysis. DOD stated that it believes it made a full accounting of its efforts available to Congress in 2003, that it has not received any credible leads that would allow DOD to continue its research, and that it currently knows of no other investigative leads that would meaningfully supplement what it believes to be a total picture of Project 112. However, as discussed in our May 2004 report, we identified a number of credible leads that could possibly result in additional Project 112 information. In addition, as discussed in this report, almost 600 additional individuals who were potentially exposed during Project 112 (more than a 10 percent increase) have been identified by non- DOD sources since DOD’s 2003 report to Congress and its decision to cease actively searching for additional exposures. In light of the increasing number of individuals who have been identified since DOD provided its report to Congress in 2003 and ceased its active search for additional individuals, until the department provides a more substantive analysis that supports its decision to cease active searches for additional individuals potentially exposed during Project 112 tests, Congress and veterans may continue to question the completeness and level of commitment to this effort. Because DOD has disagreed with our recommendation and has not adequately addressed our May 2004 recommendation to determine the feasibility of addressing unresolved issues associated with Project 112, we have added a Matter for Congress to consider directing the Secretary of Defense to conduct such an analysis. In response to our recommendations, VA agreed to work with DOD to modify the guidance about the scope of work for its current effort to clearly define consistent, reasonable, and acceptable goals and objectives; and the types and amount of information that will need to be collected to meet these goals and objectives. VA also agreed to contact the Internal Revenue Service to determine if a more timely response can be obtained from them to assist VA in notifying individuals potentially exposed to chemical or biological substances. We believe these steps are consistent with the intent of our recommendations. However, VA disagreed with a part of our recommendation that it needs to pursue information from the Social Security Administration since the credit bureau that VA uses to obtain contact information already receives the same information from the Social Security Administration. Accordingly, we adjusted our recommendation to the Secretary of Veterans Affairs so that it did not refer to the Social Security Administration as another source of information. We are sending copies of this report to other interested congressional committees, the Secretary of Defense, the Secretary of Veterans Affairs, and the Secretary of Labor. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-5431 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix IV. To assess the Department of Defense’s (DOD) efforts since 2003 to identify servicemembers and civilians who may have been exposed to chemical or biological substances used during tests conducted under Project 112, we reviewed and analyzed documents pertaining to Project 112, including DOD’s 2003 Report to Congress: Disclosure of Information on Project 112 to the Department of Veterans Affairs. We interviewed officials at the Office of the Secretary of Defense, Washington, D.C., including the Under Secretary of Defense for Acquisition, Technology, and Logistics, and the Under Secretary for Personnel and Readiness. We also interviewed officials at the Office of the Assistant Secretary of Defense for Health Affairs who were responsible for conducting DOD’s investigation of Project 112 tests and have been designated as the single point of contact for providing information related to tests and potential exposures during Project 112. We interviewed officials at the Institute of Medicine and reviewed their 2007 report on the long-term health effects of participation in the shipboard hazard and defense tests of Project 112. In addition, we reviewed and analyzed our prior reports as well as reports of other organizations to provide a historical and contextual framework for evaluating DOD’s efforts. To evaluate DOD’s current effort to identify servicemember and civilian exposures that occurred during activities outside of Project 112 tests, we reviewed and analyzed reports, briefings, and documents and interviewed officials at the Office of the Secretary of Defense, Washington, D.C., including the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Under Secretary of Defense for Personnel and Readiness. We also interviewed officials at the Office of the Assistant Secretary of Defense for Health Affairs, who have been designated as the single point of contact for providing information related to tests and potential exposures outside of Project 112. In addition, we interviewed officials at the U.S. Army Medical Research Institute of Infectious Diseases and the U.S. Army Medical Research and Materiel Command, Fort Dietrich, Maryland; the Department of Veterans Affairs, Washington, D.C.; the Institute of Medicine, Washington, D.C.; the Vietnam Veterans of America, Silver Spring, Maryland; and DOD’s contractor currently conducting research to identify potential exposures that occurred outside of Project 112. We also evaluated DOD’s methodology for identifying servicemembers and civilians who may have been exposed to chemical or biological substances by observing the process the contractor uses to conduct research at repositories containing documents related to chemical and biological exposures from tests and other activities, such as the transportation and storage of chemical and biological substances. We interviewed officials and observed storage facilities at the three chemical or biological substance exposure record repositories where the contractor was currently conducting its work: Edgewood Chemical and Biological Center Technical Library, Aberdeen Proving Grounds, Maryland; U.S. Army Research, Development, and Engineering Command Historical Office, Aberdeen Proving Grounds, Maryland; and U.S. Army Medical Research Institute of Infectious Diseases Technical Library, Fort Detrick, Maryland. In addition, we interviewed officials and observed the records storage area at the U.S. Army Medical Research Institute of Infectious Diseases Medical Records Office, Fort Detrick, Maryland, where information about Operation Whitecoat is maintained. We also reviewed DOD’s outreach efforts and the extent to which DOD coordinated with other agencies that might have useful information, including the Department of Veterans Affairs (VA), the Department of Labor, the Institute of Medicine, and the Vietnam Veterans of America. To evaluate VA’s process to notify servicemembers whom DOD has determined may have been exposed to a chemical or biological substance, we interviewed VA officials with the Veteran’s Benefit Administration, Veteran’s Health Administration, and Office of Planning and Policy, and gathered data concerning their success in making notifications. In particular, we documented the number of servicemembers whose names had been provided to VA by DOD, the extent to which notification letters were sent, the extent to which veterans were deceased, and the number of cases where sufficient documentation was not available to obtain contact information to make notifications. We assessed the reliability of DOD’s and VA’s data by interviewing agency officials knowledgeable about the data and by reviewing existing information about the data and the systems used to maintain and produce them. Although we found that there were potential problems with the quality and reliability of the information, we determined that the data were sufficient for the purposes of this report. We conducted this performance audit from June 2007 to February 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Robert L. Repasky (Assistant Director), Tommy Baril, Renee S. Brown, Brian D. Pegram, Steven Putansu, Terry L. Richardson, and Karen Thornton made key contributions to this report. Agent Orange: Limited Information Is Available on the Number of Civilians Exposed in Vietnam and Their Workers’ Compensation Claims. GAO-05-371. Washington, D.C.: April 22, 2005. Chemical And Biological Defense: DOD Needs to Continue to Collect and Provide Information on Tests and Potentially Exposed Personnel. GAO- 04-410. Washington, D.C.: May 14, 2004. Human Experimentation: An Overview on Cold War Era Programs. GAO/T-NSIAD-94-266. Washington, D.C.: September 28, 1994. Veterans Disability: Information From Military May Help VA Assess Claims Related to Secret Tests. GAO/NSIAD-93-89. Washington, D.C.: February 18, 1993.

Tens of thousands of military personnel and civilians were potentially exposed to chemical or biological substances through Department of Defense (DOD) tests since World War II. DOD conducted some of these tests as part of its Project 112 test program, while others were conducted as separate efforts. GAO was asked to (1) assess DOD's efforts to identify individuals who were potentially exposed during Project 112 tests, (2) evaluate DOD's current effort to identify individuals who were potentially exposed during tests conducted outside of Project 112, and (3) determine the extent to which DOD and the Department of Veterans Affairs (VA) have taken action to notify individuals who might have been exposed during chemical and biological tests. GAO analyzed documents and interviewed officials from DOD, VA, the Department of Labor, and a veterans service organization. Since 2003, DOD has stopped actively searching for individuals who were potentially exposed to chemical or biological substances during Project 112 tests, but did not provide a sound and documented basis for that decision. In 2003, DOD reported it had identified 5,842 servicemembers and estimated 350 civilians as having been potentially exposed during Project 112, and indicated that DOD would cease actively searching for additional individuals. However, in 2004, GAO reported that DOD did not exhaust all possible sources of information and recommended that DOD determine the feasibility of identifying additional individuals. In response to GAO's recommendation, DOD determined continuing an active search for individuals had reached the point of diminishing returns, and reaffirmed its decision to cease active searches. This decision was not supported by an objective analysis of the potential costs and benefits of continuing the effort, nor could DOD provide any documented criteria from which it made its determination. Since June 2003, however, non-DOD sources--including the Institute of Medicine--have identified approximately 600 additional names of individuals who were potentially exposed during Project 112. Until DOD provides a more objective analysis of the costs and benefits of actively searching for Project 112 participants, DOD's efforts may continue to be questioned. DOD has taken action to identify individuals who were potentially exposed during tests outside of Project 112, but GAO identified four shortcomings in DOD's current effort. First, DOD's effort lacks clear and consistent objectives, scope of work, and information needs that would set the parameters for its efforts. Second, DOD has not provided adequate oversight to guide this effort. Third, DOD has not fully leveraged information obtained from previous research efforts that identified exposed individuals. Fourth, DOD's effort lacks transparency since it has not kept Congress and veterans service organizations fully informed of the progress and results of its efforts. Until DOD addresses these limitations, Congress, veterans, and the American public can not be assured that DOD's current effort is reasonable and effective. DOD and VA have had limited success in notifying individuals potentially exposed during tests both within and outside Project 112. DOD has a process to share the names of identified servicemembers with VA; however, DOD has delayed regular updates to VA because of a number of factors, such as competing priorities. Furthermore, although VA has a process for notifying potentially exposed veterans, it was not using certain available resources to obtain contact information to notify veterans or to help determine whether they were deceased. Moreover, DOD had not taken any action with the civilian names, focusing instead on veterans since the primary impetus for the research has been requests from VA. DOD has refrained from taking action on civilians in part because it lacks specific guidance that defines the requirements to notify civilians. Until these issues are addressed, some identified veterans and civilians will remain unaware of their potential exposure.

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For almost a decade, the government of Mexico has sought to combat the growing power of criminal groups that initially emerged as DTOs in the 1980s and 1990s. This struggle became a national priority in 2006 when then-President Felipe Calderón mobilized the Mexican military and law enforcement agencies to disrupt DTO operations and target their leadership structures. As the Congressional Research Service reported, while these efforts have continued, under current President Enrique Peña Nieto, who was elected in 2012, there has been a shift in emphasis toward reducing criminal violence that threatens the security of civilians and the business sector. According to a RAND Corporation report, besides trafficking billions of dollars’ worth of narcotics into the United States annually, Mexican DTOs’ criminal activity now extends to other areas, including human trafficking, kidnapping, money laundering, extortion, bribery, racketeering, and weapons trafficking. According to the Strategy DTOs require a constant supply of firearms and ammunition to assert control over the territory where they operate, eliminate rival criminals, enforce illicit business dealings, and resist government operations. The Strategy indicates that firearms that criminal organizations acquire from the United States are primarily transported overland into Mexico using the same routes and methods employed when smuggling bulk cash south and drugs north across the U.S.-Mexico border. The Strategy also notes that within the United States, DTOs or their agents typically rely on “straw purchasers.” According to ATF, a “straw purchase” occurs when a person who is a convicted felon (or otherwise prohibited by federal law from purchasing a firearm) or who wishes to remain anonymous, uses a third party, the straw purchaser, to execute the paperwork necessary to purchase a firearm from a federally licensed firearms dealer. The straw purchaser is a person who, but for making false statements on the license application, would otherwise be eligible under federal law to purchase a firearm and is therefore able to pass the mandatory background check conducted by the federal firearms licensee. Although straw purchasers may legally purchase firearms for their own possession and use, when they purchase firearms on behalf of criminals or others, they violate federal law by making a false statement to a federal firearms licensee on the required forms. Firearm trafficking organizations also frequently obtain firearms from unlicensed private sellers in secondary markets, particularly at gun shows and flea markets or through classified ads or private-party Internet postings, according to ATF officials. The surge in criminal activity by DTOs along the U.S.-Mexico border has generated concern among policymakers that this violence is spilling over into the United States. Since 2009, according to the National Drug Threat Assessment—which is produced by the U.S. Department of Justice’s National Drug Intelligence Center, Mexican-based DTOs have been known to operate in more than a thousand cities in the United States. While the extent of violence seen in Mexico has not been reported in the United States, law enforcement officials in two border cities we visited told us that murders and other criminal activity on the U.S. side are often linked to Mexican DTO activities. The governments of the United States and Mexico have committed to work together to stem the activities of these criminal organizations, including illicit arms trafficking. From fiscal year 2008 to fiscal year 2015, Congress appropriated about $2.5 billion in assistance for Mexico that has been provided through the Mérida Initiative, including approximately $194 million provided in the Consolidated and Further Continuing Appropriations Act, 2015. For fiscal year 2016, the administration’s budget request for the Mérida Initiative is $119 million, from various accounts. The Mérida Initiative is a bilateral security partnership between the United States and Mexico to fight organized crime and build the capacity of Mexico’s justice sector and law enforcement institutions to uphold the rule of law. Among the many activities supported under the Mérida Initiative, some assistance is provided to help combat firearms trafficking, such as providing canines trained to detect weapons and ammunition, and non-intrusive inspection equipment to detect the flow of illicit goods, including firearms. DOJ’s ATF and DHS’s ICE are the two primary agencies combating illicit sales and trafficking of firearms across the Southwest border. ATF combats firearms trafficking within the United States and from the United States to other countries as part of its mission under the Gun Control Act (see table 1). ATF is responsible for investigating criminal and regulatory violations of federal firearms laws, among other responsibilities. In carrying out its responsibilities, ATF licenses and regulates federal firearms licensees to ensure that they comply with applicable laws and regulations. ATF also traces U.S. and foreign manufactured firearms for international, federal, state, and local law enforcement agencies to link a firearm recovered in a criminal investigation to its first retail purchaser. This information can be used to help link a suspect in the criminal investigation to a firearm or identify potential traffickers. ATF is the only entity within the U.S. government with the capacity to trace firearms seized in crimes in Mexico. The agency has conducted investigations to identify and prosecute individuals involved in firearms trafficking schemes and has provided training to Mexican law enforcement officials on firearms identification and tracing techniques, among other efforts. ICE enforces U.S. export laws, and ICE agents and other staff address a range of issues, including combating the illicit smuggling of money, people, drugs, and firearms (see table 2). As the primary federal law enforcement agency responsible for investigating international smuggling operations and enforcing U.S. export laws, ICE’s Homeland Security Investigations division targets the illegal movement of U.S.-origin firearms, ammunition, and explosive weapons with the goal of preventing the procurement of these items by DTOs and other transnational criminal organizations. ICE’s investigative strategy includes the identification and prosecution of criminal networks and individuals responsible for the acquisition and movement of firearms from the United States. Other U.S. agencies that contribute to the effort to stem firearms trafficking to Mexico include: CBP. DHS’s CBP is charged with managing, securing, and controlling the nation’s borders for both people and cargo entering and leaving the United States. CBP’s outbound mission is to facilitate the movement of legitimate cargo, while interdicting the illegal export of weapons and other contraband out of the United States. State. State’s Bureau of International Narcotics and Law Enforcement Affairs (INL) advises the President, Secretary of State, and government agencies on policies and programs to combat international narcotics and crime. INL programs support State’s strategic goals to reduce the entry of illegal drugs into the United States and to minimize the impact of international crime on the United States and its citizens. INL oversees funding provided to build the capacity of Mexico to fight organized crime under the Mérida Initiative, including funds to support efforts to combat firearms trafficking. ONDCP. ONDCP is a White House component whose principal purpose is to establish policies, priorities, and objectives for the nation’s drug control program. It produces a number of publications, including the Strategy—first issued in 2007. The Strategy is intended to serve as an overarching guide for combating criminal activity along the U.S.-Mexico border; since 2009 it has included a Weapons Chapter in recognition of the threat posed by the smuggling of firearms across the Southwest border. Given ATF’s and ICE’s roles in combating firearms trafficking, these agencies share responsibility for preparing the information presented in the Weapons Chapter of the Strategy. While ONDCP tracks progress by U.S. agencies in meeting these objectives, it is not directly involved in planning or implementing their activities. Data from ATF on firearms seized in Mexico and traced from calendar year 2009 to 2014 indicate that the majority originated in the United States. Because of the illicit nature of the trafficking, the exact number of firearms trafficked from the United States into Mexico is unknown. Similarly, ATF officials noted that since firearms seized in Mexico are not always submitted for tracing the same year they were seized, or are not submitted at all, it is not possible to develop data to track trends on firearms seized. However, ATF uses the number of firearms seized and traced as an indicator to estimate extent of illicit firearms trafficking. While the government of Mexico collects data on the number of firearms its law enforcement entities seize each year, our analysis and findings refer exclusively to the universe of firearms seized in Mexico that were submitted for tracing using eTrace. According to ATF data, of the 104,850 firearms seized by Mexican authorities and submitted for tracing from 2009 to 2014, there were 73,684, or 70 percent, found to have originated in the United States. About 17 percent of the total, 17,544 firearms, were traced to a country other than the United States. ATF could not determine the origin of 13,622 (13 percent) of these firearms because of incomplete information. See figure 1. From 2009 to 2011, numbers of firearms seized by Mexican authorities and submitted for tracing fluctuated significantly, followed by a steady decline after 2011. According to ATF officials, shifts in the number of guns seized and traced do not necessarily reflect fluctuations in the volume of firearms trafficked from the United States to Mexico from one year to the next. ATF staff explained that there are several factors that have influenced the year-to-year variance in the number of firearms traced since 2009. For example, they explained that the high number of firearms traced in 2009 reflects a single submission by the Mexican military to ATF for tracing of a backlog of thousands of firearms. Conversely, ATF officials noted there was a lower number of firearms submitted for tracing in 2010 because that is the year eTrace in Spanish was initially deployed in Mexico, and Mexican law enforcement officials at the local, state, and federal level had to be trained on using the system. In 2011, a much higher number of firearms were traced as Mexican officials became proficient in using the system. Finally, U.S. and Mexican officials suggest the decline since 2011 may reflect a period of adjustment in cooperation under the Peña Nieto administration. This included the centralization of access to eTrace in Mexico’s Attorney General’s Office and retraction of eTrace accounts from federal, state, and local law enforcement, which resulted in fewer Mexican law enforcement officials able to trace firearms using the system. According to Mexican law enforcement officials we interviewed, DTOs prefer high caliber weapons with greater firepower, including high caliber rifles or long guns, and military grade equipment. Officials explained that the firearms of choice for drug traffickers are high caliber assault rifles, such as AK type and AR 15 type, which are available for purchase in the United States and which can be converted to fully automatic fire (i.e., converted into machine guns). Officials also noted that in recent years they have seen DTOs acquire military equipment, such as .50 caliber machine guns, rocket launchers, and grenade launchers. However, they said that unlike firearms typically used by DTOs, which often can be traced back to the United States, this type of equipment is known to often be trafficked into Mexico from leftover Central American military stockpiles from past conflicts. See figure 2 for examples of long and short guns (also referred to as handguns). According to data provided by ICE, the agency seized 5,951 firearms that were destined for Mexico in the last 6 years. Of firearms seized by ICE from 2009 to 2014, 2,341, or 39 percent, were long guns—including rifles and shotguns. During the same period, ICE seized 3,610 short guns— including revolvers and pistols (see fig. 3). According to data provided by ATF, almost half of all firearms seized in Mexico and traced in the last 5 years were long guns. From 2009 through 2014, 49,566 long guns—rifles and shotguns—were seized and traced. During that same period, 53,156 short guns—including revolvers and pistols—were seized and traced. The data also show a substantial decline in the number of long guns traced since 2011 (see fig. 4). Mexican law enforcement officials said that in the last 2 years they often seized more handguns than rifles, but stated that the use of high caliber rifles by cartels is still widespread. According to ATF officials, steps the bureau has taken to combat firearms trafficking to Mexico have made it more difficult for firearms traffickers to acquire long guns. Specifically, they noted implementation of Demand Letter 3, which requires licensed dealers and pawnbrokers in Arizona, California, New Mexico, and Texas to report multiple sales of certain rifles. According to ATF, information from multiple sales reports on long guns allows the bureau to identify indicators of suspicious or high-volume purchasing by individuals, repetitive purchasing, and purchases by associates, as well as geographical trends for such sales. ATF officials reported that this information has helped them identify firearms traffickers and others involved in a timelier manner, which on several occasions has led to arrests and seizures of firearms intended for trafficking to Mexico. From 2011 to 2014, 490 long guns that had been recorded as part of multiple sales transactions under Demand Letter 3 were seized in crime scenes—259 in the United States, 209 in Mexico, and 22 in undetermined locations. Most of the firearms seized in Mexico that were traced and found to be of U.S. origin from 2009 to 2014 came from U.S. Southwest border states. While guns seized in Mexico of U.S. origin were traced to all of the 50 states, most came from Texas, California, and Arizona. As shown in figure 5, of all firearms seized in Mexico that were traced and identified to be of U.S. origin, about 41 percent came from Texas, 19 percent from California, and 15 percent from Arizona. According to ATF, in fiscal year 2014, there were about 10,134 licensed dealers and pawnbrokers in the four Southwest border states, many of them along the border. This represents about 16 percent of the approximately 63,311 licensed dealers and pawnbrokers nationwide. These licensed dealers and pawnbrokers can operate in locations such as gun shops, pawn shops, their own homes, or gun shows. According to ATF officials, most firearms seized in Mexico and traced back to the United States are purchased in the United States then transferred illegally to Mexico. ATF has been able to determine the original retail purchaser for about 45 percent of firearms seized in Mexico and traced to the United States from 2009 to 2014. However, ATF was unable to determine a purchaser for 53 percent, because of factors such as incomplete identifying data on trace request forms, altered serial numbers, no response from the federal firearm licensee to ATF’s request for trace information, or incomplete or never received out-of-business licensee records. ATF and Mexican government officials told us that a new complicating factor in their efforts to fight firearms trafficking is the use of weapons parts transported to Mexico to be later assembled into finished firearms. According to documents provided by ATF, firearm parts include unfinished receivers barrels, triggers and hammers, buttstocks, pistol grips, pins, bolts, springs, and other items. Figure 6 shows some of these firearms parts. None of these firearm parts are classified as firearms under the Gun Control Act. In general, U.S. federal laws and regulations requiring manufacturers and importers of firearms to identify firearms with a serial number do not apply to parts, unless otherwise specified by law. Federal firearms licensees and other retailers are not required to report on the acquisition and disposition of firearm parts as they must for firearms. Furthermore, any individual in the United States may legally acquire and possess certain firearm parts that are not otherwise proscribed by law, including persons prohibited from possessing firearms and ammunition, such as convicted felons. Firearms may be assembled by using parts kits that include all of the components of a fully operable firearm minus the firearm receiver or frame, which may be obtained separately. ATF officials explained that in order to circumvent marking requirements on transactions involving firearms and thus avoid tracing, criminals will sometimes use unfinished receivers, such as “castings” or “flats,” rather than fully functional receivers. A frame or receiver by itself is classified as a firearm by definition under the Gun Control Act. The receiver is the part of the firearm that houses the operating parts, typically the bolt or bolt carrier group, the magazine well, and the trigger group. A casting is essentially a piece of metal fabricated with the exterior features and contours of the firearm receiver for which it is intended to substitute, but that without further machining will not function as a firearm. Castings and flats are commonly referred to as 80 percent receivers in marketing materials and advertisements promoting their sale. The “80 percent” label is intended to convey that the product has been cast or fabricated with most of the features of a finished, functional firearm receiver, but it will require further machining to function as a firearm (see fig. 7). A receiver flat is a piece of metal that has the same dimensions as a receiver, but that has not been shaped into a firearm configuration. In this form, it cannot accept any component parts, but with the proper equipment it can be readily bent into shape and molded into a receiver (see fig. 8). According to documents provided by ATF, since kits, castings, and flats are not classified as firearms, transfers of those items are not regulated under the Gun Control Act or National Firearms Act. Although ICE officials noted they are subject to export control laws, they have no serial numbers and generally no markings; thus, firearms assembled with them are untraceable. In addition, receivers and firearms parts are small and when transported separately may not be easily identified as items intended for the production of firearms. They are also easy to conceal, making it more challenging for customs authorities to detect illicit shipments of such parts. According to ATF officials, there are no reliable data on the extent of firearm parts trafficking from the United States into Mexico. They noted, however, that recent seizures of firearms parts, firearms made with unmarked parts, and equipment used to assemble or manufacture firearms in Mexico suggest an emerging reliance by criminal organizations on this source of weapons. For example, law enforcement officials in Mexico described to us two high-profile cases in 2014 involving illicit firearm parts assembly of this type. One was in Guadalajara, where Jalisco state police seized hundreds of unfinished receivers and pieces of sophisticated equipment being used to complete high caliber rifles. The second was in Tijuana, where Baja California state police seized 25 rifles in the process of assembly with firearm parts from the United States. ATF and ICE have taken several steps to improve coordination on efforts to combat firearms trafficking that we previously identified. In 2009, we reported instances of dysfunctional operations, duplicative initiatives, and jurisdictional conflicts between ATF and ICE. In response to our recommendations on how to address these challenges, ATF and ICE updated and signed an interagency collaboration memorandum of understanding (MOU) in June 2009. In their revised MOU, the agencies committed to a shared goal of keeping the public safe by using the tools given to both agencies and which are vital to the effective control of domestic and international trafficking of firearms, ammunition, explosives, weapons, and munitions. Specifically, the MOU set forth roles and requirements for each agency with respect to (1) intelligence and information sharing, (2) general investigative guidelines, (3) specific investigative guidelines, (4) sources of information, and (5) conflict resolution. This effort to improve coordination and optimize use of the agencies’ expertise provided the basis to address the issues that had hampered interagency collaboration prior to the MOU’s implementation. ICE and ATF officials said that after the MOU was signed, they held joint training exercises and conferences to ensure that agents had knowledge of the MOU and its jurisdictional parameters and collaboration requirements. Officials from each agency in headquarters, Mexico, and border locations we visited indicated that personnel working on firearms trafficking to Mexico were generally aware of the MOU’s key provisions and collaborated on this basis. Agency officials also highlighted a more recent joint interagency conference in September 2014, which sought to provide participants with a common understanding of collaborative efforts and respective areas of jurisdiction. Additionally, senior agency headquarters officials asserted that there is extensive cooperation between ATF and ICE, at the headquarters and field office levels. ATF and ICE officials in border field offices we visited confirmed that they were familiar with the MOU and that it provides them guidance on interagency collaboration. Similarly, ATF and ICE officials in Mexico stated that since they are co-located physically, they have a greater opportunity to work together closely on firearms trafficking-related cases, and an ICE official said that they rely on the MOU to help define their respective roles. Nevertheless, we identified persistent challenges in information sharing and some disagreement on the agencies’ respective roles in investigations. For example, ATF and ICE disagree on the extent to which trace data on firearms seized in Mexico collected through eTrace should be shared to support ICE firearms trafficking investigations. According to an ICE assistant deputy director, these firearms trace data from Mexico are currently only shared on a limited basis with ICE. Several ICE officials expressed an interest in obtaining access to these data and indicated that this access would enhance their ability to identify methodologies used by firearms traffickers and trends in criminal activity along the Southwest border. ICE officials responsible for investigations said that trace data should be shared in accordance to the MOU, which states “ATF shall report to the appropriate ICE field office in a timely manner any intelligence received relating to the illegal exportation, attempted exportation, or planned exportation of any item on the United States Munitions List...” However, the MOU does not address how general trafficking information, such as that submitted through eTrace by a third law enforcement agency, may be shared. ATF officials asserted that their agency shares trace data on firearms seized in Mexico with ICE according to established agency polices, which currently only allow ATF to provide non-case-specific information to other agencies in aggregate form. With respect to the results of individual trace requests, ATF officials explained that they are provided only to the law enforcement agency that submits the trace information; generally, this information is not shared with third parties, including other law enforcement agencies. ATF would have to obtain authorization from the third-party law enforcement agency that submitted the trace information to share it with ICE. Thus, ATF cannot automatically share information with ICE on firearm traces submitted by Mexican law enforcement agencies without their authorization. ATF staff said these policies are set forth in the agreements ATF signs with each law enforcement agency for the use of eTrace. Officials from ATF and ICE said there are joint efforts under way to find a mechanism to share this information. Additionally, the 2009 MOU sets forth investigative guidelines to define the roles and responsibilities of ATF and ICE pursuant to their respective statutory authorities. For example, the MOU states that “the regulation and inspection of the firearms industry is within the sole purview of ATF” and that “all investigative activities at the port of entry, borders and their functional equivalents must be coordinated through ICE.” Notwithstanding these guidelines, we found some confusion among some agency officials about the appropriate roles of their counterparts in conducting investigations. For example, a senior ICE official responsible for investigations questioned the involvement of ATF in firearms trafficking investigations to Mexico, because, according to the official, ATF’s jurisdiction focuses on combating domestic firearms violations. ICE officials also expressed concerns that the involvement of ATF’s international desk with Mexican agencies may create confusion among Mexican government authorities over the roles that ICE and ATF play in addressing firearms trafficking cases. However, an ICE assistant deputy director explained that pursuant to the Arms Export Control Act, ICE has primary jurisdiction over violations related to the international trafficking of firearms, but many such trafficking investigations begin with domestic criminal activities for which ATF has jurisdiction. Therefore, he stressed that it is essential that the two agencies collaborate to leverage ICE’s international and ATF’s domestic legal authorities. He added that ATF’s international operations also provide much-needed capacity building regarding forensics and e-Trace activities in Mexico. However, ICE and ATF must work to ensure that confusion is not created among Mexican agencies regarding the responsibilities for the investigation of international firearms trafficking by U.S. authorities. ATF officials agree that their agency’s efforts to combat firearms trafficking are concentrated in the United States, and that they recognize the role of ICE in addressing transnational weapons trafficking. However, some ATF officials said that it is incorrect to suggest that ICE has exclusive jurisdiction with respect to illicit cross-border firearms trafficking to Mexico. According to these officials, most investigations involving the smuggling of firearms from the United States to Mexico implicate ATF jurisdiction, because they typically involve the illegal acquisition of firearms inside the United States. ATF’s jurisdiction extends to unlawful acquisition of firearms by prohibited persons, straw purchasing, and other unlawful transfers of firearms. ATF officials added that the bureau’s statutory responsibility for tracing firearms includes the deployment of eTrace to Mexican and other foreign law enforcement entities, and noted that eTrace entries from Mexico can result in the opening of firearm trafficking investigations focused on criminal activity in the United States. ATF officials also acknowledge that because of the nature of firearms trafficking to Mexico, many investigations involve overlapping jurisdiction with respect to cross-border offenses squarely within ICE’s jurisdiction. They also noted the critical role ATF plays in providing training and capacity building on firearms and explosives identification and tracing for Mexican law enforcement. During our fieldwork, Mexican law enforcement agencies confirmed the benefits they derived from ATF capacity-building efforts, and they said they regarded ATF as their lead U.S. counterpart in investigating firearms trafficking. Thus, although ATF has established productive cooperative relations with Mexican agencies, there may also be some confusion in Mexico over ATF’s and ICE’s roles in combating firearms trafficking, as expressed by some ICE officials. In prior work, we have identified several interagency mechanisms that can be used to improve collaboration among agencies working on a shared mission, such as information sharing, agency roles and responsibilities, and oversight and monitoring. We have also reported that written interagency agreements, such as MOUs, are most effective when they are regularly updated and monitored. We observed that when implementation of such agreements is not regularly monitored, there is sporadic and limited collaboration among agencies. We also have found that agencies that create a means to monitor, evaluate, and report the results of collaborative efforts can better identify areas for improvement. Immediately after the MOU was updated in 2009, the agencies committed to undertake efforts to ensure that its provisions would be implemented accordingly. For example, at that time, ICE informed GAO that headquarters had a process to obtain information from ICE field offices every 60 days to identify coordination issues with ATF that could not be resolved at the field level within the framework of the MOU. In such situations, ICE headquarters would then work with the appropriate ATF component to resolve the issue. ICE officials explained these initial monitoring efforts were designed to ensure that the updated MOU was being effectively followed as it introduced several provisions or guidelines on how ATF and ICE should collaborate on firearms trafficking. However, according to ICE officials, this process was only in place during the initial implementation period of the MOU, and the effort was not sustained. Currently, officials from both agencies acknowledged that there is no specific mechanism in place to monitor implementation of the MOU. However, each agency’s officials referred to different efforts that they said provide an opportunity to monitor interagency collaboration under the MOU. For example, a deputy assistant director for ICE stated that coordination between ICE and ATF on firearms trafficking cases occurs at the Export Enforcement Coordination Center as well as at the field level. ICE’s Export Enforcement Coordination Center is intended to serve as the primary forum within the federal government for executive departments and agencies to coordinate their export control enforcement efforts. The Center seeks to maximize information sharing, consistent with national security and applicable laws. Thus, it is likely that coordination challenges between ICE and ATF on firearms trafficking could potentially be detected at the Center. However, given the Center’s broader responsibility to enhance export control enforcement efforts with multiple agencies, it is not directly intended to monitor implementation of the MOU. Moreover, coordination challenges related to the MOU persist even though the Center has been in place for 5 years, indicating that this may not be an effective means to monitor the MOU’s implementation. Senior ATF officials said that although there is no formal arrangement to regularly monitor implementation of the MOU, they consider joint interagency training to be an effective approach to ensure that officials from both agencies are familiar with the provisions of the MOU and are working together effectively. However, only two such training exercises have taken place—one in 2014 and another in September 2015. The training is intended to acquaint officials from both agencies with how the agencies coordinate firearms trafficking efforts, and as part of the training, the MOU provisions are discussed, but these training exercises do not constitute a mechanism for consistent monitoring of implementation of the MOU. By not sustaining a monitoring process for the MOU, the agencies have no assurance that its provisions are being implemented effectively, and challenges we identified are continuing to persist without a process for resolution. Mexican and U.S. officials described how upon coming to power in December 2012, the current administration of Mexican President Enrique Peña Nieto undertook a reevaluation of U.S.-Mexico law enforcement collaboration, including efforts to combat firearms trafficking. According to some officials, the government of Mexico took steps to consolidate law enforcement cooperative activities under an approach termed Ventanilla Única—which translates to Single Window. Under Ventanilla Única, Mexico’s Interior Ministry has become the primary entity through which Mérida Initiative training and equipment are coordinated, including capacity-building activities related to firearms trafficking. The government of Mexico also established a single point of contact within Mexico’s Office of the Attorney General to approve joint investigations with U.S. counterparts. Additionally, Mexican officials explained that Mexican law categorizes firearms trafficking as a federal crime and permits only federal authorities to work on such cases. This has led to some notable changes in the way U.S. and Mexican authorities work together on firearms trafficking efforts. One of these changes stemmed from the decision to centralize access to ATF’s eTrace in the Mexican Attorney General’s Office. Consistent with our prior recommendations, in 2010, ATF reached an agreement for deployment of eTrace in Spanish in Mexico, with Mexican authorities. According to ATF, this was a significant investment for which ATF provided training to numerous officials from various Mexican federal, state, and local law enforcement agencies on the use of eTrace, while assigning accounts to allow them to access the system. However, by 2013 the Mexican government retracted access to many of these accounts, effectively limiting eTrace in Mexico to certain authorized officials in the office of Mexico’s Attorney General. Mexican officials explained that the decision to consolidate access at the Attorney General’s office was intended to provide the government of Mexico with more effective control over the information associated with eTrace, and to support a central repository of evidence related to federal crimes such as trafficking of firearms. However, U.S. officials and some Mexican authorities said that limiting access to eTrace to a single governmental entity has restricted opportunities for bilateral collaboration. Some U.S. officials based in Mexico similarly noted that limiting access to eTrace diminished tracing of total firearms seized by Mexican authorities. Another significant change following the reassessment of bilateral collaboration, which began in 2012, was the suspension of periodic meetings of a working group known as GC Armas, which brought together U.S. and Mexican officials from various agencies involved in combating firearms trafficking. According to ATF officials, prior to 2013, GC Armas held periodic meetings annually with the participation of approximately 70 to 100 officials from both governments. These officials shared useful information on firearms trafficking trends, trace data, investigations, collaboration questions, and many other issues. ATF officials said that oftentimes very productive cooperative efforts on firearms trafficking began informally at GC Armas meetings and were subsequently formalized. Mexican officials similarly characterized GC Armas meetings as contributing in a fundamental manner to reaching significant agreement between law enforcement in both countries on how to combat firearms trafficking. They noted one such bilateral effort that resulted in a comprehensive assessment of firearms and explosives trafficking with recommendations for each country on sharing information and cooperating on cross-border investigations. Officials from both countries explained that while bilateral coordination did not cease after the suspension of GC Armas meetings, overall collaboration slowed down with fewer opportunities to promote bilateral firearms trafficking initiatives. U.S. and Mexican authorities acknowledge the challenges to law enforcement efforts posed by continuing corruption among some Mexican officials. As we discussed in our 2009 report, concerns about corruption within Mexican government agencies often limit U.S. officials’ ability to develop a full partnership with their Mexican counterparts. Officials we met with from ATF, ICE, CBP, and State continued to express such concerns regarding corruption in Mexico. Some Mexico-based ICE officials, for example, stated that they are conscious that their U.S.-based colleagues will not always share with them all of the information they have on firearms trafficking investigations because of concerns about corruption. That is, ICE officials in the United States and along the U.S.- Mexican border are concerned about sharing information with ICE officials based in Mexico, fearing that the information may unintentionally reach corrupt Mexican authorities and compromise their investigations. According to ICE officials, concerns they had about corruption in Mexico were exacerbated early in the Peña Nieto administration when a vetted unit of Mexican law enforcement officials that they trusted and that ICE had trained and worked with for several years was disbanded. U.S. officials also highlighted the problems frequent turnover in Mexican law enforcement pose for bilateral efforts to combat criminal activities, including firearms trafficking. Some U.S. officials explained that recurring personnel changes aggravate the issue of corruption. In a country such as Mexico, where there is an underlying concern about government corruption, frequent turnover complicates efforts to develop trust with counterpart officials. Other U.S. officials noted that there are no civil service protections in Mexico, so there can be a virtually complete change in the staff of a government agency when a new administration comes into office, or even when the head of an agency is reassigned. As a result, all of the people who received specialized training, such as firearms recognition, can be removed suddenly leaving no institutional memory, which complicates planning future collaboration and program implementation. Similarly, ATF officials commented that oftentimes Mexican law enforcement personnel in key positions for whom they provided firearms training were subsequently replaced. While turnover has been a recurring challenge for U.S. agencies working in Mexico, various U.S. officials said that it appears to have been particularly frequent in the past few years. For example, the spokesperson for one U.S. agency in Mexico noted that in the past 5 years the division responsible for implementing professional development at a key Mexican law enforcement entity has been replaced seven times. While both U.S. and Mexican officials collaborating on firearms trafficking said that bilateral efforts had been scaled back after the Peña Nieto administration came into power, these officials noted that over the past year collaborative activities have been bolstered and are gaining momentum. For example, around the time of our fieldwork in Mexico, CBP was working with Mexican authorities to deploy specially trained canine units able to detect firearms and explosives around the country. Similarly, ATF was providing training on firearms identification for Mexican Customs. A Mexican Customs spokesman stressed the importance of such training in helping front-line customs officers recognize and safely secure not just firearms but also ammunition, firearms’ components, and explosives that criminals try to smuggle across the border. He explained that this training has been critical in allowing officers at the border to perform their mission. Mexican Attorney General officials also noted their increasing level of cooperation with U.S. authorities on firearms trafficking. They highlighted ATF training on the use of eTrace and the resumption of GC Armas meetings in 2015. ICE officials also told us that they have recently reestablished the vetted unit in Mexico, which improves trusted working relationships with Mexican counterparts. Finally, in addition to renewing existing collaborative efforts with Mexican law enforcement counterparts, ATF has also sought to reach out to other Mexican government entities. For example, this year ATF has been collaborating with the Mexican Navy on training for firearms and explosives detection, identification, and seizure. Mexican Navy officers expressed gratitude for this training, noting that they are increasingly confronting real-world situations that require this type of knowledge. The indicator used in the Strategy to track progress by U.S. agencies to stem firearms trafficking to Mexico does not adequately measure implementation of the strategic objective. The Strategy includes strategic objectives and indicators for each of its nine issue chapters to ensure effective implementation. The strategic objective for the Weapons Chapter is to “stem the flow of illegal weapons across the Southwest border into Mexico.” ONDCP’s indicator for this chapter is the “number of firearms trafficking/smuggling seizures with a nexus to Mexico.” The Strategy does not further define the indicator, but ONDCP staff explained that it refers to the number of firearms seized in Mexico that are traced by ATF. While ONDCP’s Strategy asserts that it is critical to have indicators that enable tracking the implementation of objectives, this indicator for the Weapons Chapter does not effectively track the status of efforts to stem the flow of illegal weapons across the Southwest border. As previously noted in this report, ATF officials readily acknowledge that shifts in the number of guns seized and traced do not necessarily reflect fluctuations in the volume of firearms trafficked from the United States to Mexico in any particular year. There are many factors that could account for the number of firearms traced in a given year beside the number of firearms smuggled from the Unites States. Moreover, as discussed above, for various reasons the number of firearms seized in Mexico and traced back to the United States shifted significantly year to year after 2009 and then declined steadily since 2011. Thus, while the number of firearms seized and traced by ATF is useful to provide an overall indication of firearms of U.S. origin found in Mexico, by itself it is not an adequate measure of progress agencies are making to stem the flow of firearms trafficked from the United States into Mexico. Additionally, ONDCP has not reported progress made on the strategic objective in the Weapons Chapter in 2011 or 2013. ONDCP staff said they anticipate that the 2015 Strategy will include a section to report on the outcomes of the last 2 years, and they plan to report on this indicator. Beside the strategic objective and indicator, the Weapons Chapter of the Strategy also includes five supporting actions, along with associated activities to achieve those actions; see table 3. According to an ONDCP spokesman, while the number of firearms seized in Mexico and traced by ATF may be an indicator of the flow of firearms across the border, these five supporting actions and their associated activities should also be considered to get a full picture of the agencies’ progress in combating arms trafficking. ONDCP officials said that they monitor progress in combating arms trafficking by obtaining periodic information from ATF and ICE on their implementation of these and other activities. Our review of the Weapons Chapter in the 2011 and 2013 Strategies determined that, generally, accomplishments under each supporting action were discussed. For example, in the 2011 Strategy, one supporting action called for ATF to increase staffing at the El Paso Intelligence Center Firearms and Explosives Trafficking Intelligence Unit through the incorporation of partner agencies. In 2013, the Strategy included an update that the unit had incorporated a CBP analyst dedicated to weapons-related intelligence. Similarly, in 2011, the agencies said they had plans under way to train over 200 Mexican law enforcement personnel in how to correctly use eTrace. The 2013 Strategy noted that 350 Mexican law enforcement personnel had received training on using eTrace. Nevertheless, the supporting actions described in the Strategy are not consistently linked to indicators or regularly measured. Currently, the narrative related to these supporting actions typically covers ongoing efforts by the agencies to address these actions, but it does not include a measure of overall progress. By including these supporting actions and activities in the Weapons Chapter as measures, ONDCP could better assess the agencies’ efforts in combating firearms trafficking because this would provide a more comprehensive assessment. Although ATF and ICE have pledged, through the 2009 MOU, to collaborate effectively to combat firearms trafficking, these agencies have not set up a mechanism to monitor implementation of the MOU that would allow them to identify and address information sharing and collaboration challenges. Consequently, gaps in information sharing and some disagreement about agency roles in the broader effort to combat firearms trafficking have emerged that weaken the effectiveness of the MOU. It is unclear to what extent ONDCP’s Strategy has advanced U.S. government efforts to combat firearms trafficking, since the indicator used to track progress, by itself, is not sufficient to measure progress made by U.S. agencies in stemming arms trafficking to Mexico. Other actions that agencies take to stem the flow of firearms from the United States into Mexico may be worth considering as additional measures of progress, such as the number of interdictions of firearms destined for Mexico, the number of investigations leading to indictments for firearms trafficking related to Mexico, and the number of convictions of firearms traffickers with a nexus to Mexico. By including these types of measures in a comprehensive indicator or set of indicators, ONDCP will be better positioned to monitor progress on stemming firearms trafficking across the Southwest border. We recommend that the Attorney General of the United States and the Secretary of Homeland Security convene cognizant officials from ATF and ICE to institute a mechanism to regularly monitor the implementation of the MOU and inform agency management of actions that may be needed to enhance collaboration and ensure effective information sharing. To ensure effective implementation of the strategic objective of the Weapons Chapter of the Strategy, we recommend that the ONDCP Director establish a more comprehensive indicator, or set of indicators, that more accurately reflects progress made by ATF and ICE in meeting the strategic objective. We provided a draft of this report for review and comment to the Departments of Homeland Security, Justice, and State; and the Office of National Drug Control Policy. DHS agreed with our recommendation regarding monitoring implementation of the MOU and provided written comments in response to the draft, reproduced in appendix II. In comments on the draft report provided via e-mail by a designated ATF Audit Liaison Officer, DOJ also agreed with this recommendation, noting that ATF officials will work with counterparts at DHS to create a mutually acceptable method to further enhance implementation of the MOU. State did not provide comments on the draft report. In e-mail comments provided by a designated General Counsel official, ONDCP concurred with our recommendation to establish a more comprehensive set of indicators for the Weapons Chapter of the Strategy. Accordingly, ONDCP indicated that it would work with ICE and ATF to develop additional indicators to evaluate their progress. The indicators developed through this collaborative process will be used in future iterations of the Strategy beginning with the next report in 2017. ICE and ATF also provided technical comments which we incorporated throughout the report where appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Homeland Security; the Attorney General of the United States; the Director of the Office of National Drug Control Policy; the Secretary of State; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6991 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To identify data available on the origin of firearms trafficked to Mexico that were seized and traced, we relied primarily on the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) data compiled by its National Tracing Center (NTC).The data provided by NTC were obtained from ATF’s Firearms Tracing System, most of which is developed through eTrace submissions. We discussed with cognizant NTC officials the methodology used to collect these data and reviewed supporting agency documentation. Based on these discussions, we determined that NTC data were sufficiently reliable to permit an analysis of where the firearms seized in Mexico that were submitted for tracing had been manufactured and whether they had been imported into the United States before arriving in Mexico. For those firearms that were traced to a retail dealer in the United States before being trafficked to Mexico, NTC data also contained information on the states where they had originated. NTC trace data also contained information allowing identification of the types of firearms that were most commonly seized in Mexico and subsequently traced. We corroborated this information in discussions with U.S. and Mexican law enforcement officials. Since firearms seized in Mexico are not always submitted for tracing within the same year as they were seized, it was not possible for us to develop data to track trends on the types of firearms seized year to year. Similarly, we were unable to obtain quantitative data from U.S. or Mexican government sources on the users of illicit firearms in Mexico. However, there was consensus among U.S. and Mexican law enforcement officials that most illicit firearms seized in Mexico had been in the possession of organized criminal organizations linked to the drug trade. The involvement of criminal organizations with ties to drug trafficking in the trafficking of illicit firearms into Mexico was confirmed by law enforcement intelligence sources. We learned about the use of firearms parts for the assembly of firearms in Mexico through our interviews with cognizant U.S. and Mexican government and law enforcement officials and through review of ATF-provided documents. To learn more about U.S. government efforts to combat illicit sales of firearms in the United States and to stem the flow of these firearms across the Southwest border into Mexico, we interviewed cognizant officials from the Department of Justice’s (DOJ) ATF, the Department of Homeland Security’s (DHS) Immigration and Customs Enforcement (ICE) and Customs and Border Protection (CBP), and the Department of State (State) regarding their relevant efforts. We obtained data from ATF and ICE on funding for their respective efforts to address firearms trafficking to Mexico, and data from ICE on seizures of southbound firearms. To assess the reliability of the data, we discussed sources and the methodology use to develop the data with agency officials. We determined that the information provided to us was sufficiently reliable to describe agencies’ efforts to combat firearms trafficking. We also conducted fieldwork at U.S.-Mexico border crossings at El Paso, Texas, and San Diego, California. In these locations, we interviewed ATF, CBP, and ICE officials responsible for overseeing and implementing efforts to stem the flow of illicit firearms trafficking to Mexico and related law enforcement initiatives. We reviewed and analyzed DOJ and DHS documents relevant to U.S. government efforts and collaboration to address arms trafficking to Mexico, including funding data provided to us by ATF and ICE, the 2009 memorandum of understanding (MOU) between ICE and ATF, data from ICE on seizures of firearms destined for Mexico, data from ATF and ICE on efforts to investigate and prosecute cases involving arms trafficking to Mexico, and agency reports and assessments related to the issue. We also reviewed relevant prior GAO reports, Congressional Research Service reports and memorandums, and reports from DOJ’s Office of Inspector General related to ATF’s efforts to enforce federal firearms laws. We reviewed provisions of federal firearms laws relevant to U.S. government efforts to address firearms trafficking to Mexico, including the Gun Control Act of 1968, the National Firearms Act of 1934, and the Arms Export Control Act of 1976. We did not independently review any Mexican laws for this report. To determine how well agencies collaborated with Mexican authorities to combat illicit firearms trafficking, we conducted fieldwork in Mexico City, Guadalajara, and border locations in Ciudad Juarez and Tijuana, Mexico. In Mexico, we met with ATF, CBP, ICE, and State officials working on law enforcement issues at the U.S. embassy. We interviewed Mexican government officials engaged in efforts to combat firearms trafficking from the Attorney General’s Office (Procuraduría General de la República), the Federal Police (Policía Federal); the Ministry of Public Safety (Secretaría de Seguridad Pública); the Ministry of Defense (Secretaría de la Defensa Nacional); the Mexican National Intelligence Agency (Centro de Investigación y Seguridad Nacional, or CISEN); the Mexican Navy (Secretaría de Marina or Armada de Mexico); Customs (Servicio de Administración Tributaria); the Forensic Science Institute of Jalisco (Instituto Jalisciense de Ciencias Forenses); Attorney General Regional Offices, Federal Police, and State Police in Tijuana and Ciudad Juarez; and the State Attorney General in Guadalajara. Because our fieldwork was limited to selected locations along the Southwest border and in the interior of Mexico, our observations in these locations are illustrative but are not generalizable and may not be representative of all efforts to address the issue. To assess the extent to which the National Southwest Border Counternarcotics Strategy (Strategy) outlines U.S. goals and progress made in efforts to stem firearms trafficking to Mexico, we reviewed the 2011 and 2013 versions of the Strategy’s Weapons Chapter and the 2010 implementation guide. We also met with Office of National Drug Control Policy officials responsible for the implementation and monitoring the Strategy, as well as with ATF and ICE officials responsible for writing the Weapons Chapter and overseeing implementation and reporting on activities described within their respective agencies. In addition to the contact named above, Charles Johnson (Director), Juan Gobel (Assistant Director), Francisco Enriquez (Analyst-in-Charge), Danny Baez, and Julia Jebo-Grant made key contributions to this report. Ashley Alley, Karen Deans, Justin Fisher, and Oziel Trevino provided additional assistance.

Violent crimes committed by drug trafficking organizations in Mexico often involve firearms, and a 2009 GAO report found that many of these firearms originated in the United States. ATF and ICE have sought to stem firearms trafficking from the United States to Mexico. GAO was asked to undertake a follow-up review to its 2009 report ( GAO-09-709 ) addressing these issues. This report examines, among other things, (1) the origin of firearms seized in Mexico that have been traced by ATF, (2) the extent to which collaboration among U.S. agencies combating firearms trafficking has improved, and (3) the extent to which the National Southwest Border Counternarcotics Strategy measures progress by U.S. agencies to stem firearms trafficking to Mexico. To address these objectives, GAO analyzed program information and firearms tracing data from 2009 to 2014, and met with U.S. and Mexican officials on both sides of the border. According to data from the Department of Justice's Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), 73,684 firearms (about 70 percent) seized in Mexico and traced from 2009 to 2014 originated in the United States. ATF data also show that these firearms were most often purchased in Southwest border states and that about half of them were long guns (rifles and shotguns). According to Mexican government officials, high caliber rifles are the preferred weapon used by drug trafficking organizations. According to ATF data, most were purchased legally in gun shops and at gun shows in the United States, and then trafficked illegally to Mexico. U.S. and Mexican law enforcement officials also noted a new complicating factor in efforts to fight firearms trafficking is that weapons parts are being transported to Mexico to be later assembled into finished firearms, an activity that is much harder to track. In 2009, GAO reported duplicative initiatives, and jurisdictional conflicts between ATF and the Department of Homeland Security's Immigration and Customs Enforcement (ICE). That year, in response to GAO's recommendations on these problems, ATF and ICE updated an interagency memorandum of understanding (MOU) to improve collaboration. ATF and ICE have taken several steps since then to improve coordination on efforts to combat firearms trafficking, such as joint training exercises and conferences to ensure that agents are aware of the MOU and its jurisdictional parameters and collaboration requirements. However, GAO found that ATF and ICE do not regularly monitor the implementation of the MOU. In the absence of a mechanism to monitor MOU implementation and ensure that appropriate coordination is taking place between the two agencies, GAO found that gaps in information sharing and misunderstandings related to their roles and responsibilities persist. The indicator used to track U.S. agencies' efforts to stem firearms trafficking to Mexico in the Office of National Drug Control Policy's (ONDCP) National Southwest Border Counternarcotics Strategy , by itself, does not adequately measure progress. ONDCP tracks progress based on the number of arms seized in Mexico and traced to the United States; however, this number does not reflect the total volume of firearms trafficked from the United States, and it does not take into account other key supporting agency actions and activities as measures. GAO recommends that the Secretary of Homeland Security and the Attorney General of the United States take steps to formally monitor implementation of the 2009 MOU between ATF and ICE. GAO also recommends that ONDCP establish comprehensive indicators that more accurately reflect progress made in efforts to stem arms trafficking to Mexico. The Departments of Homeland Security and Justice, and ONDCP agreed with GAO's recommendations.

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Each state has a central repository for receiving criminal history information contributed by law enforcement agencies, prosecutors, courts, and corrections agencies throughout the state. Each repository compiles this information into criminal history records (commonly called “rap sheets”), which are to be made available to criminal justice personnel for authorized purposes. Typically, a criminal history record is created for each individual offender (each “subject”). The record is to contain relevant identifiers (including fingerprints) and information about all arrests and their dispositions, such as whether the criminal charges were dropped or resulted in an acquittal or a conviction. Efforts to improve criminal history records nationwide predate NCHIP by more than 2 decades. For example, the development of computerized criminal history systems in the states was a priority of the Law Enforcement Assistance Administration, established by the Omnibus Crime Control and Safe Streets Act of 1968. Also, during much of the 1970s, 1980s, and early 1990s—largely without specifically appropriated funds—BJS (or its predecessor, the National Criminal Justice Information and Statistics Service) took the lead in encouraging states to computerize criminal records and ensure conformity with evolving FBI standards. In the 1990s, efforts to improve the accuracy, completeness, and accessibility of criminal history records received an impetus with passage of various federal statutes, particularly the Brady Handgun Violence Prevention Act (“Brady Act”), which, among other things, authorized grants for the improvement of state criminal history records and amended the Gun Control Act of 1968; the National Child Protection Act of 1993, which was enacted to provide national criminal background checks for child care providers; and the Violent Crime Control and Law Enforcement Act of 1994, which, among other things, strove to improve access to court protection orders and records of individuals wanted for stalking and domestic violence. With initial grant awards to states in 1995, NCHIP was designed by BJS to implement these federal mandates to improve public safety by enhancing the nation’s criminal history records systems. In 1998, NCHIP’s scope was expanded in response to federal directives to develop or improve sex offender registries and to contribute data to a national sex offender registry. Also, in 1998, the “permanent” provisions of the Brady Act went into effect with the implementation of NICS—the computerized system designed to instantly (as the name indicates) conduct presale background checks of purchasers of any firearm (both handguns and long guns). In contrast, the “interim” provisions of the Brady Act (effective from 1994 to 1998) applied to handgun purchases only, and law enforcement officers were allowed a maximum of 5 business days to conduct presale background checks for evidence of felony convictions or disqualifying information. The effectiveness of NICS depends largely on the availability of automated records—including the final dispositions of arrests, such as whether the criminal charges resulted in convictions or acquittals. In this regard, many criminal justice agencies, from police departments to the courts, are generators of records relevant to NICS. Over the years, BJS has tried to ensure that the use of NCHIP funds was closely coordinated with the federal Edward Byrne Memorial Grant Program, which requires that states use at least 5 percent of their awards for improving criminal history records. All 50 states, the District of Columbia, and the U.S. territories have been recipients of NCHIP grant awards, which totaled more than $438 million during fiscal years 1995 through 2003. Also, as mentioned previously, to ensure national compatibility and accessibility of records, recipients’ uses of NCHIP funds must conform with the FBI’s standards for national data systems—including, as applicable, NICS, NCIC, III, and IAFIS. Regarding IAFIS, for example, most states have some type of automated fingerprint identification system (AFIS); a state can use NCHIP funds to enhance its AFIS by purchasing Livescan equipment, if the state has implemented (or is implementing) procedures to ensure that the AFIS is compatible with FBI standards. More details about the national data systems are presented in appendix II. For the recent fiscal years we studied, states used NCHIP grants primarily to support NICS in conducting background checks of firearms’ purchasers. According to BJS data, a total of $165.2 million in NCHIP grants was awarded during fiscal years 2000 through 2003. Of this total, a majority— over 75 percent—was used for NICS-related purposes that encompassed a broad range of activities, such as converting manual records to automated formats and purchasing equipment to implement computerized systems or upgrade existing systems. All other uses of NCHIP grants during this period, according to BJS, also had either direct or indirect relevance to building an infrastructure of nationally accessible records, such as implementing technology to support the automated transfer of fingerprint data to IAFIS. We found that a state’s participation status in NICS— whether the state was a full participant, partial participant, or nonparticipant—made little difference in how NCHIP funds were used by states. As indicated in table 1, NCHIP award amounts can be grouped into six spending categories in which BJS awarded a total of $165.2 million in NCHIP grants for fiscal years 2000 through 2003. A majority of these funds was used for NICS-related purposes. For example, the two largest categories of spending—NICS/III/criminal records improvements and disposition reporting improvements—accounted for over 75 percent of total program awards during this period. Both categories directly affected NICS. The NICS/III/criminal records improvements category affected NICS by focusing on activities for improving records related to federal firearms disqualifiers and enhancing access to these records through III. Similarly, the disposition reporting improvements category provided access to information about the disposition of arrests—information that is critical for determining whether persons are legally prohibited from purchasing firearms. Regarding this category, BJS encourages states to focus on making systemic improvements rather than using staff to manually research records to determine dispositions. Nonetheless, according to BJS, states may use NCHIP funds to research arrest dispositions in response to specific NICS-related queries, if the information is subsequently added to the automated system. BJS officials could not quantify the NCHIP grant amounts that all states have allocated for staff to research arrest dispositions. Officials in 2 of the 5 case-study states indicated that their states had used NCHIP funding to research missing arrest dispositions and update criminal history records in response to specific NICS-related queries. One of these states (Maryland) used $41,000 of its fiscal year 2002 NCHIP award to fund a full-time position for researching the state’s archived criminal history records. Also, table 1 shows that BJS awarded 3 percent of NCHIP funding specifically for protection order activities to improve records related to this firearms-purchase disqualifier. The other categories in table 1AFIS/Livescan activities, sex offender registry enhancements, and national security/antiterrorism activitieswere for records improvement efforts that do not directly impact NICS. However, according to BJS, even if not NICS-related, each of the six spending categories in table 1 had either direct or indirect relevance to building an infrastructure of nationally accessible records, such as implementing technology to support the automated transfer of fingerprint data to IAFIS. Appendix III presents more information about the use of NCHIP funds in the 5 case-study states, and appendix IV presents information about the use of NCHIP funds in the 5 priority states. As mentioned previously, for purposes of NICS background checks of persons purchasing firearms, states are categorized as full participants, partial participants, or nonparticipants. As table 2 shows, we found little difference in the use of NCHIP funds by states based on their participation status in NICS. With relatively minor exceptions, the relative order of spending across categories was the same in all three types of states. Of the various spending categories, NICS/III/records improvements reflected the largest difference in percentage points—that is, a difference of 12 percentage points between the partial participant states (47 percent) and the full participant states (35 percent). A BJS official stated that this difference is not substantial and might occur because some states have legislation with slightly different prohibitors for purchasing firearms. Using their own funds, in addition to NCHIP grants and other federal funds, states have made progress in automating criminal history records and making them accessible nationally. For example, the percentage of the nation’s criminal history records that are automated increased from 79 percent at the end of 1993 to 86 percent at the end of 1995 and to 89 percent at the end of 2001, according to BJS’s most recent biennial survey of states. To ensure national compatibility and accessibility of records, recipients’ uses of NCHIP funds must conform with the FBI’s standards for national data systems—including, as applicable, NICS, NCIC, III, and IAFIS. Such conformance is important, for example, because III is the primary system used to access state-held data for NICS checks. The number of states participating in III increased from 26 at the end of 1993 to 30 at the end of 1995 and to 45 by May 2003, indicating growth in compatible automated records. On the other hand, progress has been more limited for some NICS-related purposes. For example, automated information on the disposition of felony and other potentially disqualifying arrests is not always widely available. Also, automated information is not always available to identify other prohibited purchasers of firearms, such as persons convicted of a misdemeanor crime of domestic violence, persons adjudicated as mental defective, or persons who are unlawful users of controlled substances. In fiscal year 2004, BJS plans to begin using a new, performance-based tool for making NCHIP funding decisions. In recent years, with the use of state and federal funds, criminal history record automation levels in the states and the accessibility of these records nationally have improved. BJS survey data from the end of 1993 to the end of 2001 (the most recent data) show that increases in automation levels have outpaced increases in the number of criminal history records. Specifically, while the number of total records increased 35 percent during this period, the number of automated records increased 52 percent— which indicates progress in automating older criminal history records. Also, the number of records accessible by the III system increased 196 percent (see fig. 1). Overall, the percentage of the nation’s criminal history records that are automated increased from 79 percent at the end of 1993 to 86 percent at the end of 1995 and to 89 percent at the end of 2001. The number of states participating in III increased from 26 at the end of 1993 to 30 at the end of 1995 and to 45 by May 2003. Also, according to BJS, other indicators of improved automation levels and accessibility are as follows: In 1997, the FBI established the NCIC Protection Order File to provide a repository for protection order records. As of May 2003 (within 6 years of implementation), 43 states and 1 territory had contributed more than 778,000 records to this system. In 1999, in response to mandates in the amendments to the Jacob Wetterling Crimes Against Children and Sexually Violent Offender Registration Act, the FBI established a national sex offender database for states to register and verify addresses of sex offenders. As of May 2003 (within 5 years of implementation), 50 states, the District of Columbia, and 3 territories had contributed all of their then-applicable records (over 300,000 records) to the National Sex Offender Registry. In 1999, the FBI implemented IAFISa computerized system for storing, comparing, and exchanging fingerprint data in a digital format. As of April 2003 (within 4 years of implementation), 44 states, the District of Columbia, and 3 territories had submitted some portions of their fingerprint files electronically to the FBI for entry into IAFIS. BJS officials told us that NCHIP funds played a role in leading states to these and other accomplishments. Similarly, officials in the 5 case-study states we visited told us that the criminal history record improvements in their states would not have been possible without NCHIP funds. According to BJS officials, NCHIP is best viewed as being an “umbrella” program that pools or coordinates various streams of monies. The officials noted that NCHIP grants generally should not be viewed in isolation, apart from funds that the states themselves spend for these initiatives. That is, the NCHIP grants generally provide the seed money or the supplemental funds that the states need to undertake major system upgrades or to implement an overall plan for modernizing their information systems. While NCHIP requires that states provide a 10 percent match to the federal funds awarded, officials in the case-study states told us that their states typically have invested much more than the required 10 percent. For example, 1 state that has received over $5 million in NCHIP funds estimated that over $20 million of its own funds have been invested in system improvements since 1995. Another state, receiving almost $7 million in NCHIP grants, estimated that $35.4 million in state resources have been spent on improving and automating its systems. In addition to NCHIP and state-provided funds, other federal programs provide funds that can be used to improve criminal history records. For example, the Bureau of Justice Assistance provides funds to states through Byrne grants, a block grant program that requires states to set aside 5 percent of any award for criminal justice information systems to assist law enforcement, prosecution, courts and corrections organizations. In addition to criminal history record improvements, Byrne grants may be used for a variety of other system-related activities that are not related to NCHIP. Examples include activities involving systems to collect criminal intelligence and systems to collect driving-under-the influence data. According to Bureau of Justice Assistance data for fiscal years 2001 through 2003, almost $73 million in Byrne grants were set-aside to improve criminal justice information systems. Grants are also now available for antiterrorism purposes under the Crime Identification Technology Act of 1998, as amended by the United Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 2001. Besides characterizing NCHIP as an umbrella program, BJS officials also described it as being a “partnership” program—among BJS, the FBI, and the states and localities—for building a national infrastructure to facilitate the interstate exchange of information. The officials explained that such exchanges or accessibility are needed to support a variety of both criminal justice purposes (e.g., making decisions regarding pretrial release, sentencing, etc.) and noncriminal justice purposes (e.g., conducting background checks of firearms’ purchasers, child-care providers, etc.). The BJS officials noted that NCHIP funds often are spread across a variety of long-term initiatives undertaken by the states’ executive and judicial branch agencies to upgrade the architecture and coverage of criminal records information systems. For some NICS-related purposes, limited progress had been made in the automation and accessibility of relevant records. For example, automated information on the disposition of older felony and other potentially disqualifying arreststhat is, information regarding whether the criminal charges against the arrested individual were dropped or proceeded to be prosecuted and resulted in a conviction or acquittalis critical for conducting background checks of persons purchasing firearms but is not always widely available. Also, automated information is not always available to identify other prohibited purchasers, such as persons convicted of misdemeanor crimes of domestic violence, adjudicated as mental defectives, or who are unlawful users of controlled substances. In conducting background checks of firearms’ purchasers, automated information on whether the criminal charges against arrested individuals were dropped or proceeded to be prosecuted and resulted in a conviction or acquittal is not always widely available. For example, 23 of the 38 states that responded to a question on final dispositions in BJS’s most recent biennial survey reported that 75 percent or less of their arrest records had final dispositions recorded (see table 3). It is important to draw a distinction between old and new arrest records with respect to disposition reporting. The BJS Director told us that, given limited resources, the agency has always emphasized to the states the importance of making certain that records of recent criminal activity are updated and compatible with FBI standards. In this regard, the Director explained that many states adopted a “day 1” approach in using NCHIP funds to improve records—that is, improve new records first—and left a number of old, inactive records archived in state repositories. The Director noted that BJS research, with FBI assistance, has indicated that older arrest records account for much of the “open arrest” problem. That is, of the criminal history records for which missing disposition information was never recorded, about one-half involve arrests that occurred before 1984 and three-quarters pre-date NCHIP. Nonetheless, while states have made progress in automating newer disposition information—and automating disposition information discovered when conducting research of older records—achieving universal automation of disposition information continues to present challenges, as table 3 indicates. BJS has recognized that, whenever criminal history records show arrests without final dispositions, there is the potential for delays in responding to presale firearms inquiries because, in most instances, disqualifications result from convictions rather than arrests. Since 1995, BJS has encouraged states to contact court representatives and determine how NCHIP funds can be used to improve disposition reporting. Further, since 2000, BJS has required that such contacts be documented in the states’ application packages for NCHIP funds. For example, in the Fiscal Year 2003 Program Announcement (Mar. 2003), BJS specified that “all applications will be required to demonstrate that court needs have been considered, and if no funds for upgrading court systems capable of providing disposition data are requested, applicants should include a letter from the State court administrator or Chief Justice indicating that the courts have been consulted in connection with the application.” The Gun Control Act of 1968, as amended, specifies four nonfelony or noncriminal categories that prohibit an individual from owning or purchasing a firearmthat is, persons who (1) have been convicted of a misdemeanor crime of domestic violence, (2) are subject to certain outstanding court protection orders, (3) have been adjudicated as mentally defective, or (4) are unlawful users of controlled substances. Generally, states have used NCHIP funds to provide information for only one of these four categories—court protection orders. For fiscal years 2000 through 2003, states received a total of approximately $5.3 million in NCHIP funds to develop systems for reporting information to the FBI to be included in the NCIC Protection Order File as indicated in table 1. As of May 2003, states had made more than 778,000 records of court protection orders available to the national file. However, the availability of information regarding domestic violence misdemeanor convictions, mental health commitments, and controlled substance abusers is problematic for various reasons. For example, according to BJS, problems in identifying domestic violence misdemeanor convictions are twofold—(1) misdemeanor data traditionally have not been maintained at the state level in an automated format and (2) misdemeanor assault charges rarely specify the victim-offender relationship unless domestic violence is specifically charged. That is, domestic violence-related offenses can be difficult to distinguish from misdemeanors broadly classified as assaults. Since fiscal year 1996, BJS has encouraged states to use NCHIP funds to improve access to domestic violence records. BJS has provided direction, for example, to the states to set “flags” on the records of persons known to have a conviction for domestic violence. Records regarding mental health commitments are often not available nationally for reasons beyond the control of NCHIP. For instance, state mental health laws, privacy laws, or doctor-patient considerations may preclude federal law enforcement officials from routinely accessing some of these records. According to BJS, the area of mental health records and their shareability is a very difficult area—and is an area in which BJS has encouraged states to do more with NCHIP funds since fiscal year 1996. The FBI’s strategy—which BJS encourages the states to use—has been to create a Denied Persons File in the NICS Index where the reason for denial is not given unless the denial is appealed. In reference to substance abuse, BJS noted that federal law is very unclear regarding who is a prohibited person, which makes it very difficult for states to make records available to the FBI for NICS checks. Also, BJS noted that states have no central registries of active drug users or addicts. Given the complications of federal definitions, BJS emphasized that it would be a very challenging undertaking to develop such registries and keep them current. Overall, as table 4 indicates, a national system for domestic violence misdemeanor records is not available, only 10 states have provided mental health records to the NICS Index, and only 3 states have provided substance abuse records. According to BJS, most states have chosen to use NCHIP awards to automate criminal history records overall and improve criminal history record systems, rather than focus on improving access to these four specific types of records. BJS recognizes that ensuring the availability of additional nonfelony or noncriminal records involves various considerations or challenges that extend beyond simply providing more money to improve records. For example, as mentioned previously, BJS noted that federal law is very unclear regarding who is a prohibited person in reference to substance abuse. BJS has recognized that the absence of widely accessible information on domestic violence misdemeanors and noncriminal disqualifying factors is among the most important issues affecting the accuracy and timeliness of presale background checks of firearms purchasers. Thus, for several years, BJS has been encouraging states to use NCHIP funds to make improvements. Recently, for example, in providing NCHIP guidance in the Fiscal Year 2003 Program Announcement (Mar. 2003), BJS encouraged states to develop systems that would make this information available nationally. As mentioned previously, NCHIP’s goal is to improve public safety by enhancing the quality, completeness, and accessibility of the nation’s criminal history and sex offender record systems and the extent to which such records can be used and analyzed for criminal justice and authorized noncriminal justice purposes. To better measure progress toward this goal, BJS is developing a tool—a criminal history records quality index (RQI)—to uniformly characterize and monitor performance across jurisdictions and over time. RQI is to be based on a series of key indicators or outcome measures, such as the proportion of fully automated criminal history records in a state’s repository, the proportion of court dispositions transmitted electronically to the repository, and the extent to which the state submits data electronically to the FBI. According to BJS, RQI will be used to assess the progress of records quality at both the state and national levels, identify critical records improvement activities by pinpointing areas of deficiency and permit BJS to target specific problems and deficiencies for allocating future funding at the individual state level. After RQI is operationalized, BJS plans to begin using it for NCHIP funding decisions. Initial RQI development—and pilot testing in 10 states—was completed in 2003. As of January 2004, according to BJS, collection of the underlying RQI measures data from the other 46 jurisdictions (40 states, the District of Columbia, the 5 U.S. territories) was still ongoing. BJS hopes to receive RQI data submissions from all jurisdictions by April 30, 2004. One of the most relevant factors for policymakers to consider when debating the future of NCHIP is the extent of cumulative progress (and shortfalls) to date in creating national, automated systems that cover all needed types of information. While states have made progress, more work remains. For NICS-related purposes, as discussed previously, automated information is not always widely available on the disposition of felony and other potentially disqualifying arrests, nor on other prohibited purchasers, such as persons convicted of a misdemeanor crime of domestic violence. Another relevant factor to consider is that the demand for background checks is growing, with increases in recent years driven by screening requirements for employment and other noncriminal justice purposes. Furthermore, technology is not static, which necessitates periodic upgrades or replacements of automated systems for them to remain functional. As discussed previously, much progress has been made in automating records in recent years. On the other hand, some areas reflect a continuing need for improvements. For instance, the availability of and access to arrest disposition informationnecessary for timely presale background checks of persons purchasing firearms—continues to be problematic. Such information is important for preventing or minimizing the sale of firearms by “default proceed.” That is, by statute, if a background check is not completed within 3 business days, the sale of the firearm is allowed to proceed by default, sometimes to prohibited persons. In 2000, we reported that default proceeds occurred primarily due to a lack of arrest dispositions in states’ automated criminal history records and that many of these transactions involved individuals—2,519 purchasers during a 10-month period—who were later determined by the FBI to be prohibited persons. We further reported that firearms being transferred to prohibited persons presented public safety risks and placed resource demands on law enforcement agencies in retrieving the firearms. More recently, according to the FBI, over one-third (1,203) of the total 3,259 firearms retrieved in 2002 by the Bureau of Alcohol, Tobacco, Firearms, and Explosives occurred because disposition information for felony arrests could not be determined within 3 days. Another one-third (1,052) of the total retrievals in 2002 involved background checks whereby FBI examiners were unable to timely determine from available records that misdemeanor assault convictions involved domestic violence. A national system for domestic violence misdemeanor records is not available (see table 4). To further support NICS, table 4 also indicates that there is still much opportunity for improving the availability of records regarding persons who have been adjudicated as mentally defective and persons who are unlawful users of controlled substances. Additional examples (not exhaustive) of opportunities for further progress in automating records and/or enhancing national systems include the following: 5 states (Hawaii, Kentucky, Louisiana, Maine, and Vermont), the District of Columbia, and the 5 U.S. territories (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands) still do not participate in III; 7 states (Hawaii, Mississippi, Nevada, New Jersey, Utah, Virginia, and West Virginia), the District of Columbia, and 4 U.S. territories (American Samoa, Guam, Northern Mariana Islands, and Puerto Rico) have not contributed any data to the NCIC Protection Order File; and 6 states (Arkansas, Delaware, Missouri, Nevada Vermont, and Wyoming) and 2 U.S. territories (Northern Mariana Islands and Puerto Rico) have not submitted any files electronically to IAFIS. In debating the future of NCHIP, another relevant factor for policymakers to consider is that the demand for background checks is growing, with increases in recent years driven by screening requirements for employment and other noncriminal justice purposes. Generally, background checks for these “civil” purposes are based on fingerprint submissions—in contrast to the “name-based” searches conducted under NICS. The number of civil fingerprint submissions to the FBI has increased substantially in recent years. As figure 2 shows, for 5 of the 7 years during 1996 to 2002, the number of civil fingerprint submissions exceeded the number of criminal fingerprint submissions (i.e., fingerprints of criminal suspects or arrestees). In the most recent year (2002), civil fingerprint submissions totaled 9.1 million, whereas criminal fingerprint submissions totaled 8.4 million. The growth in civil fingerprint submissions is partly attributable to 1993 federal legislation that encouraged states to have procedures requiring fingerprint-based national searches of criminal history records of individuals seeking paid or volunteer positions with organizations serving children, the elderly, or the disabled. As of February 2004, according to BJS, 47 states had enacted legislation authorizing these record checks. Further, in 2003, federal legislation was enacted that establishes, in general, a pilot program in 3 states to conduct fingerprint-based background checks on individuals seeking volunteer positions involving interactions with children. Within 6 months of the date of the 2003 Act’s enactment, the Attorney General is to conduct a feasibility study to determine, among other things, the number of background checks that would be required if the pilot were implemented nationwide and the impact these additional checks might have on the FBI and IAFIS. If this pilot program is implemented nationally, BJS officials estimate that millions of additional background checks would be required annually. Homeland security concerns are another factor that has increased the demand for fingerprint-based background checks. Since the events of September 11, 2001, Congress passed legislation to protect the nation from future terrorist attacks. These laws require that individuals employed in sensitive positions undergo background checks to qualify for employment. FBI and BJS officials expect the number of applicant background checks to be in the millions, as homeland defense laws are fully implemented. Examples of federal homeland defense legislation and the number of checks anticipated follow: USA PATRIOT Act of 2001—Requires background checks on commercially licensed drivers who transport hazardous materials. Officials from the FBI’s Criminal Justice Information Services Division estimated that 800,000 to 1,000,000 individuals held commercial licenses at the time the USA PATRIOT Act was passed. Under the act, license renewals, in addition to new licensees, will need background checks to qualify for commercial licenses. Aviation and Transportation Security Act of 2001—Requires background checks of those individuals in security screener positions or other positions such as those with unescorted access to aircraft or secured areas of an airport. New background checks are required for those employees already hired at the time of the Aviation and Transportation Security Act’s passage as well as for individuals seeking employment. This act further requires background checks of foreigners seeking enrollment in flight schools. The Transportation Security Administration has requested over 105,365 background checks since passage of the act in November 2001. In addition to these checks, FBI officials estimated that flight school checks alone could result in up to 50,000 fingerprint checks annually. Public Health Security and Bioterrorism Preparedness and Response Act of 2002—Requires the Attorney General to conduct background on persons possessing, using, or transferring various toxins and biological agents. FBI officials estimated that this law could result in 30,000 checks annually. Another factor for consideration is that technology is not static and can change rapidly, which necessitates periodic upgrades or replacements of automated systems. For example, 1 case-study state used fiscal year 1995 NCHIP funds to purchase Livescan equipment for its major metropolitan areas. According to state officials, this equipment is now outdated and fiscal year 2003 NCHIP funds will be used to purchase new equipment. According to state officials, the 1995 machines will be retained for installation in other areas, such as the state’s less populous or more rural counties. Another relevant factor is how long-term funding needs will be met. Replacing outdated equipment and automating records can be expensive. States advocate that steady or long-term funding streams are important for implementing technological advances. In this regard, states do not rely entirely on NCHIP grants for system improvements. That is, states view NCHIP funding as “seed” or supplemental money and contribute from their own coffers to fund these upgrades. For instance, as noted previously, officials in the case-study states told us that their states typically have invested much more than the 10 percent matching funds required by NCHIP. The overarching goal of NCHIP—building a national infrastructure to facilitate the interstate exchange of criminal history and other relevant records—is important for many purposes. Without such an infrastructure, individuals who are, in fact, prohibited but whose records are inaccessible, or do not reflect such a prohibition may be allowed to purchase firearms, creating safety concerns not only for the general public, but also for the law enforcement officials responsible for retrieving these firearms after the prohibited status is ascertained. Further, inaccurate, incomplete, or inaccessible records and systems do not help to prevent persons who have been convicted of crimes to be hired in paid or volunteer positions with organizations serving children, the elderly, or the disabled, putting these populations at risk for abuse or worse. Also, accurate, complete, and accessible records and systems are necessary to respond to the needs and requirements of homeland security and to avert terrorism, particularly with respect to individuals employed in sensitive positions. Since its initiation in 1995, NCHIP has provided more than $438 million in federal grants nationwide. Using their own funds, as well as NCHIP and other federal grants, states have made much progress in automating their records and making them accessible nationally by conforming with the FBI’s standards for applicable national data systems—such as NICS, NCIC, III, and IAFIS. Continued progress toward establishing and sustaining a national infrastructure inherently will involve a partnering of federal, state, and local resources and long-term commitments from all governmental levels. On January 28, 2004, we provided a draft of this report for comment to the Department of Justice. In a response letter, dated February 13, 2004, the Assistant Attorney General (Office of Justice Programs) commented that the report fairly and accurately described NCHIP, its accomplishments, and the continued need to promote state and local participation in national criminal history records systems. Also, the Assistant Attorney General commented that the following issues mentioned in the report should be highlighted: Given limited resources, it is important to draw the distinction between old and new arrest records with respect to disposition coverage. BJS has always emphasized to the states the importance of making certain that records of recent criminal activity were updated and compatible with FBI standards. In many cases, state laws prohibit sharing mental health information because of confidentiality and doctor-patient privacy laws. The strategy for the FBI, and one which BJS has encouraged the states to use, has been to utilize the Denied Persons File in the NICS Index where the reason for denial of a firearm purchase is not given unless the denial is appealed. Most states do not fingerprint misdemeanants, and misdemeanor assault charges rarely specify the victim-offender relationship (unless domestic violence is specifically charged). BJS has given strong direction to the states to set flags on the records of persons known to have a conviction for domestic violence. No state has a central registry of active drug users or addicts. It will be challenging to develop such registries and to keep them current. In perspective, the number of problematic firearms sales—that is, default proceeds that result in a need to retrieve firearms from prohibited purchasers—is very small compared to the 8 million to 9 million background checks conducted each year. RQI, a metric developed by BJS, is a major step forward and may provide a significant opportunity for evaluating performance over time and establishing a basis for targeting future assistance to state and local participants in federal funding programs. The full text of the Assistant Attorney General’s letter is presented in appendix V. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to interested congressional committees and subcommittees. We will also make copies available to others on request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report or wish to discuss the matter further, please contact me at (202) 512-8777 or Danny Burton at (214) 777-5600. Other key contributors to this report are listed in appendix VI. As requested by the Chairman, House Committee on the Judiciary, our overall objective was to broadly review the National Criminal History Improvement Program (NCHIP). Managed by the Department of Justice’s Bureau of Justice Statistics (BJS), NCHIP is a federal grant program to build a national infrastructure to facilitate the interstate exchange of criminal history and other relevant records—that is, to improve the accuracy, completeness, and accessibility of records used by various national systems. One of the primary systems is the National Instant Criminal Background Check System (NICS), which is managed by the Federal Bureau of Investigation (FBI) and is used to conduct presale background checks of persons purchasing firearms. As agreed with the requester’s office, this report presents information on how states have used NCHIP grant funds, particularly the extent to which they have been used by states for NICS-related purposes; the progressusing NCHIP grants and other funding sourcesthat states have made in automating criminal history and other relevant records and making them accessible nationally; and the various factors that are relevant considerations for policymakers in debating the future of NCHIP. Regarding the use of NCHIP grant funds, as further agreed with the requester’s office, this report also presents information on (1) the use of such funds by the priority states and their progress in automating records and (2) whether any of the 50 states have used NCHIP funds to develop or implement a ballistics registration systemthat is, a system that stores digital images of the markings made on bullets and cartridge casings when firearms are discharged. In addressing the objectives, to the extent possible, we focused on obtaining national or programwide perspectives. For example, we reviewed BJS’s biennial national survey data or reports on the automation status of all states’ criminal history records. Further, we interviewed NCHIP managers at BJS and NICS managers at the FBI’s Criminal Justice Information Services Division (Clarksburg, W. Va.). Also, we reviewed BJS program documentation that describes allowable NCHIP spending activities. In addition, given that NCHIP consolidates criminal records improvement funding authorized by various federal laws, we reviewed these laws, such as the Brady Handgun Violence Prevention Act, and related legislative histories. Also, to provide supplemental or more in-depth perspectives, we conducted case studies of 5 recipient states (California, Maryland, Mississippi, Texas, and West Virginia). We selected these states to reflect a range of various factors or considerations—the amounts of grant funding received, status of NICS participation, and levels of automation, as well as to encompass different geographic areas of the nation (see table 5). To obtain an overview of how all jurisdictions (the 50 states, District of Columbia, and 5 U.S. territories) have used NCHIP grant funds, we requested that BJS provide us information on total awards for each of the 4 most recent fiscal years (2000 through 2003)—with the amounts disaggregated into applicable spending categories. Generally, NCHIP spending can be grouped into six spending categories: (1) NICS/Interstate Identification Index (III)/criminal records improvements, (2) disposition reporting improvements, (3) Automated Fingerprint Identification System (AFIS)/Livescan activities, (4) sex offender registry enhancements, (5) protection order activities, and (6) national security/antiterrorism activities. In cases where expenditures could be included in more than one category, BJS judgmentally selected the category that was the most descriptive of the activity. We reviewed BJS documentation and interviewed BJS officials to determine which of these spending categories involved NICS-related purposes. In addition, we analyzed the spending category information in reference to the 50 states’ participation status in NICS (full participant, partial participant, or nonparticipant) to determine any general differences in the types of NCHIP-funded projects undertaken. Similarly, we analyzed the spending category information to determine how the 5 priority states had used NCHIP grant funds (see app. IV). For more in-depth perspectives, we reviewed data on the use of NCHIP grant funds by the 5 states we selected for case studies. Preliminarily, we reviewed information in grant files maintained by the Office of the Comptroller (a component of the Department of Justice’s Office of Justice Programs). Then, we visited each of the 5 states and interviewed state officials responsible for NCHIP-funded projects. At our request, using definitions provided by BJS, the officials grouped their respective state’s grant awards into applicable spending categories (see app. III). For some NCHIP-funded activities, officials in the case-study states indicated that expenditures could be included in more than one category. In these cases, based on input from state officials, we selected the category that was most descriptive of the activity. For each of the case-study states, these spending category analyses covered NCHIP grant awards for fiscal year 1995 (when the program was initiated) through fiscal year 2002 (the most current data available at the time of our visits). Regarding ballistics registration systems, we interviewed NCHIP managers to determine if NCHIP guidelines allow NCHIP funds to be used to develop and implement such systems and, if so, the extent to which states have used or are planning to use NCHIP funds for this purpose. In addition, in visiting the 5 case-study states, we asked state officials if NCHIP money had been or would be used to develop and implement ballistics registration systems. We reviewed BJS’s biennial survey data and/or reports (for 1993, 1995, 1997, 1999, and 2001) on the automation status of states’ criminal history records. We contacted BJS managers to clarify (when necessary) the survey data and discuss automation progress, including the contributing roles played by NCHIP and other federal grants and by the states’ use of their own funds. Further, we reviewed BJS and FBI information regarding the progress of states in making criminal history and other relevant records accessible nationally by, for example, conforming with the FBI’s standards for national data systems—including, as applicable, NICS, the National Crime Information Center (NCIC), III, and the Integrated Automated Fingerprint Identification System (IAFIS). Also, in each of the 5 case-study states, we discussed these issues with state officials. To determine various factors that are relevant considerations for policymakers in debating the future of NCHIP, we interviewed NCHIP and NICS managers, as well as officials in the 5 case-study states. We also contacted officials from other organizations, such as SEARCH (The National Consortium for Justice Information and Statistics) and the American Prosecutors Research Institute. Further, we relied on insights gained in addressing the objectives of this work. To assess the reliability of BJS’s data (by spending category) on NCHIP funds awarded to all jurisdictions for fiscal years 2000 through 2003 (see table 1) and to the 5 case-study states for fiscal years 1995 through 2002 (see tables 6 through 11), we reviewed existing documentation related to the data sources, electronically tested the data to identify obvious problems with completeness or accuracy, and interviewed knowledgeable agency officials about the data. We determined that the NCHIP funds data were sufficiently reliable for the purposes of this report. To assess the reliability of data reported by BJS based on its biennial surveys of state criminal history information systems for 1993, 1995, 1997, 1999, and 2001, we (1) reviewed the published survey results and (2) interviewed officials knowledgeable about the surveys. We determined that the biennial survey data were sufficiently reliable for the purposes of this report. BJS strives to create national criminal history records systems that contain accurate, complete, and accessible information. To accomplish this, since 1995, BJS has awarded approximately $438 million in NCHIP grants to states, the District of Columbia, and U.S. territories to help these jurisdictions improve their records and establish automated capabilities that enhance participation in national criminal history records systems. Each state operates a central criminal history records repository that receives information regarding individuals’ criminal histories from a number of sources throughout the state, including state and local law enforcement agencies, prosecutors, courts, and corrections agencies. For each individual, the repository compiles the information from these sources into a comprehensive criminal history record for that person. These records are commonly referred to as “rap sheets.” By means of statewide telecommunications systems, the repositories make these records available to criminal justice personnel for authorized purposes, such as pretrial release and sentencing decisions. The repositories also provide criminal history records for authorized noncriminal justice purposes. For example, with increasing frequency, state and federal laws are requiring local law enforcement agencies to conduct criminal history background checks on persons seeking employment in sensitive positions (such as child and elder care) and for occupational license authorizations. The FBI has historically maintained criminal history record files on all federal offenders and on state offenders to the extent that states voluntarily submit state criminal history information. The FBI also maintains a nationwide telecommunications system that enables federal, state, and local criminal justice agencies to conduct national record searches and to obtain criminal justice related-information, for example, about individuals who are arrested and prosecuted in other states. Criminal record services are also provided to noncriminal justice agencies authorized by federal law to obtain such records. The practice of maintaining duplicative state offender records at both the state and federal levels is being replaced by efforts to build an automated infrastructure that will make all criminal history records accessible nationally. To fully participate in the national systems that are to comprise this infrastructure, a jurisdiction must have an automated criminal history record system that meets FBI standards for participation. For example, the state’s automated system must be compatible with the federal systems and be capable of responding automatically to requests for records. The principal national, federal systems are discussed in the following paragraphs. Prior to 1967, the FBI’s criminal history records were manual files. In 1967, the FBI established NCIC, an automated, nationally accessible database of criminal justice and justice-related records. NCIC provides automated information on wanted and missing persons, as well as identifiable stolen property, such as vehicles and firearms. Each state has a central control terminal operator, who is connected to NCIC through a dedicated telecommunications line maintained by the FBI. Authorized local agencies use their state’s law enforcement telecommunications network to access NCIC through the respective operator. An investigator can obtain information on wanted and missing persons and stolen property by requesting a search by name or other nonfingerprint-based identification. Information provided can include graphics, such as mug shots, pictures of tattoos, and signatures in a paperless, electronic format. Using this system, an investigator can also perform searches for “sound alike” names, such as “Knowles” for “Nowles.” The system has an enhanced feature for searching all derivatives of names, such as Jeff, Geoff, Jeffrey. NCIC includes the National Sex Offender Registry and a Protection Order File (discussed later). NCIC data may be provided only for criminal justice and other specifically authorized purposes. For example, authorized purposes include presale firearms checks, as well as checks on potential employees of criminal justice agencies, federally chartered or insured banks or securities firms, and state and local governments. Maintained by the FBI, the III system is an interstate, federal-state computer network, which currently provides the means of conducting national criminal history record searches to determine whether a person has a criminal record anywhere in the country. This system is designed to tie the automated criminal history records databases of state central repositories and the FBI together into a national system by means of an “index-pointer” approach. The FBI maintains an identification index of persons arrested for felonies or serious misdemeanors under state or federal law. The index includes identification information (such as name, date of birth, race, and sex), FBI numbers, and state identification numbers from each state holding information about the individual. Criminal justice agencies nationwide can transmit search inquiries based on name or other identifiers automatically through state law enforcement telecommunications networks and the FBI’s NCIC telecommunications lines. According to the FBI, the III system responds to search inquiries within seconds. If the search results in a “hit,” the system automatically requests records using the applicable FBI and state identification numbers, and each repository holding information on the individual forwards its records to the requesting agency. The FBI provides responses for states that are not yet participants in III. Under Brady Handgun Violence Prevention Act requirements, the FBI established NICS to provide instant background checks of individuals applying to purchase firearms from federally licensed dealers. Federal law prohibits the purchase or possession of a firearm by any person who (1) has been convicted of a crime punishable by a prison term exceeding 1 year, (2) is a fugitive from justice, (3) is an unlawful user of controlled substances, (4) has been adjudicated as mental defective, (5) is an illegal or unlawful alien, (6) has been discharged dishonorably from the armed forces, (7) has renounced his or her U.S. citizenship, (8) has been convicted of a misdemeanor crime of domestic violence, or (9) is subject to certain domestic violence protection orders. The three primary, component databases searched by NICS are III, NCIC (including the Protection Order File and a file of active felony or misdemeanor warrants), and the NICS Index. This third database was created solely for presale background checks of firearms purchasers and contains disqualifying information contributed by local, state, and federal agencies. For example, the database contains information on individuals who are prohibited from purchasing firearms because they are aliens unlawfully in the United States, are persons who have renounced their U.S. citizenship, have been adjudicated as mental defectives, have been committed to a mental institution, have been dishonorably discharged from the armed forces, or are unlawful users of or addicted to controlled substances. The FBI established the National Sex Offender Registry (NSOR) to enable state sex offender information to be obtained and tracked from one jurisdiction to another. In 1994, the Jacob Wetterling Crimes Against Children and Sexually Violent Offender Registration Act (the Jacob Wetterling Act) required that states create sex offender registries within 3 years or lose some of their federal grant funds. The law further provided that—when any offender convicted of committing a criminal sexual act against a minor or committing any sexually violent offense—is released from custody or supervision into the community, he or she must register with law enforcement agencies for a period of 10 years. The act was amended in 1996 to require the FBI to establish a NSOR and to register and verify addresses of sex offenders when a state’s registry does not meet the minimum compliance standards required by the Jacob Wetterling Act. According to the FBI Law Enforcement Bulletin, all 50 states currently have sex offender registration laws, and all states require a registration period of at least 10 years, with some states requiring lifetime registration. State registry information typically includes the offender’s name, address, Social Security number, date of birth, physical description, photograph, and fingerprints. NSOR is a component of NCIC that serves as a pointer system to identify a sex offender’s records in the III system. When agencies request authorized fingerprint-based criminal history background checks, NSOR will flag the subjects who are registered sex offenders. The FBI established the Protection Order File in 1997 to provide a repository for protection order records. The purpose of this NCIC component is to permit interstate enforcement of protection orders and the denial of firearms transfers to individuals who are the subjects of court protection orders. Such orders include civil and criminal court orders issued to prevent a person from committing violent, threatening, or harassing acts against another individual. A protection order can preclude the person from contacting, communicating with, and being in physical proximity to a named individual. State and federal law enforcement agencies can submit protection orders to the NCIC Protection Order File. In 1999, the FBI implemented IAFIS, a computerized system for storing, comparing, and exchanging digitized fingerprint data. Most fingerprint data submitted to IAFIS originate when a local or state law enforcement agency arrests a suspect. At that time, the agency takes the suspect’s fingerprints manually (using ink and paper fingerprint cards) or electronically (using optical scanning equipment). The agency forwards a copy of the fingerprints—along with nonbiometric data such as name and age—through its state repository to the FBI. Electronic submissions are automatically entered into IAFIS, and paper submissions sent through the mail are scanned into an electronic format for entry. When a set of fingerprints is submitted, IAFIS searches for a prior entry in the system that matches the suspect’s nonbiometric personal identifying data. If a prior entry is not found, the system compares the submitted fingerprints with those previously stored in the computer’s memory to determine if the suspect has an entry under another name. This information can be used for a number of purposes, including positively identifying arrestees to prevent the premature release of suspects who use false names and are wanted in other jurisdictions. To support crime scene investigations, the system can also compare a full or partial fingerprint from a crime scene with the prints stored in the database to identify a suspect. This appendix presents information about the use of NCHIP funds by 5 case-study statesCalifornia, Maryland, Mississippi, Texas, and West Virginia—for fiscal years 1995 through 2002. As mentioned previously, we selected these states to reflect a range of factors or considerations—that is, the amounts of grant funding received, status of NICS participation, and levels of automation, as well as to encompass different geographic areas of the nation (see app. I). NCHIP funding amounts can be grouped into six categories of spending established by BJS to track the use of program funds. These six categories are (1) NICS/III/criminal records improvements, (2) disposition reporting improvements, (3) AFIS/Livescan activities, (4) sex offender registry enhancements, (5) protection order activities, and (6) national security/antiterrorism activities. Table 6 shows that since the inception of NCHIP in 1995, 4 of the 5 case- study states have devoted the majority of their grant awards for the first two BJS spending categories—NICS/III/criminal records improvements and disposition reporting improvements. Expenditures in the first category include overall system upgrades, equipment purchases, database development, and other activities required to bring states in compliance with FBI standards so that the states may participate in national systems maintained by the FBI. Expenditures in the second category include efforts to automate disposition records and provide linkages for reporting these records to the state’s central records repository. Maryland, the only case-study state that did not devote the majority of its funds to the first two categories, still allocated nearly half (48 percent) of its total grant awards for these two areas. Maryland devoted a large amount (40 percent) of its NCHIP funding to AFIS/Livescan activities, as did Texas (45 percent). For all 5 case-study states, the NCHIP funding detailed in table 6 represented “seed” or “catalyst” money and, therefore, accounted for only a portion of the total criminal records improvement spending. For example, according to California officials, state resources accounted for 85 percent of records improvement funding in California during fiscal year 2002-03. The remaining 15 percent consisted of NCHIP grants (6 percent) and other federal sources (approximately 9 percent). Three of the other 4 states provided data indicating that NCHIP grants accounted for less than a majority of the criminal records improvement funding in the respective state. More details on each case-study state’s use of NCHIP funds are presented in the following sections. During fiscal years 1995 through 2002, BJS awarded California a total of $29.9 million in NCHIP fundsthe most of any state. As shown in table 7, California allocated approximately two-thirds (66 percent) of its NCHIP awards for NICS/III/criminal records improvements. For example, the state devoted over $4.9 million of program funds to projects for converting manual fingerprint and palm print cards to an electronic format and matching records maintained by the FBI’s III system to those maintained by the state repository. According to California officials, these efforts will improve overall criminal record keeping and benefit NICS by improving the state’s response to queries on prospective gun purchasers. Officials also said that the state has used NCHIP funds to improve the reporting of case dispositions to the state’s central repository. For example, officials have used program funds to improve disposition reporting in the 28 counties that represent 70 percent of the disposition volume for the entire state. As a result, these 28 counties report 100 percent of their dispositions to the state central repository via a magnetic tape batch process occurring three times a week. In addition, California officials are conducting an NCHIP-funded pilot project in one county to test the feasibility of moving to a real-time updating system for disposition reporting rather than the current batching approach. During fiscal years 1995 through 2002, BJS awarded Maryland $6.8 million in NCHIP funds. As shown in table 8, Maryland allocated the largest percentage (40 percent or $2.7 million) of its NCHIP awards for AFIS/Livescan activities. This category, together with NICS/III/criminal records improvement, accounted for over three-fourths (76 percent) of the state’s use of NCHIP funds. Regarding the first category in table 8, Maryland devoted a sizeable portion of its NCHIP award ($1.2 million) to make the state’s automated systems compatible with the FBI’s NCIC database, which was updated and expanded in 2000. In addition, Maryland is using nearly $200,000 of program funds to convert over 700,000 historical arrest records (older than October 1998) to a format compatible with the FBI’s III system. This effort will make older records accessible to the FBI, which will improve NICS background checks. In the category of disposition reporting, Maryland has also implemented a $360,000 NCHIP project to automate reporting from the courts (including case dispositions) to the central records repository on a daily basis. Maryland currently reports dispositions from courts to the state’s central records repository through weekly magnetic tape updates. For purposes of NICS, Maryland is a partial participant state. That is, a designated state agency (Maryland State Police) conducts background checks for handgun purchases, whereas the FBI conducts such checks for long gun purchases. For both types of firearms purchases (handguns and long guns), another state agency (Maryland State Archives) provides support (researching the disposition results of arrests) for criminal history records generated before 1982. In fiscal year 2002, the Maryland State Archives received $41,000 in NCHIP funds to conduct disposition research for NICS queries from the FBI. Earlier, due to a lack of state funding, this state agency had discontinued such research for a period of approximately 3-1/2 months (March 18 to July 2, 2002). According to Maryland and BJS officials, the $41,000 award in 2002 was the first distribution of NCHIP funds to the Maryland State Archives since the inception of the grant program. As shown in table 9, for fiscal years 1995 through 2002, Mississippi allocated approximately three-fourths (76 percent) of its NCHIP funds for projects in the category of NICS/III/criminal records improvements. NCHIP projects in this category centered on creation of and support for the state’s computerized criminal history database. According to state officials, prior to the rollout of the state’s new automated criminal history database in March 1998, Mississippi was without any type of arrest record automation. After the rollout, Mississippi was one of fewer than 10 states with an automated system whereby every arrest record was automatically associated with a fingerprint record and made available to authorized inquirers across the state and the nation. Mississippi officials told us that, without NCHIP, this advance in records automation would not have been possible. On the other hand, in responding to BJS’s latest biennial survey (2001), Mississippi reported that 3 percent of its automated criminal records included final dispositionsthe lowest among the responding case-study states. However, as indicated in table 9, Mississippi is using NCHIP funds for various projects to improve disposition reporting. During fiscal years 1995 through 2002, BJS awarded Texas $19.5 million in NCHIP fundsthe third highest total among all states, behind only California and New York. As shown in table 10, Texas allocated about half (52 percent) of its NCHIP funds for NICS/III/criminal records improvements. A significant project in this category is an ongoing upgrade of the state’s computerized criminal history system. According to state officials, this upgrade will “rewrite” the system to meet new demands and expectations. For example, the rewrite will allow Texas to “flag” domestic violence misdemeanors (a category for prohibiting firearms sales under NICS) at the arrest, prosecution, and court levels. During this period, Texas also allocated 45 percent of its NICHIP funds for AFIS/Livescan activitiesthe highest percentage for this category among the 5 case-study states. To implement electronic reporting of arrest data, Texas used NCHIP funds to purchase Livescan equipment for placement in 4 major cities and 27 of the state’s 254 counties. According to Texas officials, these cities and counties account for a majority of the state’s total arrests. Also, as shown in table 10, Texas allocated 2 percent of its NCHIP awards for disposition reporting improvementsthe lowest among the 5 case- study states. However, according to Texas officials, criminal case disposition reporting is recognized as an area in need of improvement and will be addressed by future projects funded by NCHIP. Also, as an example of recent progress in Texas, BJS noted that NCHIP funds were used to automate approximately 52,600 court disposition records from Harris County—which includes Houston, the most populous city in Texas—for inclusion in the state’s central repository. During fiscal years 1995 through 2002, BJS awarded West Virginia approximately $4.7 million in NCHIP funds. As shown in table 11, West Virginia allocated half of its NCHIP funds for NICS/III/criminal records improvements. Also, the state allocated 35 percent for disposition reporting improvementsthe highest percentage for this category among the 5 case-study states. The purpose of the ongoing projects in this category is to automate the reporting of court data (including case dispositions) to the state’s central records repository. According to its 2003 NCHIP grant application, West Virginia was the last state to implement an AFIS. NCHIP funding assisted the state to implement its system by financing a study to determine AFIS requirements and costs. West Virginia officials noted that plans call for placing Livescan equipment in each of the state’s nine regional jails, which are to be booking sites for all persons entering the state’s criminal justice system. This appendix provides information on the 5 states that BJS identified as having the lowest levels of criminal history record automation in 1994. Maine, Mississippi, New Mexico, Vermont, and West Virginia were designated as priority states, making each eligible to receive an additional $1 million in funding during NCHIP’s first year. NCHIP was tasked with implementing statutory grant provisions that required the states with the lowest levels of criminal history record automation receive priority funds from the program to give them some extra help in automating their records. This additional funding for priority states applied to only the first year of NCHIP grant awards. Also, this appendix provides information about whether any of the 50 states have used NCHIP funds to develop or implement a ballistics registration system—that is, a system that stores digital images of the markings made on bullets and cartridge casings when firearms are discharged. For fiscal years 2000 through 2003, table 12 shows that the priority states allocated 70 percent of their NCHIP awards for NICS/III/criminal records improvements and disposition reporting improvements. The remaining 30 percent of the priority states’ NCHIP award amounts was allocated for AFIS/Livescan activities, sex offender registry enhancements, and protection order activities. None of the priority states allocated NCHIP award amounts for national security/antiterrorism activities. The priority states have made progress in automating their criminal history records. Prior to NCHIP, these states had approximately 1.4 million records in manual formats and very few automated records. By 2003, BJS estimated that these 5 states had over 1 million automated records. More specifically, as shown in table 13, biennial surveys of state criminal history record repositories also indicate the priority states have made progress in automating their records. For example, New Mexico and Mississippi progressed from little or no automation in 1993 to 100 percent automation in 2001. The other priority states also have made progress in automating their records but have not yet achieved full automation. According to Mississippi officials, NCHIP played a critical role in the state’s successes in automating and sharing criminal history information. The officials noted, for instance, that receiving the “priority” designation and the accompanying additional funds enabled Mississippi to begin automating its criminal history records and take advantage of the latest technology developments. Similarly, a West Virginia official commented that the additional priority funding helped the state establish and begin implementing an automated fingerprint identification system, the backbone of West Virginia’s entire records improvement and automation project. Another indicator of progress is participation in III, the system used for a number of law enforcement-related purposes, including background checks of persons purchasing firearms. As of May 2003, 3 of the 5 priority states participated in III, with New Mexico joining the program in 1997 and Mississippi and West Virginia joining in 1998. At the time of our review, Maine and Vermont were not participating in III. According to BJS, Maine’s participation may not occur until some time in 2004 because the state is in the process of undertaking a major revision of its entire criminal justice information technology infrastructure. Vermont officials reported to BJS that the state is currently using NCHIP funds to install a new system that is fundamental to III participation and that the state will be III-compliant by January 2004. States must ensure that their computerized criminal history records systems meet specific FBI criteria and that these systems are compatible with the FBI’s national data systems before the FBI will allow states to provide records nationally through III. The 5 priority states have also increased their participation in other national systems. According to BJS officials, all 5 states participate in the National Sex Offender Registry, 4 of the 5 states have provided some portion of their criminal fingerprints electronically to IAFIS, and 3 states have submitted protection order records to the NCIC Protection Order File. BJS officials said that no NCHIP funds have been used to develop or implement a ballistics registration system—a system typically used as an investigative tool to compare crime scene evidence to the stored images. Also, according to BJS officials, NCHIP funds are to improve the availability of information on the “person,” rather than to improve investigative tools. BJS does not plan to expand the scope of NCHIP funding to include investigative tools because improvements are still needed in the ability to identify prohibited purchasers of firearms, such as individuals with domestic violence misdemeanor convictions. Of the 5 case-study states we visited, only 1 (Maryland) had developed a ballistics registration system. According to BJS and state officials, federal funding was not used to develop or implement this system. In addition to the above, Grace Coleman, Geoffrey Hamilton, Michael H. Harmond, Kevin L. Jackson, Jan B. Montgomery, Jerome T. Sandau, Linda Kay Willard, and Ellen T. Wolfe made key contributions to this report.

Public safety concerns require that criminal history records be accurate, complete, and accessible. Among other purposes, such records are used by the Federal Bureau of Investigation's (FBI) National Instant Criminal Background Check System (NICS) to ensure that prohibited persons do not purchase firearms. Initiated in 1995, the National Criminal History Improvement Program represents a partnership among federal, state, and local agencies to build a national criminal records infrastructure. Under the program, the Department of Justice's Bureau of Justice Statistics (BJS) annually provides federal grants to states to improve the quality of records and their accessibility through NICS and other national systems maintained by the FBI. GAO examined (1) how states have used program grant funds, particularly the extent to which such funds have been used for NICS-related purposes; (2) the progress--using program grants and other funding sources--that states have made in automating criminal history and other relevant records and making them accessible nationally; and (3) the various factors that are relevant considerations for policymakers in debating the future of the program. States have used program grants primarily to support NICS in conducting presale background checks of firearms' purchasers. BJS data show that over 75 percent of the total $164.3 million in program grants awarded in fiscal years 2000 through 2003 was used for NICS-related purposes. These uses encompassed a broad range of activities, such as converting manual records to automated formats and purchasing equipment to implement computerized systems or upgrade existing systems. All other uses of program grants, according to BJS, also had either direct or indirect relevance to building an infrastructure of nationally accessible records. Using their own funds, in addition to the program and other federal grants, states have made progress in automating criminal history records and making them accessible nationally. The percentage of the nation's criminal history records that are automated increased from 79 percent in 1993 to 89 percent in 2001, according to BJS's most recent data. Also, the number of states participating in the Interstate Identification Index--a "pointer system" to locate criminal history records anywhere in the country--increased from 26 at year-end 1993 to 45 by May 2003. But, progress has been more limited for some NICS-related purposes. A national system for domestic violence misdemeanor records is not available. Also, as of May 2003, only 10 states had made mental health records available to NICS, and only 3 states had provided substance abuse records. One of the most relevant factors for policymakers to consider when debating the future of the program is the extent of cumulative progress (and shortfalls) to date in creating national, automated systems. While states have made progress, more work remains. Also, the demand for background checks is growing, and technology is not static, which necessitates periodic upgrades or replacements of automated systems. Continued progress toward establishing and sustaining a national infrastructure inherently will involve long-term commitments from all governmental levels. Justice commented that GAO's report fairly and accurately described the program and its accomplishments.

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With the enactment of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980, the Congress created the Superfund program to clean up the nation’s most severely contaminated hazardous waste sites. The Congress extended the program in 1986 and 1990 and is now considering another reauthorization. Under CERCLA, EPA investigates contaminated areas and places the most highly contaminated sites on the National Priorities List (NPL) for study and cleanup. As of December 1996, there were 1,210 sites on the NPL. After a site is placed on the NPL, EPA extensively studies and evaluates the site to determine the appropriate cleanup remedy for it. The remedy selected depends upon the site’s characteristics, such as the types and levels of contamination, the risks posed to human health and the environment, and the applicable cleanup standards. The site’s cleanup can be conducted by EPA or the party responsible for the contamination, with oversight by EPA or the state. Through fiscal year 1995, the latest period for which EPA has data, EPA had selected incineration as a Superfund cleanup remedy 43 times, or in about 6 percent of the decisions on remedies it had reached through that date.At the time of our review, three incinerators were operating at Superfund sites—the Bayou Bonfouca site in Louisiana, the Times Beach site in Missouri, and the Baird and McGuire site in Massachusetts. As of October 1996, EPA planned to use incineration at four additional sites. Incineration is the burning of substances by a controlled flame in an enclosed area that is referred to as a kiln. Incineration involves four basic steps: (1) wastes, such as contaminated soil, are prepared and fed into the incinerator; (2) the wastes are burned, converting contamination into residual products in the form of ash and gases; (3) the ash is collected, cooled, and removed from the incinerator; and, (4) the gases are cooled, remaining contaminants are filtered out, and the cleaned gases are released to the atmosphere through the incinerator’s stack. (See fig. 1.) Incinerators may be fixed facilities that accept waste from a variety of sources, or they may be transportable or mobile systems. Fixed facility hazardous waste incinerators are required by the Resource Conservation and Recovery Act of 1976 (RCRA) to obtain an operating permit from EPA. RCRA regulates all facets of the generation, transportation, treatment, storage, and disposal of hazardous wastes in the United States. RCRA requires that fixed facility hazardous waste incinerators be operated according to EPA’s regulations and be inspected by EPA every 2 years. Incinerators used to clean Superfund sites are generally “transportable,” that is, they are transported to the site in pieces, assembled, and removed when the cleanup is complete. These incinerators are constructed and operated by contractors. CERCLA exempts any portion of a cleanup action conducted entirely on-site, including incineration, from the need to obtain any permit. However, CERCLA requires EPA to apply legally applicable or relevant and appropriate environmental standards from other federal laws, including RCRA, to Superfund cleanups. Accordingly, EPA requires incinerators at Superfund sites to meet RCRA’s substantive requirements, such as the act’s standards for emissions. EPA relies on four principal methods to ensure the safe operation of incinerators used to clean up Superfund sites. These methods are (1) setting site-specific standards for emissions and operations, (2) incorporating safety features into an incinerator’s emergency systems, (3) monitoring emissions at the incinerator’s stack and along the site’s perimeter, and (4) providing 24-hour on-site oversight. (See app. I for more details on the safeguards at the three incinerators in operation at the time of our review.) EPA establishes specific cleanup standards for each incinerator used at a Superfund site. These standards are based on studies of the site’s characteristics (e.g., the type and concentration of contamination present) conducted during the incinerator’s design and construction. Standards can be adopted from other environmental programs or laws, such as RCRA or the Toxic Substances Control Act. Typically, RCRA’s standards for fixed facility hazardous waste incinerators are applied. RCRA’s standards govern the extent to which an incinerator must destroy and remove contaminants and set limits on emissions from the incinerator. EPA establishes the operating parameters needed for the incinerator to achieve the emissions standards and tests the parameters through a “trial burn” required under RCRA. The operating parameters can include the temperature of the kiln, the minimum oxygen levels needed to break down contaminants in the kiln, and the maximum carbon monoxide levels that may be produced. Although not required by EPA’s regulations, a trial burn plan was reviewed by a RCRA expert at all the sites we visited to determine whether the proper operating conditions were being tested. According to EPA officials, if the incinerator operates within the parameters established at the trial burn, the incinerator will be operating safely. Besides establishing standards for emissions and operations, EPA requires engineering controls to prevent the standards from being exceeded. In addition, incinerators at the three sites we visited had built-in safety features unique to each model to prevent excessive emissions of contaminants in the event of an emergency shutdown. RCRA’s regulations, which EPA applies at Superfund sites, require that incinerators have devices, called automatic waste feed cutoffs, that will stop contaminated waste from being fed into an incinerator when the operating conditions deviate from the required operating parameters. The waste feed would be cut off, for example, when a change in pressure or a drop in temperature occurred that could compromise the kiln’s effective incineration of the contaminants. These cutoffs are set with a “cushion” so that the waste feed shuts down before the incinerator operates outside the established parameters. The number and type of waste feed cutoffs will depend on the requirements for each site. According to EPA officials, some cutoffs are routine, to be expected during the normal course of an incinerator’s operations, and a sign that the safety mechanisms are working properly. For example, cutoffs can be triggered by expected changes in pressure within the kiln brought on by variations in the waste input stream. However, other cutoffs, especially repeated cutoffs, can be signs of problems. At the three sites we visited, all of the incinerators had some additional safety measures, not required by regulation, in the event that a critical part of the incinerator failed. At the Times Beach and the Bayou Bonfouca sites, the incinerators have emergency systems that fully shut down the incinerator and decontaminate the gases remaining in the system at the time of the shutdown. These systems seal off the gases and expose them to a high-temperature flame to destroy any residual contamination. At the Baird and McGuire site, the emergency system ensures that metals and particulates are removed before gases are emitted from the kiln. The most common reason for activating the emergency systems at the three sites was a shutdown caused by a power outage. EPA continuously monitors the air in the vicinity of an incinerator to ensure that emissions from the stack and from areas where soil is being excavated before being put into the incinerator do not exceed the maximum permitted levels. Air monitoring at the sites involves measuring conditions in real time and performing detailed laboratory analyses of samples that are collected over a longer period of time. For example, at the Baird and McGuire site, stack emissions are monitored continuously to measure key indicators of combustion, such as the oxygen levels in exhaust gases, to ensure that the incinerator is operating properly. For organic contamination, a more detailed laboratory analysis is carried out during the trial burn to provide additional assurance that dioxin, a cancer-causing substance produced by the burning of organic substances, is not excessively emitted. The Baird and McGuire site also has nine air monitors at its perimeter, each of which is hooked up to alarms that sound if emission levels approach the established parameters. These monitors, which are intended primarily to detect possible emissions from the on-site excavation of contaminated soil, monitor and record data every minute. According to the incineration contractor’s project manager at the Baird and McGuire site, the air monitors picked up elevated levels only once during an excavation, when a drum of chemicals was removed. In a situation such as this, the excavation is slowed to bring emissions down to required levels. According to EPA’s reports for the three sites we visited, emissions from the incinerators’ stacks never exceeded the permitted levels. Although 24-hour oversight is not required by regulations or formal EPA policy, Corps of Engineers or state officials continuously observed the operations of the incinerator at each of the sites we visited. For the two cleanups that EPA managed (at the Baird and McGuire and Bayou Bonfouca sites), EPA had contracted with the U.S. Army Corps of Engineers for on-site oversight, while at Times Beach, where a responsible party was conducting the cleanup, a Missouri state agency provided oversight. At the time of our visit, these sites had staff to cover operations 24 hours a day. For example, at Baird and McGuire, 12 Corps of Engineers staff were assigned to monitor the incinerator’s operations. On-site observation involves visual inspections and record reviews to ensure that the incineration companies are meeting the operating conditions specified by EPA. At the sites we visited, Corps of Engineers or state officials were responsible for checking the operating parameters displayed on computer screens in the incineration control rooms and inspecting measurement devices on incineration equipment to verify that they were working properly. For example, at Times Beach, a state official monitored operations from an on-site computer screen, while a state RCRA employee obtained the computerized information from his office in the state capitol to ensure that the conditions of the state’s RCRA permit were being met. At Bayou Bonfouca, Corps officials examined operation log books and talked to incinerator operators to look for any problems and oversaw the procedures for testing and sampling emissions from the incinerator. The officials were also responsible for reviewing the air-monitoring reports and operation summary reports required of the incineration company and reporting their findings to EPA. In addition to the safeguards discussed above, EPA planned two additional methods to promote the safe operation of Superfund incinerators but never fully implemented them. First, EPA issued a directive requiring inspectors from its hazardous waste incinerator inspection program to periodically evaluate Superfund incinerators. This requirement had not been followed at two of the three incinerators operating at the time of our review. Second, EPA has not carried out its intention to systematically ensure that the lessons learned about an incinerator’s operations in one incineration project are applied to subsequent projects. EPA is relying upon informal communication to transfer “best practices” from one incineration project to the next. In 1991, EPA issued a directive requiring that the same type of inspections that are conducted at RCRA-permitted hazardous waste incinerators be conducted at Superfund incinerators. In 1993, EPA issued interim guidance on how to perform these inspections at Superfund incinerators. This guidance required that inspectors in EPA’s regional offices review the operating records for Superfund incinerators and examine the units to ensure that they were operating within their established parameters. Only one of the three incinerators we visited had received such an inspection. That incinerator received two inspections, one of which was conducted while the incinerator was shut down for maintenance. EPA regional staff we talked to were unaware of the directive and guidance on these inspections. EPA headquarters personnel told us that they were unaware that the inspections were not taking place but confirmed with the regions that only one region was inspecting Superfund incinerators. EPA officials attributed the lack of inspections to the higher priority given to other enforcement demands and a reorganization of enforcement functions, which muddied the responsibility for inspecting the incinerators. Headquarters officials said they would encourage the regions to do the inspections in the future. According to officials from EPA’s Office of Enforcement and Compliance Assurance (OECA), who are responsible for implementing the inspection program, RCRA incinerator inspectors had visited Superfund incinerators when the guidance was first issued in 1993. However, these inspectors said their inspections were hampered because they did not have a site-specific document containing the requirements for each incinerator’s operations that they could use to evaluate these operations. At Superfund sites where transportable incinerators are used, EPA may specify standards, operating parameters, emergency controls, and requirements for air monitoring and on-site oversight in various documents, such as a contract with the operator of the incinerator, a court-approved consent decree with the responsible party, or a work plan for the site. In contrast, fixed facility hazardous waste incinerators require a RCRA permit, which documents the conditions under which an incinerator must operate. Inspectors use the conditions specified in the permit as criteria for evaluating the incinerator’s operations. For Superfund incinerators, however, an operating permit is not required. The 1993 interim guidance for inspecting Superfund incinerators recognized the need for a single document specifying site-specific operating requirements and procedures and stated that such a document would be developed. However, no such document was developed because, according to EPA officials, other priorities intervened. EPA officials attributed the lack of recent Superfund incinerator inspections, in part, to the lack of a consolidated list of requirements. The Superfund, RCRA, and OECA officials we interviewed on this question agreed that Superfund incinerators should be inspected. They stated that experienced RCRA hazardous waste incinerator inspectors in EPA’s regional offices have knowledge and experience that makes them well qualified to evaluate the operations of Superfund incinerators. These officials believed that an inspection by an outside, independent inspector was important even if an incinerator had on-site oversight. RCRA officials told us that at the few RCRA-permitted hazardous waste incinerators with on-site inspectors, the inspectors are rotated every 6 months in order to maintain their independence and objectivity. In addition, they said that experienced incinerator inspectors would have more expertise than the Corps of Engineers or state staff assigned to oversee the incinerators’ operations. Although these staff do receive training, they are generally not experts on incineration. Because EPA site managers may work on as few as one or two projects at a time and because incineration is not a common remedy at Superfund sites, managers may have limited experience with incineration. However, EPA does not have any formal mechanism to share the lessons learned about an incinerator’s operations. The need for information-sharing is illustrated by experiences at two sites we visited. The Bayou Bonfouca site had a policy to stop feeding waste to the incinerator during severe storms. This policy was adopted to reassure the public that the incinerator would not suffer an emergency shutdown during a storm-related power outage. The Times Beach site, which was using the same incinerator model, did not formally adopt this policy until after a severe storm had knocked out the power at that incinerator, causing an emergency shutdown. The storm and power outage caused the emergency emissions system and the perimeter air monitors to fail. (See app. I for details.) The lessons learned from these problems could be applied to future incineration projects to prevent similar problems from arising. However, EPA has no formal mechanism to ensure that other incineration projects can benefit from the Times Beach experience. EPA officials agreed that they should be sharing the lessons learned from each site. According to officials, they had intended to do so by issuing fact sheets, but the effort was dropped before any fact sheets were issued. The officials stated that the fact sheets were not issued because of a fear that information on problems with incinerators’ operations could be used against them in litigation. In addition, they attempted to have monthly conference calls with all of the managers of incineration sites, but the effort soon faded away. However, EPA officials told us that they do informally share lessons learned through discussions with regional staff responsible for incineration sites. Also, they encourage site managers to visit other incineration sites to learn from the experiences there; however, they do not currently intend to revive their plans for preparing fact sheets. EPA employs a number of techniques to encourage the safe operation of Superfund incinerators. These techniques include mechanical features, such as air monitors, as well as operational procedures, such as 24-hour independent oversight. However, residents of the areas surrounding incinerators frequently desire an extra degree of assurance that the incinerators are operating safely. EPA has not followed through on other opportunities to improve its oversight of incinerators and thereby provide additional assurance to the public. First, EPA has not followed its own policy of having RCRA hazardous waste incinerator inspectors inspect Superfund incinerators. Although these inspections would provide the public with independent evaluations of the incinerators’ compliance, they did not take place, in part, because consolidated lists were not made available to inspectors of the standards, design requirements, and operating rules for each site where incineration is used. Inspectors could use such lists, just as they use the operating permits for fixed facility hazardous waste incinerators, as an aid in evaluating compliance. Second, EPA’s attempts to systematically share the lessons learned from site to site were never fully implemented. Because incinerators are being used at relatively few Superfund sites, EPA project managers may have little or no experience with them. These managers would benefit from the experiences of other managers of sites where incinerators have been used. At the sites we visited, operational problems occurred that might be avoided at other incineration projects if the knowledge gained was preserved and shared. To provide further assurance that incinerators at Superfund sites are being operated safely, we recommend that the Administrator, EPA, implement the agency’s guidance for having RCRA hazardous waste incinerator inspectors evaluate Superfund incinerators, including the development of a single document specifying site-specific operating requirements and procedures for these incinerators, and document the lessons learned about safe operation from the experiences of each Superfund site where incineration is used and institute a systematic process to share this information at other sites where incinerators are used. We provided copies of a draft of this report to EPA for its review and comment. On January 29, 1997, we met with EPA officials, including a senior process manager from EPA’s Office of Emergency and Remedial Response and officials from EPA’s Office of Enforcement and Compliance Assurance and Solid Waste and Emergency Response, to obtain their comments. EPA generally agreed with the facts, conclusions, and recommendations in the report. However, while not disagreeing that the lessons learned should be documented, EPA did question the benefits of preparing voluminous site-specific studies on lessons learned, given the decreasing use of incineration. We concur that the type of documentation should be concise and the format useful. EPA also provided technical and editorial comments, which we incorporated in the report as appropriate. To examine EPA’s oversight of incinerators at Superfund sites, we visited the three Superfund sites with operating incinerators: the Baird and McGuire site in Massachusetts, the Bayou Bonfouca/Southern Shipbuilding site in Louisiana, and the Times Beach site in Missouri. At these sites, we spoke with EPA, state government, U.S. Army Corps of Engineers, and contractor officials to determine how the incinerators operate, what safety measures they employ to ensure safe operation, and what oversight activities occur. We also interviewed EPA officials in regions I, VI, and VII and in the headquarters offices of Solid Waste, Emergency and Remedial Response; Pollution Prevention and Toxics; and Enforcement and Compliance Assurance. In addition, we obtained and analyzed documents and data from EPA and from the relevant states, counties, and responsible parties when necessary. Our work was performed in accordance with generally accepted government auditing standards from February through December 1996. As arranged with your offices, unless you publicly announce its contents earlier, we will make no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies of the report to other appropriate congressional committees; the Administrator, EPA; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. Should you need further information, please call me at (202) 512-6520. Major contributors to this report are listed in appendix II. We visited the three Superfund incinerators that were in operation at the time of our review: the Baird and McGuire site in Holbrook, Massachusetts; the Bayou Bonfouca/Southern Shipbuilding site in Slidell, Louisiana; and the Times Beach Superfund site near St. Louis, Missouri. A brief description of the incineration project at each site follows. The Baird and McGuire site, approximately 14 miles south of Boston, is a former chemical manufacturing facility that operated for 70 years until it was shut down in 1983. This 20-acre site is contaminated with approximately 200,000 pounds of chemicals and metals, including creosote, herbicides and pesticides, arsenic, lead, and dioxin. Chemicals from the site have contaminated groundwater, a nearby river, and a nearby lake. EPA chose to incinerate soil and other contaminated material on-site because it judged that this remedy would be the most protective of human health and because complicating factors made other remedies, such as covering the contaminated areas with a clay cap, inappropriate. These factors included the location of part of the site in a 100-year flood plain, the existence of wetlands on the site, and the potential for the contamination to spread farther (via groundwater) if the site was not effectively treated. In addition, dioxin is present at the site, leaving few off-site treatment possibilities because regulations limit the locations at which dioxin-contaminated material can be treated. The operation of the incinerator at the Baird and McGuire site began in June 1995 and is expected to be completed in April 1997. The incinerator was designed specifically to remediate the high levels of metal contamination at the site. (See fig. I.1.) It is configured to capture the metals (which cannot be destroyed by the incineration process and may be present in the gases produced by the burn) in a pollution control device before they are emitted into the atmosphere. The incinerator has 13 automatic waste feed cutoffs. In case the incinerator is totally shut down, a diesel backup system will keep filtration systems running to prevent the release of hazardous emissions. Emissions from the site are monitored continuously from the incinerator’s stack and from nine locations along the site’s perimeter. Oversight is carried out by 12 staff from the U.S. Army Corps of Engineers, who receive technical assistance from an engineering consulting firm. According to a Corps engineer at the site, the Corps staff complete inspection reports detailing on-site events 2 to 3 times per day and provide weekly summary reports for EPA’s review. The Bayou Bonfouca site includes 55 acres of sediment and surface water that were contaminated with wood-treating chemicals from an abandoned creosote works plant. The main threats to human health at this site included direct contact with contaminated groundwater, the potential for contamination to spread to a nearby waterway during flooding, and the potential for direct contact with concentrated hazardous material at the unsecured site. From February 1992 through September 1995, EPA incinerated contaminated soil and other material. After incinerating the waste from the Bayou Bonfouca site, EPA began to use the incinerator to burn similar wastes from the nearby Southern Shipbuilding Superfund site. (See fig. I.2.) This site was contaminated with 110,000 cubic yards of sludge, containing mostly polycyclic aromatic hydrocarbons that were left from barge cleaning and repair operations. Polycyclic aromatic hydrocarbons are chemicals formed during the incomplete burning of coal, oil, gas, refuse, or other organic substances. In addition to 15 automatic waste feed cutoff parameters to prevent the incinerator from operating outside the regulatory limits, the incinerator has an emergency stack venting system that further treats the gases from the kiln if the incinerator is totally shut down. In case of a power outage or another event that would cause the major functions of the incinerator to fail, this emergency system draws the kiln gases into an emergency stack where a flame further destroys contaminants. According to an incineration contractor official at the Bayou Bonfouca site, this emergency system prevents the release of kiln gases that exceed emission regulations. Oversight at the Bayou Bonfouca site is carried out by a team of nine Corps of Engineers inspectors. These inspectors check the computer screens in the incinerator’s control room every 2 hours to ensure that the incinerator is operating within the regulatory parameters set during the trial burn. The Corps team also inspects the incinerator’s machinery, is present for all sampling and testing done by the incineration company, and documents all of the automatic waste feed cutoffs. Corps officials review monthly, quarterly, and yearly reports from the incineration contractor. Air monitoring at the site includes continuous monitoring from the stack, the excavation site, and other areas of the site, and samples are taken daily for more complete chemical analysis. According to Corps officials, emissions have never exceeded regulatory levels. In addition, EPA Region VI had two RCRA inspections completed at the Bayou Bonfouca site. However, the incinerator was shut down for maintenance at the time of one of the inspections. This Bayou Bonfouca/Southern Shipbuilding project was completed in November 1996. The Times Beach Superfund site is a 0.8-square-mile area, 20 miles southwest of St. Louis, that was contaminated with dioxin. The contamination resulted from spraying unpaved roads with dioxin-tainted waste oil to control dust. EPA decided to incinerate soil from Times Beach and 26 other nearby sites that were contaminated in the same way. (See fig. I.3.) EPA believed that incineration was the best remedy for the large volumes of dioxin-contaminated soil and the large pieces of contaminated debris to be treated. The incineration project at Times Beach began in March 1996 and is expected to be completed in March 1997. The Times Beach site is unusual because EPA obtained a RCRA permit to operate the incinerator. A permit is generally not required at Superfund sites, and the process of obtaining it resulted in some delays in beginning operations. However, EPA regional officials obtained the permit to provide nearby residents with additional assurance that the incinerator would operate safely and would be removed after the project was completed, rather than being kept in place to burn contaminated material from other sites. As required by the permit, the Times Beach incinerator has 17 automatic waste feed cutoffs. In addition, the incinerator includes the same emergency system that is used at Bayou Bonfouca. Oversight at Times Beach is handled primarily by the Missouri Department of Natural Resources. State officials monitor operations on-site and via computer in the state capitol. Three on-site state employees originally provided oversight 24 hours a day. Currently, the state has oversight officials at the site 11-1/2 hours each weekday and 9 hours a day on the weekend. In addition, they conduct unannounced random visits to the site during off hours. To supplement the state’s oversight, St. Louis County inspects operations and tracks the results of air-monitoring testing to ensure that the incinerator’s emissions are in compliance with the limits set in the county’s air pollution permit. According to a county official, although formal inspections are required about once every 2 years, the county informally monitors the site more frequently. As with the other sites, Times Beach has two levels of air monitoring: continuous monitoring and a more detailed laboratory analysis. According to EPA officials, emissions from the incinerator have never exceeded the permissible levels. Despite extensive monitoring at the Times Beach site, incidents have occurred. Once, when an unexpected storm interrupted electrical power and caused a shutdown, the emergency system failed to fire. High winds had blown out the pilot lights on this treatment system, which should have fired after the power to the incinerator had been lost. Without the firing, the emergency system did not further treat the kiln gases as it was designed to do. Although EPA concluded that the event caused no significant health effects, the agency could only estimate emission levels during the shutdown because the air-monitoring equipment that would have recorded the actual emission levels was on the same circuit as the incinerator and, therefore, was not operating during the event. To prevent future emergency shutdowns from storm-related power losses, the incineration contractor hired local weather forecasting services to improve storm warnings and formally adopted a standard operating procedure to stop the waste feeds during severe weather. (This standard operating procedure had already been in force at the Bayou Bonfouca/Southern Shipbuilding Superfund site when the event occurred.) In addition, other measures were taken to prevent the emergency system’s pilot lights from being blown out and to decrease the number of power outages. Improper handling of the emission samples taken during a dioxin stack test was alleged following the discovery that the test samples were taken by a company that is a subsidiary of the incineration contractor. EPA maintains that the incinerator operator followed all required procedures for testing the samples. EPA has no regulation that prohibits the incineration contractor or one of its subsidiaries from taking, transporting, or analyzing the test samples. In addition, the time taken to deliver the samples to the laboratory was questioned—8 days from the time the samples left the site until they arrived at the laboratory. According to EPA officials, the samples are stable, making the time taken to get them to the laboratory unimportant. State officials reviewed the testing and determined that the results were valid. However, in December 1996, the EPA Ombudsman issued a report on the allegations and recommended that a new stack test be conducted to ensure public confidence in the cleanup. EPA agreed to implement the Ombudsman’s recommendation. James F. Donaghy, Assistant Director Jacqueline M. Garza, Staff Evaluator Richard P. Johnson, Attorney Adviser William H. Roach, Jr., Senior Evaluator Paul J. Schmidt, Senior Evaluator Magdalena A. Slowik, Intern Edward E. Young, Jr., Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Environmental Protection Agency's (EPA) use of incineration at Superfund sites, focusing on: (1) what safeguards EPA uses to promote the safe operation of incinerators at these sites; and (2) whether EPA has fully implemented its planned system of safeguards. GAO noted that: (1) EPA relies upon four main methods to promote the safe operation of incinerators used at Superfund sites; (2) these methods are: (a) required site-specific standards for an incinerator's emissions and performance; (b) engineering safety features built into the incinerator's systems; (c) air monitoring to measure the incinerator's emissions; and (d) on-site observation of the incinerator's operations; (3) EPA sets standards after it studies each site's characteristics; (4) each incinerator is designed with safety features intended to stop its operation if it fails to meet the specified operating conditions; (5) air monitors are placed in the incinerator's stack and around the site's perimeter to measure the incinerator's emissions; (6) at the three Superfund sites with ongoing incineration projects at the time of GAO's review, EPA had arranged for 24-hour, on-site oversight from either the U.S. Army Corps of Engineers or a state government to ensure that the incinerator was operating properly; (7) in addition to the four methods discussed above, EPA managers intended to use two other techniques, inspections and applications of lessons learned, to encourage safe operations, but neither was fully implemented; (8) EPA has not used inspectors from its hazardous waste incinerator inspection program to evaluate the operations of all Superfund incinerators as it required in a 1991 directive; (9) only one of the three incinerators GAO visited had received such an inspection; (10) EPA regional staff responsible for hazardous waste incinerator inspections were unaware that the Superfund incinerators were supposed to be inspected, and EPA headquarters officials were unaware that the inspections were not occurring; (11) EPA managers did not follow through on their intention to systematically apply the lessons learned from incineration at one site to other sites; (12) they had intended to prepare documents describing problems and solutions at each incineration project for use in designing and operating other projects and to hold periodic conference calls with the managers from incineration sites to discuss issues of common interest; (13) both of these methods of transferring information were dropped for various reasons; (14) GAO found that the lessons learned from the problems experienced at the sites GAO visited could benefit other sites; and (15) EPA headquarters officials told GAO that they encouraged Superfund project managers to share their experiences with incineration but had not facilitated this exchange in a structured way.

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SEC’s financial statements, including the accompanying notes, present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, SEC’s assets, liabilities, net position, net costs, changes in net position, budgetary resources, and custodial activity as of, and for the fiscal years ended, September 30, 2007, and September 30, 2006. However, misstatements may nevertheless occur in other financial information reported by SEC and may not be prevented or detected because of the internal control deficiencies described in this report. As disclosed in footnote 1.C. to SEC’s financial statements, in fiscal year 2007, SEC changed its method of accounting for user fees collected in excess of current-year appropriations. Because of the material weakness and significant deficiencies in internal control discussed below, SEC did not maintain effective internal control over financial reporting as of September 30, 2007, and thus did not have reasonable assurance that misstatements material in relation to the financial statements would be prevented or detected on a timely basis. Although certain compliance controls should be improved, SEC maintained, in all material respects, effective internal control over compliance with laws and regulations as of September 30, 2007, that provided reasonable assurance that noncompliance with laws and regulations that could have a direct and material effect on the financial statements would be prevented or detected on a timely basis. Our opinion on internal control is based on criteria established under 31 U.S.C. § 3512(c)(d), commonly referred to as the Federal Managers’ Financial Integrity Act (FMFIA) and the Office of Management and Budget (OMB) Circular No. A-123, Management Accountability and Control. During this year’s audit, we identified significant control deficiencies in SEC’s financial reporting process, which taken collectively, result in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Therefore, we considered the combination of the following control deficiencies to collectively constitute a material weakness in SEC’s financial reporting process: period-end financial reporting process, disgorgements and penalties accounts receivable, accounting for transaction fee revenue, and preparing financial statement disclosures. In addition to the material weakness discussed above, we identified three significant deficiencies in internal control, which although not material weaknesses, represent significant deficiencies in the design or operation of internal control. Although we are considering these issues separately from the material weakness described above, they nevertheless adversely affect SEC’s ability to meet financial reporting and other internal control objectives. These deficiencies concern property and equipment, and accounting for budgetary resources. In our prior year audit, we reported on weaknesses we identified in the areas of SEC’s (1) recording and reporting of disgorgements and penalties, (2) information systems controls, and (3) property and equipment controls. During fiscal year 2007, SEC improved its controls over the accuracy, timeliness, and completeness of the disgorgement and penalty data and used a much improved database for the initial recording and tracking of these data. However, the processing of these data for financial reporting purposes is still done through a manual process that is prone to error. We found that the internal controls that compensated for the manual processing of the related accounts receivable balances in fiscal year 2006 were not effective in fiscal year 2007. This issue is included in the material weakness in SEC’s financial reporting process for fiscal year 2007. SEC continues to make progress in resolving the information security weaknesses. Previously identified weaknesses, though, still need to be addressed, along with new weaknesses we found during this year’s audit. Therefore, we consider information security to be a significant deficiency as of September 30, 2007. In addition, we continued to identify the same weaknesses in controls over property and equipment during this year’s audit, and therefore, we considered this area to be a significant deficiency as of September 30, 2007. Although SEC had one material weakness and three significant control deficiencies in internal control, SEC’s financial statements were fairly stated in all material respects for fiscal years 2007 and 2006. However, the weaknesses in internal control noted above may adversely affect decisions by SEC management that is based, in whole or in part, on information that is inaccurate because of this weakness. In addition, unaudited financial information reported by SEC, including performance information, may also contain misstatements resulting from these weaknesses. We will be reporting additional details concerning the material weakness and the significant deficiencies separately to SEC management, along with recommendations for corrective actions. We will also be reporting less significant matters involving SEC’s system of internal controls separately to SEC management. During this year’s audit, we found control deficiencies in SEC’s period-end financial reporting process, in its calculation of accounts receivable for disgorgements and penalties, in its accounting for transaction fee revenue, and in preparing its financial statement disclosures. We believe these control deficiencies, collectively, constitute a material weakness. SEC’s financial management system does not conform to the systems requirements of OMB Circular No. A-127, Financial Management Systems. Specifically, Circular No. A-127 requires that financial management systems be designed to provide for effective and efficient interrelationships between software, hardware, personnel, procedures, controls, and data contained within the systems. Circular No. A-127 further states that financial systems must have common data elements, common transaction processing, consistent internal controls, and efficient transaction entry, and that reports produced by the systems shall provide financial data that can be traced directly to the general ledger accounts. SEC’s period-end financial reporting process for recording transactions, maintaining account balances, and preparing financial statements and disclosures are supported to varying degrees by a collection of automated systems that are not integrated or compatible with its general ledger system. These automated systems’ lack of integration and compatibility require that extensive compensating manual and labor-intensive accounting procedures, involving large spreadsheets and numerous posting and routine correcting journal entries, dominate SEC’s period-end financial reporting process. Some of SEC’s subsidiary systems, such as that for property and equipment and for disgorgements and penalties, do not share common data elements and common transaction processing with the general ledger system. Therefore, intermediary information processing steps, including extensive use of spreadsheets, manipulation of data, and manual journal entries, are needed to process the information in SEC’s general ledger. This processing complicates review of the transactions and greatly increases the risk that the transactions are not recorded completely, properly, or consistently, ultimately affecting the reliability of the data presented in the financial statements. Our identification this year of errors in SEC’s calculation of disgorgement and penalty accounts receivable, discussed below, illustrates this risk. The risk to data reliability is further increased because basic controls over electronic data, such as worksheet and password protection, change history, and controls over data verification, such as control totals and record counts, were not consistently used during the data processing between the source systems and the general ledger. In addition, currently, SEC’s general ledger has several unconventional posting models and other limitations that prevent proper recording of certain transactions. As a result, SEC’s year-end reporting process requires extensive routine correcting journal entries to correct errors created by incorrectly posted transactions in its general ledger. We also noted that SEC’s documentation used to crosswalk individual accounts to the financial statement line items contained an incorrect routing to a line item on SEC’s Statement of Budgetary Resources for SEC’s year-end financial statement preparation process, which caused a material error in SEC’s draft financial statements. Also, SEC did not have detailed written documentation of its methodologies and processes for preparing financial statements and disclosures, increasing the risk of inconsistent and improper reporting and the risk that disruptions and error may arise when staff turnover occurs. As part of its enforcement responsibilities, SEC issues orders and administers judgments ordering, among other things, disgorgements, civil monetary penalties, and interest against violators of federal securities laws. SEC recognizes a receivable when SEC is designated in an order or a final judgment to collect the assessed disgorgements, penalties, and interest. At September 30, 2007, the gross amount of disgorgements and penalties accounts receivable was $330 million, with a corresponding allowance of $266 million resulting in a net receivable of $64 million. In our reviews of the interim June 30, 2007, and year-end September 30, 2007, balances of accounts receivable for disgorgements and penalties, we found errors in SEC’s spreadsheet formulas resulting in overstatements of these receivable balances for both periods. These errors consisted of incorrectly changed spreadsheet formulas that affected the final calculated balances. SEC subsequently detected and corrected the June 30 errors, but then made different spreadsheet calculation errors in the year-end balances as of September 30, 2007, which we detected as part of our audit. SEC made adjustments to correct the errors, which were not material. However, SEC’s process for calculating its accounts receivable for disgorgements and penalties presents a high risk that significant errors could occur and not be detected. The main cause of these errors is the breakdown this year in the manual controls that were intended to compensate for the lack of an integrated accounting system for disgorgements and penalties, as discussed above. Specifically, although the journal entries posting the amounts to the general ledger were reviewed, this review did not extend to the preparation of the spreadsheet SEC used to document the accounts receivable calculation at June 30 and September 30, 2007, and therefore, was not sufficient to detect significant spreadsheet formula errors. As one of its sources of revenue, SEC collects securities transaction fees paid by self-regulatory organizations (SRO) to SEC for stock transactions. SRO transaction fees are payable to the SEC twice a year –in March for the previous months September through December, and in September for the previous months January through August. Since the SROs are not required to report the actual volume of transactions until 10 business days after each month end, SEC estimates and records an amount receivable for fees payable by the SROs to SEC for activity during the month of September. At September 30, 2007, SEC estimated this receivable amount at $100.6 million. Based on information SEC received in mid-October concerning the actual volume of transactions, the amount of claims receivable at September 30, 2007, should have been $74.4 million. In previous years, SEC made adjustments to reflect the actual volume of transactions; however, SEC does not have written procedures to help ensure that this adjustment is made as a routine part of its year-end financial reporting process. We proposed, and SEC posted, the necessary audit adjustment to correct the amount of transaction fee revenue for fiscal year 2007. Statement on Auditing Standards No.1, Codification of Auditing Standards and Procedures, which explains the accounting requirements for subsequent events, requires that events or transactions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements should be considered for adjustment to or disclosure in the financial statements through the date that the financial statements are issued. In addition, the concept of consistency in financial reporting provides that accounting methods, including those for determining estimates, once adopted, should be used consistently from period to period unless there is good cause to change. In our review of SEC’s year-end draft financial statement disclosures, we noted numerous errors including misstated amounts, improper break out of line items, and amounts from fiscal year-end 2006 incorrectly brought forward as beginning balances for fiscal year 2007. For example, in its disclosure for Custodial Revenues and Liabilities, SEC improperly excluded approximately $320 million in collections. In another example, for its disclosure on Fund Balance with Treasury, SEC misclassified approximately $90 million into incorrect line items. Also, in its disclosure for Fiduciary Assets and Liabilities, SEC’s beginning balances for Fund Balance with Treasury and for Liability for Fiduciary Activity were each misstated by $8.9 million due to errors in carrying forward ending balances from September 30, 2006. SEC revised the financial statement disclosures to correct the errors that we noted. We believe the cause of these and numerous other errors in the disclosures is due mainly to the lack of a documented timeline and process for completing the fiscal year 2007 financial statements and disclosures, including review of the disclosures. In addition, the cumbersome and complicated nature of SEC’s financial reporting process discussed above did not allow SEC finance staff sufficient time to carry out thorough and complete reviews of the disclosures in light of the November 15 reporting deadline. We also identified three control deficiencies that adversely affect SEC’s ability to meet its internal control objectives. These conditions concern deficiencies in controls over (1) information security, (2) property and equipment, and (3) accounting for budgetary resources, which are summarized below. SEC relies extensively on computerized information systems to process, account for, and report on its financial activities and make payments. To provide reasonable assurance that financial information and financial assets are adequately safeguarded from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction, effective information security controls are essential. These controls include security management, access controls, configuration management, physical security, and contingency planning. Weaknesses in these controls can impair the accuracy, completeness, and timeliness of information used by management and increase the potential for undetected material misstatements in the agency’s financial statements. During fiscal year 2007, SEC made important progress in mitigating certain control weaknesses that were previously reported as unresolved at the time of our prior review. For example, SEC developed a comprehensive program for monitoring access activities to its computer network environment, tested and evaluated the effectiveness of controls for the general ledger system, and documented authorizations for software modifications. SEC also took corrective action to restrict access to sensitive files on its servers, change default database accounts that had known or weak passwords, and apply strong encryption key management practices for managing secure connections. Despite this progress, SEC has not consistently implemented certain key information security controls to effectively safeguard the confidentiality, integrity, and availability of its financial and sensitive information and information systems. During this year’s audit, we identified continuing and new information security weaknesses that increase the risk that (1) computer resources (programs and data) will not be adequately protected from unauthorized disclosure, modification, and destruction; (2) access to facilities by unauthorized individuals will not be adequately controlled; and (3) computer resources will not be adequately protected and controlled to ensure the continuity of data processing operations when unexpected interruptions occur. For example, SEC had not yet mitigated weaknesses related to malicious code attacks on SEC’s workstations, had not yet adequately documented access privileges for a major application, and had not yet implemented an effective intrusion detection system. New control weaknesses in authorization, boundary protection, configuration management, and audit and monitoring that we identified this year include for example, the use of a single, shared user account for posting journal vouchers in a financial application, inadequate patching of enterprise databases, and inadequate auditing and monitoring capabilities on its database servers. Lapses in physical security enabled unauthorized network access from a publicly accessible location within SEC Headquarters. In addition, SEC did not have contingency plans for key desktops that support manual processes such as the preparation of spreadsheets. These weaknesses existed, in part, because SEC has not yet fully implemented its information security program. Collectively, these problems represent a significant deficiency in SEC’s internal control over information systems and data. Specifically, the continuing and newly identified weaknesses decreased assurances regarding the reliability of the data processed by the systems and increased the risk that unauthorized individuals could gain access to critical hardware and software and intentionally or inadvertently access, alter, or delete sensitive data or computer programs. Until SEC consistently implements all key elements of its information security program, the information that is processed, stored, and transmitted on its systems will remain vulnerable, and management will not have sufficient assurance that financial information and financial assets are adequately safeguarded from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. We will be issuing a separate report on issues we identified regarding information security concerns at SEC. SEC’s property and equipment consists of general-purpose equipment used by the agency; capital improvements made to buildings leased by SEC for office space; and internal-use software development costs for projects in development and production. SEC acquired approximately $27 million dollars in property and equipment during fiscal year 2007. Similar to our last year’s audit, during the course of testing fiscal year 2007 additions, we noted numerous instances of inaccuracies in recorded acquisition costs and dates for property and equipment purchases, as well as unrecorded property and equipment purchases, and errors in amounts capitalized and amortized for internal-use software projects. In addition, errors were carried forward from the previous year. These systemic errors did not materially affect the balances reported for property and equipment or the corresponding depreciation/amortization expense amounts in SEC’s financial statements for fiscal year 2007; however, these conditions evidence a significant deficiency in control over the recording of property and equipment that affects the reliability of its recorded balances for property and equipment. Specifically, SEC lacks a process that integrates controls over capitalizing and recording property and equipment purchases. For example, SEC does not have a formalized, documented process for comparing quantity and type of item received against the corresponding order for property purchases. In addition, SEC does not have sufficient oversight of the recording of acquisition dates and values of the capitalized property. Further, SEC’s lack of an integrated financial management system for accounting for property and equipment, as discussed above, requires compensating procedures, which were not effective, to ensure that manual calculations, such as those for depreciation and amortization, are accurate. Until it has a systemic process that incorporates effective controls over receiving, recording, capitalizing, and amortizing property and equipment purchases, SEC will not have sufficient assurance over the accuracy and completeness of its reported balances for property and equipment. For fiscal year 2007, SEC incurred $877 million in obligations, which represents legal liabilities against funds available to SEC to pay for goods and services ordered. At September 30, 2007, SEC reported that the amount of budgetary resources obligated for undelivered orders was $255 million, which reflects obligations for goods or services that had not been delivered or received as of that date. In our testing of undelivered order transactions for this year’s audit, we identified several concerns over SEC’s accounting for obligations and undelivered orders. Specifically, we found numerous instances in which SEC (1) recorded obligations prior to having documentary evidence of a binding agreement for the goods or services, (2) recorded invalid undelivered order transactions due to an incorrect posting configuration in SEC’s general ledger, and (3) made errors in recording new obligations and deobligations due to the use of incorrect accounts and by posting incorrect amounts in the general ledger. The majority of exceptions related to these issues, amounting to approximately $76 million, were corrected by SEC through adjusting journal entries. While the remaining uncorrected amounts did not materially affect the balances on the Statement of Budgetary Resources at September 30, 2007, ineffective processes that caused these errors constitute a significant deficiency in SEC’s internal control over recording and reporting of obligations, and puts SEC at risk that the amounts recorded in the general ledger and reported on SEC’s Statement of Budgetary Resources are misstated. Specifically, SEC’s general ledger is not configured to properly post related entries, thereby resulting in the need to routinely correct entries. Extensive reviews of the budgetary transactions, along with significant adjusting journal entries, are needed to compensate for the system limitations. The errors in recording new obligations and deobligations that we found in our audit indicate a lack of effective review over those transactions. Further, SEC does not have policies or internal controls to prevent recording of obligations that are not valid. Recording obligations prior to having documentary evidence of a binding agreement for the goods and services is a violation of the recording statute, and may result in funds being reserved unnecessarily and therefore made unavailable for other uses should the agreement not materialize. In addition, early recording of obligations may result in charging incorrect fiscal year funds for an agreement executed in a later fiscal year. Our tests for compliance with selected provisions of laws and regulations disclosed no instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards or OMB audit guidance. However, the objective of our audit was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. SEC’s Management’s Discussion and Analysis and other accompanying information contain a wide range of data, some of which are not directly related to the financial statements. We do not express an opinion on this information. However, we compared this information for consistency with the financial statements and discussed the methods of measurement and presentation with SEC officials. Based on this limited work, we found no material inconsistencies with the financial statements or nonconformance with OMB guidance. However, because of the internal control weaknesses noted above, misstatements may occur in related performance information. SEC management is responsible for (1) preparing the financial statements in conformity with U.S. generally accepted accounting principles; (2) establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of FMFIA are met; and (3) complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles; and (2) management maintained effective internal control, the objectives of which are the following: Financial reporting: Transactions are properly recorded, processed, and summarized to permit the timely and reliable preparation of financial statements in conformity with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition. Compliance with applicable laws and regulations: Transactions are executed in accordance with (1) laws governing the use of budgetary authority, (2) other laws and regulations that could have a direct and material effect on the financial statements, and (3) any other laws, regulations, or governmentwide policies identified by OMB audit guidance. We are also responsible for (1) testing compliance with selected provisions of laws and regulations that could have a direct and material effect on the financial statements and for which OMB audit guidance requires testing and (2) performing limited procedures with respect to certain other information appearing in SEC’s Performance and Accountability Report. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by evaluated the overall presentation of the financial statements; obtained an understanding of SEC and its operations, including its internal control related to financial reporting (including safeguarding of assets) and compliance with laws and regulations (including execution of transactions in accordance with budget authority); obtained an understanding of the design of internal controls related to the existence and completeness assertions relating to performance measures as reported in Management’s Discussion and Analysis, and determined whether the internal controls have been placed in operation; tested relevant internal controls over financial reporting and compliance with applicable laws and regulations, and evaluated the design and operating effectiveness of internal control; considered SEC’s process for evaluating and reporting on internal control and financial management systems under the FMFIA; and tested compliance with selected provisions of the following laws and their related regulations: the Securities Exchange Act of 1934, as amended; the Securities Act of 1933, as amended; the Antideficiency Act; laws governing the pay and allowance system for SEC employees; the Prompt Payment Act; and the Federal Employees’ Retirement System Act of 1986. We did not evaluate all internal controls relevant to operating objectives as broadly defined by the FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. Because of inherent limitations in internal control, misstatements due to error or fraud, losses, or noncompliance may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. We did not test compliance with all laws and regulations applicable to SEC. We limited our tests of compliance to those required by OMB audit guidance and other laws and regulations that had a direct and material effect on, or that we deemed applicable to, SEC’s financial statements for the fiscal year ended September 30, 2007. We caution that noncompliance may occur and not be detected by these tests and that this testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards and OMB audit guidance. SEC’s management provided comments on a draft of this report. They are discussed and evaluated below and are reprinted in appendix III. In commenting on a draft of this report, SEC’s Chairman said he was pleased to receive an unqualified opinion on SEC’s financial statements. The Chairman discussed SEC’s plans to remediate this material weakness before the end of fiscal 2008, and to address each of the findings and recommendations identified during the audit. The Chairman emphasized SEC’s commitment to enhance its controls in all operational areas and to ensure reliability of financial reporting, soundness of operations, and public confidence in SEC’s mission. The complete text of SEC’s comments is reprinted in appendix III.

Established in 1934 to enforce the securities laws and protect investors, the Securities and Exchange Commission (SEC) plays an important role in maintaining the integrity of the U.S. securities markets. Pursuant to the Accountability of Tax Dollars Act of 2002, SEC is required to prepare and submit to Congress and the Office of Management and Budget audited financial statements. GAO agreed, under its audit authority, to perform the audit of SEC's financial statements. GAO's audit was done to determine whether, in all material respects, (1) SEC's fiscal year 2007 financial statements were reliable and (2) SEC's management maintained effective internal control over financial reporting and compliance with laws and regulations. GAO also tested SEC's compliance with certain laws and regulations. In GAO's opinion, SEC's fiscal year 2007 and 2006 financial statements were fairly presented in all material respects. However, because of a material weakness in internal control over SEC's financial reporting process, in GAO's opinion, SEC did not have effective internal control over financial reporting as of September 30, 2007. Recommendations for corrective action will be included in a separate report. Although certain compliance controls should be improved, SEC did maintain in all material respects effective internal control over compliance with laws and regulations material in relation to the financial statements as of September 30, 2007. In addition, GAO did not find reportable instances of noncompliance with the laws and regulations it tested. In its 2006 report, GAO reported on weaknesses in the areas of SEC's (1) recording and reporting of disgorgements and penalties, (2) information systems controls, and (3) property and equipment controls. During fiscal year 2007, SEC improved its controls over the accuracy, timeliness, and completeness of the disgorgement and penalty data and used a much improved database for the initial recording and tracking of these data. However, the processing of these data for financial reporting purposes is still done through a manual process that is prone to error. GAO found that the internal controls that compensated for the manual processing of the related accounts receivable balances in fiscal year 2006 were not effective in fiscal year 2007. This issue is included in the material weakness in SEC's financial reporting process for fiscal year 2007. Other control deficiencies included in this material weakness concern SEC's period-end closing process, accounting for transaction fee revenue, and preparation of financial statement disclosures. GAO also identified three significant deficiencies in internal control during fiscal year 2007. Although SEC has taken steps to strengthen its information security, some of the weaknesses identified in GAO's previous audit persisted and GAO found new weaknesses during this year's audit. Therefore, GAO is reporting information security as a significant deficiency as of September 30, 2007. In addition, GAO continued to identify the same weaknesses in controls over property and equipment and therefore considers this area a significant deficiency as of September 30, 2007. GAO also identified a new significant deficiency concerning SEC's accounting for budgetary transactions. In commenting on a draft of this report, SEC's Chairman emphasized SEC's commitment to enhance its controls in all operational areas and to ensure reliability of financial reporting, soundness of operations, and public confidence in SEC's mission.

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The Postal Service, the nation’s largest civilian employer, had about 765,000 career employees at the end of fiscal year 1997. Service employees include craft employees, the largest group; EAS; the Postal Career Executive Service (PCES); and others, such as inspectors for the Postal Inspection Service. The Service structure includes headquarters, 11 areas, and 85 performance clusters, with cluster-level employees making up about 96 percent of the Service workforce. For the purposes of this review, we focused on the cluster-level EAS workforce. The EAS workforce consists primarily of employees in EAS 11 through 26 positions. EAS management-level positions begin at EAS 16 and include such positions as postmaster, manager of customer services, and manager of postal operations. At the end of fiscal year 1997, EAS positions totaled 80,238, or about 10 percent of total Service career-level employees. PCES, established in 1979, includes Service senior-level officers and executives in positions such as area vice presidents. At the end of fiscal year 1997, the Service had about 900 employees in PCES positions. We did not include employees in PCES positions in our analyses for this report. According to the Service, one of its corporate goals is a commitment to employees, which includes an effort to provide equal employment opportunities to all employees, take advantage of its diverse workforce, and compete effectively in the communications marketplace. To that end, the Service created its Diversity Development Department in headquarters in 1992, which was to foster an all-inclusive business environment. The head of the Department reports directly to the Deputy Postmaster General. The Department is responsible for, among other things, actively supporting the recruitment, retention, and upward mobility of women and minorities. In addition, the Service’s 1999 Annual Performance Plan includes achieving a diverse workforce as one of its goals. To determine the effectiveness of the Service’s diversity development program, the Postal Service Board of Governors commissioned Aguirre International, a contractor, to undertake a 6-month study (May 2, 1997, to Nov. 2, 1997) of workforce diversity at the Postal Service. The study addressed Service personnel and supplier diversity and was issued in October 1997. The report stated that the Service was a leader in meeting affirmative action goals as well as striving for parity between its workforce and the CLF. It also stated, among other things, that women and minorities appeared to be experiencing problems advancing to management jobs at EAS 17 and above positions. The Board of Governors subsequently directed the Service to develop an action plan for dealing with the diversity issues raised by Aguirre. The Service developed an action plan and briefed the Board on the plan in April 1998. In our previous letter, we reviewed promotions to EAS 16 and above positions at four selected performance clusters. Documentation in the promotion files and our discussions with Service officials provided evidence that the Service’s required promotion procedures we reviewed were followed for the 127 fiscal year 1997 promotions at these 4 sites. In addition, for 117 of these promotions, we provided statistical data on the distribution of the specific EEO groups throughout the promotion process stages—applications received, applicants considered best qualified, and applicants promoted. The specific EEO groups discussed in this report include white, black, Hispanic, Asian, and Native American men and women. We did our work from July 1998 through January 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postmaster General and from Aguirre International’s Director of Operations. The Postal Service’s oral comments and Aguirre’s written comments are discussed near the end of this letter. Further details about the scope and methodology of our review can be found in appendix I. The analyses that follow show how the representation of cluster-level women and minority groups (1) compared with their representation in the 1990 CLF; (2) changed between fiscal years 1993 and 1997 in EAS 17 and above positions; (3) among those promoted to EAS 17 and above positions in fiscal year 1997, compared with their representation in EAS 17 and above positions in fiscal year 1997 (before the promotions); and (4) in EAS 17 and above positions, compared with their representation in EAS 11 through 16 positions in fiscal year 1997. We also made similar comparisons for women and minorities involving the remainder of the Postal Service workforce located at the headquarters and area office levels, as detailed in appendix II. Table 1 shows that when we compared fiscal year 1997 data for the Service’s cluster-level workforce with CLF data from the 1990 decennial census, black and Asian men and women and Hispanic men were fully represented, while Hispanic women, Native American men and women, and white women were underrepresented. Specifically, black men and women comprised 11.3 and 9.6 percent, respectively, of the cluster workforce compared with their respective 5.0 and 5.5 percent representation in the CLF; Asian men and women comprised 3.5 and 1.9 percent, respectively, of the workforce compared with their respective 1.5 and 1.3 percent representation in the CLF. However, white and Hispanic women were underrepresented, comprising 22.1 percent and 2.0 percent, respectively, of the workforce compared with their respective 35.3 percent and 3.4 percent CLF representation. White men were represented in the workforce similarly to their level of representation in the CLF. In addition to the cluster-level workforce data presented in table 1, we analyzed similar data for the Service’s headquarters-level and area office- level workforces. Table II.1 in appendix II shows that white and Hispanic women and Native American men were underrepresented among the three workforce levels. Native American women were underrepresented among cluster employees and headquarters employees, but not among area office employees. Hispanic men were underrepresented among headquarters and area office employees, while white men were underrepresented among area office employees. Black and Asian men and women were fully represented in all three workforce levels. Figure 1 shows our analysis of the representation of women and minorities at the cluster level in EAS 17 and above positions in fiscal year 1993 compared with fiscal year 1997. As the figure shows, generally, the representation of women and minorities increased over this period; black men’s representation decreased 0.6 percent over this period. Also, white men’s representation decreased over this period by about 2.0 percent. Table II.2 in appendix II shows this same type of comparison between the 2 fiscal years for women and minorities in EAS 17 and above positions at the headquarters and area office levels. At the headquarters level, in addition to the slight decrease in representation of black and white men as happened at the cluster level, representation of Native American men also showed a slight decrease. At the area office level, the representation of black men, Asian men, and Native American men all generally decreased. Also, at the headquarters and area office levels, the representation of white men decreased. As shown in figure 2, we compared the representation of each EEO group at the cluster level promoted to EAS 17 and above positions in fiscal year 1997 with their representation in EAS 17 and above positions at the cluster level in fiscal year 1997 before the promotions. Our analysis showed that the representation of women and all minority groups among those promoted was higher than the representation of women and minority groups in EAS 17 and above positions, with the exception of Asian women. Also, the representation of white males in promotions to these higher EAS positions was lower than their representation in the cluster-level workforce. Table II.3 in appendix II shows the same type of information for the same period for the headquarters and area office workforce levels. At the headquarters level, representation of women and all minority groups among those promoted was higher than their representation in EAS 17 and above positions, with the exception of Asian women and black and Native American men. However, at the area office level, representation of white women; Hispanic men and women; and Native American men and women was lower than their representation in EAS 17 and above positions. Also, white men were promoted at a rate lower than their representation at the headquarters and area office levels. Table 2 shows our last comparison, the fiscal year 1997 representation of women and minorities in EAS 17 and above positions with their representation in EAS 11 through 16 positions. We made this comparison because employees in EAS 11 through 16 positions represent the workforce pool from which selections for promotion to EAS 17 and above positions would likely be made. Our analyses in table 2 show that among cluster-level employees, the overall representation of women and minorities in EAS 17 and above positions was lower than it was in EAS 11 through 16 positions in fiscal year 1997—42 percent compared to 61 percent. Table II.4 in appendix II shows variation in the representation of women and minorities in the higher EAS positions at the headquarters and area office levels compared with their representation in EAS 11 through 16 positions. Based on our own standards for designing studies and developing methodologies to evaluate programs, we believe that the methodologies used by Aguirre International were generally reasonable, appropriate, and relevant given the established study parameters, including the 6-month time frame in which the study was to be completed and the complexities associated with addressing the sensitive issue of diversity in an organization as large as the Postal Service. In addition, limitations resulting from the study’s parameters, as well as cautions regarding the study’s findings, were noted throughout the report. However, in our review of the Aguirre report, we noted one area of concern: The report stated that it appeared that a glass ceiling impeded the progression of women and minorities to EAS 17 and above positions, but in our opinion, the report did not explicitly define the term glass ceiling or present convincing supporting evidence. At the direction of the Postal Service Board of Governors, the Service contracted with Aguirre International to study the Service’s diversity program. The Board was specifically interested in the Service’s progress in meeting its goal of creating a Service workforce as diverse as the CLF. The Board asked Aguirre to look at several areas, including hiring, promoting, training and development, and contracting. Aguirre was to complete the study within a 6-month period—May 2, 1997, through November 2, 1997. The Aguirre report stated that the study was designed to assess the effectiveness of the Service’s diversity program in eight research areas, which are listed in appendix III of this report. The approach to the study taken by Aguirre researchers involved the use of multiple research methods to research the eight questions (see app. III). Aguirre’s report indicated that it had performed numerous data analyses, reviewed written policies and practices, validated a Service database, visited 10 postal sites, and conducted a survey and interviews. Such an approach allowed the issues presented in the report to be discussed from several perspectives, which in our opinion and based on our standards for performing studies and evaluations, was an acceptable methodological approach. For example, Aguirre made what we believe were appropriate adjustments to the 1990 Census CLF data to arrive at compatible postal districts for comparisons. Aguirre staff developed models and adjusted the models to allow for Service hiring requirements and restrictions, such as English language proficiency and veteran’s preference. Using these data, they made numerous comparisons of the Postal workforce to the CLF. In addition, the report indicated that Aguirre staff gathered data from various organizational levels in the Service. It indicated that the staff spoke with Service officials at headquarters and selected sites, a number of Service employees, potential Service employees, and contractors to obtain their perspectives on diversity-related issues in the Service. Aguirre staff also visited selected Service sites and conducted employee surveys and interviews. They arranged focus group discussions with community residents who were viewed as potential employees to gather information about, among other things, their views on barriers to diversity at the Service. They also held focus groups with and interviewed potential contractors to explore the extent to which any known barriers might impede contractors, especially minority-owned contractors, from obtaining Service business. In addition, the Aguirre report referred to organizations with success in the area of diversity and used internal benchmarking to report “promising practices” within the Service. Certain study parameters set by the Board of Governors, such as the time frame for the study and the preselection of certain sites, resulted in numerous study limitations. The Aguirre report clearly noted these limitations in appropriate sections, citing appropriate cautions for readers regarding the study’s findings. According to the Aguirre Project Director, the 6-month period for the study that was set by the Board of Governors affected the manner in which the study was implemented in a number of ways. She said Aguirre wanted to further analyze the data but ran out of time. She also said that interviews and discussions with Service employees, potential employees, and potential contractors were limited in that Aguirre staff spoke only with individuals located near the sites they visited. Thus, the views of these individuals may not represent the views of similar individuals at other Service sites. Finally, the Aguirre report recognizes the information obtained from Aguirre’s visits to postal sites may not be typical of Service sites throughout the country. The Board selected the first 5 of the 10 sites visited because these sites had known diversity problems or were of special interest to particular Board members. This resulted in a highly urban sample of sites. Aguirre attempted to balance these sites by selecting five others based on demographics that were more rural and, according to Aguirre and Service officials, that had achieved some success in the area of diversity. However, even this larger sample of 10 sites had African-American representation that was twice that of the other 75 performance clusters that were not selected for review. Indeed, the report cautioned readers that the views of individuals at these sites could not be generalized to the Service as a whole. As a result, the findings from the site visits may be more indicative of specific sites selected rather than the status of the Service overall. Aguirre stated in its report that it appeared that a glass ceiling existed at positions beginning at EAS 17 for women and minorities. Aguirre did not explicitly define the term glass ceiling. Further, Aguirre officials told us that Aguirre based its finding of the glass ceiling primarily on its analyses of fiscal year 1996 data and comparisons of that data with the CLF and secondarily on discussions it had with Service employees. Specifically, Aguirre compared the level of women and minority representation at the various levels or positions within the EAS with their representation in the CLF. Because the representation of women and minorities in positions beginning at EAS 17 was less than their representation in the CLF, Aguirre stated that it appeared that a glass ceiling began at EAS 17 positions. In addition, the Project Leader for the Aguirre study told us that although Aguirre’s finding of a glass ceiling was supported primarily by its analyses and comparisons of data, the finding was also supported by the views of postal workers, many of whom perceived that barriers existed to the promotion of women and minorities to higher EAS and PCES positions. She said that the views of the Service employees Aguirre interviewed were consistent—that is, barriers, such as a perceived “old boy network,” prevented women and minorities from progressing to EAS 17 and above positions. However, she acknowledged, as did the Aguirre report, that the views expressed by these individuals at these sites could not be generalized to the entire Service workforce. We do not believe that it is appropriate to compare the EEO group representation in specific EAS positions or levels in the Service with the CLF because CLF data are not, nor were they intended to be, broken down into an appropriate pool of employees for such a comparison (i.e., similar positions or levels, as well as individuals with appropriate qualifications for those positions). Both the Aguirre Project Director and Project Leader for the study told us that Aguirre used the comparison with the CLF because the Service asked them to. Nevertheless, the Service also disagreed with Aguirre’s glass-ceiling finding on the basis of its comparison of women and minorities in specific EAS positions with the general CLF. Further, we believe that the use of the term glass ceiling in the Aguirre report could be misleading, particularly if the term were to be interpreted by readers in a general sense—that is, an upper limit beyond which few or no women and minorities could pass. Under this definition, and according to our review of workforce and promotion data for EAS 17 and above cluster-level employees in fiscal year 1997, no glass ceiling existed. For example, as shown in table 3, we found that for the cluster level, women and minorities were present in all positions and had been promoted to most of those positions. In addition, the percentage of women and minorities being promoted into these higher EAS positions was generally greater than was their representation in the same positions in fiscal year 1997 (before the promotions). For example, for EAS 17 positions, women and minorities comprised about 54 percent of the positions and received about 58 percent of the promotions. However, both our analyses and Aguirre’s suggest that opportunity may exist for the Service to increase the diversity of its workforce in the higher EAS positions, even though a glass ceiling does not appear to exist. For example, women and minorities were often less represented in the EAS 17 and above positions than they were in the EAS 11 to 16 positions. Service officials stated that the Aguirre report was intended to provide an impression of the overall state of diversity in the Postal Service. In that context, Service officials said that they have accepted the report’s basic message that the Service needs to strengthen its diversity program and have developed and begun implementing a plan to do so. They said that although it was difficult to determine the exact number of recommendations contained in the Aguirre report, they believe the actions they have under way or planned will address the major issues, concerns, and recommendations Aguirre reported. Service officials also said that their initiatives would result in ongoing changes in the way that the Service incorporates diversity into its operations. The Service developed 23 initiatives designed to improve its diversity program and address what it believed to be the Aguirre report’s major issues, concerns, and recommendations. As of December 1998, the Service reported that it had completed implementation of nine of the initiatives and was on schedule for completing the remaining initiatives, with the exception of two initiatives for which completion would be delayed. We did not verify the accuracy of the Service’s estimate of the completion status of initiatives in process nor did we evaluate whether any of the initiatives would resolve the concerns raised by Aguirre. When Service officials reported that a new policy or process had been established to partially or fully address 1 of its 23 initiatives, we obtained available documentation confirming the new policy or process. The Service organized its 23 diversity initiatives into 6 functional groups. Table 4 shows these six groups, the specific initiatives established within each group, Service estimates of the status of its efforts to implement the initiatives, and target completion dates for implementing the initiatives. The projected completion dates shown in the table are those initially established by the Service. As of December 1998, the Service reported that it was progressing in its implementation of the 23 initiatives. The Service reported that nine initiatives had been completed, and seven were 90 to 99 percent complete. Of the remaining inititiatives, three were estimated to be 80 percent complete, and four ranged from 30 percent to 50 percent complete. Service officials said that initiative 22—using supplier diversity data to measure the success of the Supplier Diversity Program—will be partially delayed because of the need to focus resources on resolving the Year 2000 computer system issue. Also, initiative 23—establishing accountability for complying with the Supplier Diversity Program for all Service employees making purchases—will require more time than initially established so that discussions with buyers on issues associated with accountability for supplier diversity can occur. According to Service Diversity Development officials, their statement that initiatives were 100-percent complete indicated that, in some cases, a policy, process, procedure, or plan had been developed and approved but that the relevant actions covered by the policy, process, procedure, or plan were still ongoing. However, for other completed initiatives, no further actions were to be taken. For example, for initiative 1, after a new Diversity Development policy statement was issued, no further actions to implement this initiative were considered necessary. This was also the case for initiatives 2 and 3—revising the Diversity Business Plan and establishing a Diversity Oversight Group. However, for initiatives 4 (evaluating the current Diversity Development Organization and staff and establishing appropriate headquarters and field staffing), 6 (establishing an economic incentive for attaining diversity targets), 16 (expanding Supplier Diversity Program communications), 18 (linking local buying to the commitment for the Supplier Diversity Program), and 20 (making it easier for suppliers to participate more effectively in the postal purchasing process), actions associated with these initiatives were still under way. Likewise, some other initiatives may involve additional action after the Service designates them 100-percent complete. Service Diversity Development officials said that they plan to monitor the implementation of new policies, processes, procedures, or plans covered by the 23 initiatives, at least on a quarterly basis, until they become standard operating procedures. Service officials also told us that they expected the monitoring process to be operational by the spring of 1999 and that, consequently, the scopes, completion dates, and implementation status for some of the initiatives could change. Service officials said that the Board of Governors did not request that they address all of Aguirre’s recommendations. Rather, they were asked to develop initiatives that they believed would help improve diversity at the Service and result in improvements in the way that the Service incorporated diversity in its operations, thereby improving Service diversity overall. They said that they believed their initiatives have addressed Aguirre’s major issues, concerns, and recommendations. Service officials noted that determining the exact number of Aguirre’s recommendations was difficult because recommendations were noted in several locations in the report and many of them appeared to be duplicative. Service officials also noted that it was sometimes unclear as to whether Aguirre’s statements were intended as recommendations or just observations. We also found it difficult to determine with precision the number of specific Aguirre recommendations for the same reasons the Service cited. For example, in chapter 5 of its report, Aguirre stated that the Service may want to do further study of the employees it classifies as American Indian/Alaskan Native since many of the employees in this category consider themselves to be something else. It is not clear whether Aguirre intended this statement to be a recommendation or an action the Service could consider. Also, the Service’s initiative 1 as shown in table 4 was designed to address five different Aguirre recommendations, all of which seemed to be directed at the same concern—developing and issuing a clear corporate policy on diversity. Service officials said that other recommendations by Aguirre called for actions that the Service was already taking or planned to take. For example, Aguirre recommended that the Service define the attrition rate that can be predicted using age and past performance for trainers and EEO experts. The Service said that this information would be available from its New Workforce Planning Model, which was already in the design phase of development. Service officials said that several of Aguirre’s recommendations seemed to be based on inaccuracies or misstatements about current Service policies and procedures. For example, Aguirre reported that the Service usually selects bidders with the lowest price. Aguirre recommended that bidder selection should consider other criteria, such as quality of the processes and products, as well as price. Service officials told us that they did not accept this recommendation because it is already their general policy to make awards based on “best value” not lowest price. Further, Service officials said that for some of Aguirre’s recommendations, they found no basis or rationale and did not plan to implement them at this time. For example, Aguirre recommended that a minimum of 7 percent of the Service’s total contract dollars be awarded to minority suppliers. Service officials said that they did not find any supporting rationale for this recommendation, and they believed that the Service’s current goal of 6 percent of total contract dollars to be awarded to minority businesses by 2002 was appropriate. The Service collects a variety of diversity-related data and has a number of initiatives under way in response to the Aguirre report that are designed to improve its data collection methods and use as well as to enhance its ability to meet its diversity goals and objectives. The Service is also in the process of establishing targets and measures to use in assessing its progress toward meeting its diversity goals and objectives. However, the Service does not have reliable data on the flow of applicants through its promotion processes that would help it to identify and remove any barriers to the promotion of women and minorities. The Service collects a wide variety of diversity data that are primarily related to its program areas, such as Purchasing and Materials. Managers of these program areas, in coordination with the Service’s Diversity Development Department, are to use these data to help achieve program goals and Service diversity goals. For example, the Purchasing and Materials Department is to collect data on the dollar size and number of contracts awarded to women and minority-owned businesses. The Aguirre report, while acknowledging that the Service collects a substantial amount of diversity-related data, made a number of comments, observations, and recommendations to the Service related to gathering, using, and monitoring such data. At least 5 of the Service’s 23 initiatives (initiatives 5, 6, 8, 18, and 22) involve some of the issues raised by Aguirre about gathering and using diversity-related data. For example, Aguirre observed that the Service did not systematically track credit card purchases by gender or EEO group and thus data on the differential impact of the credit card program on women and minority contractors are not available. The Service plans to address this issue through initiative 18, which is aimed at improving supplier diversity. In November 1998, the Service released its 1999 Annual Performance Plan related to its performance goals, objectives, and associated measures as part of its implementation of the Government Performance and Results Act of 1993 (Results Act). Within the plan, the Service identified a goal of improving employee and organizational effectiveness. The plan also stated that one of the subcomponents of that goal was the strategy to “manage and develop human capital.” Under that strategy, the plan identified the need to “achieve a diverse workforce.” Further, the Annual Performance Plan stated that based on the Aguirre study’s findings and recommendations, the Service had prepared a diversity development action plan to promote the hiring of women and minorities, improve recruitment hiring and promotion activities, and develop indicators to measure progress linked to this strategy. In addition, the Service’s Diversity Business Plan, dated December 3, 1998, supports the Service’s strategic plan. The business plan contains four principal diversity objectives, which, according to Diversity Development officials, are to be used in partnership with other organizational functions to develop programs and initiatives that will help achieve Service diversity goals. The four objectives are (1) articulate a clear diversity message; (2) ensure the representation of all employee groups in all levels of Postal Service employment; (3) create a work environment that is free from discrimination and sexual harassment; and (4) establish and maintain a strong, competitive, and diverse supplier base. According to the Manager of Diversity Policy and Planning, now that the business plan has been approved, the Service is in the beginning stages of developing specific targets and measures that would help the Service track its progress in meeting its diversity goals and objectives. According to the Service, methods to evaluate and measure success will be completed no later than March 30, 1999. Along with the establishment of diversity goals and objectives, the establishment of specific targets and measures will help the Service to focus the efforts of its numerous organizational units, achieve accountability, gauge progress, and meet goals. Although the Service has had a requirement for many years that its managers are to collect applicant data for EAS promotions and enter that data into a central electronic database, according to the Service, most locations have fallen behind in entering these data into the system. Thus, the Service has not been in the best position to analyze data on women and minorities as they move, or do not move, through the Service’s promotion process or to determine if and for what reason impediments or barriers exist to the promotion of women and minorities to higher levels of responsibility in the Service, generally, and within the EAS, specifically. The Vice President of Human Resources, in February 1997, sent a memorandum to area and district human resource managers reminding them that the requirement to collect applicant-flow data was still effective. She noted that such information was critical to Service efforts to examine the promotion process for continuous improvement. Although recognizing that managers were facing various priorities, she asked that managers develop a plan for collecting and entering past applicant data into the Promotion Report System. She also noted that this automated system was the source of data for the Applicant Flow Tracking System (AFTS), a system vital to the Diversity Development Department’s responsibility for reporting promotion demographics. According to a manager in the Service’s Human Resources Department, the Service has had a centralized, computer-based tracking system in place for the last 10 years—the AFTS—which is to track diversity data related to promotions within the Service. He acknowledged, however, that participation in this system varies across Service units. Some units have consistently entered the data into the AFTS as required, while others have never entered the data. Another manager in Human Resources said that this inconsistent use of the AFTS and subsequent incomplete data in the system have occurred because unit managers have few incentives to see that the data are entered into the system because the system is not tied to any essential information system, such as accounting and payroll or the employee master file. In addition, he said that there have been few or no consequences to these managers for not doing so. Because of the unreliability of the AFTS database, the Service has to use the Employee Master File and a separate personnel action database to obtain race, ethnicity, and gender data for those applicants who are promoted; the Service cannot readily compile and use this information on applicants seeking promotion. A reliable and complete database on all applicants would (1) provide an essential baseline against which to assess the promotion progress of specific EEO groups and (2) help the Service identify and remove or reduce the impact of barriers to the promotion of women and minorities. For example, during our initial review in response to your request, we noted that there were no Hispanic women applicants for promotion to EAS levels 17 and above in the Service’s Atlanta performance cluster in fiscal year 1997. The Service could use this type of information to (1) determine whether any problems or barriers existed in the cluster that had caused this situation, and if so, (2) take appropriate corrective action. In fiscal year 1997, overall women and minority representation in the Service’s cluster-level workforce did not parallel that of the 1990 CLF. Relative to their representation in the CLF, several specific EEO groups were fully represented, while others were underrepresented. Also, in fiscal year 1997, women and minorities were generally promoted to EAS 17 and above positions in percentages higher than or close to their workforce representation in the three workforce levels—cluster, headquarters, and area offices. As of September 1997, women and minorities were present in all EAS 17 and above positions and generally had been promoted to EAS 17 and above positions during 1997 in the three workforce levels. Nonetheless, as of September 1997, women and minority representation was generally lower in EAS 17 and above positions than it was in EAS 11 through 16 positions. Overall, given the short time frame and preselection of sites that resulted in certain study limitations, we believe that the multiple methodologies Aguirre used for its study were reasonable, relevant, and appropriate. However, Aguirre’s finding that a glass ceiling appeared to exist at positions beginning at EAS 17 could be misleading. Evidence that Aguirre cited to support this finding was not convincing, and according to our analysis, women and minorities were generally represented in and were being promoted to EAS 17 and above positions, albeit at varying percentages, for the period we reviewed. Neither the Service nor we could determine the exact number of recommendations made by Aguirre. Nevertheless, the Service is making progress in implementing the 23 initiatives it developed in response to the Aguirre report, which are aimed at strengthening its diversity program. We believe that the Service’s ongoing plan to continue monitoring the implementation of policies, processes, procedures, and plans covered by its 23 initiatives is especially important given the Service’s designation of some initiatives as being completed when such policies, processes, procedures, and plans have been developed and approved although specific actions required by some of these initiatives may still be ongoing. Service initiatives to better capture and use data in response to the Aguirre study appear reasonable. However, the Service has not yet (1) established and implemented targets and measures for tracking the Service’s progress in meeting its diversity goals and objectives or (2) fully captured or used EEO data on applicants as they progress, or do not progress, through the Service’s promotion process. The Service has developed diversity goals and objectives, and now that its Diversity Business Plan has been approved, is in the process of developing specific targets and measures for assessing its progress in meeting its goals and objectives. However, the Service is not capturing reliable EEO data on promotion applicants’ progress through the promotion process. Although we recognize that collecting and using EEO data on promotion applicants will require additional effort, such data are important for identifying problems and barriers affecting women and minorities in the promotion process. We recommend that the Postmaster General ensure that appropriate Service officials capture EEO group data in the AFTS and use these data to help improve the Service’s diversity program, including the identification of any barriers that might impede promotions to high-level EAS positions. On February 4, 1999, we were informed by the Postal Service that the Vice President of Diversity Development and the Vice President of Human Resources concurred with the information provided in the draft report. In addition, the Vice President of Human Resources stated that, in response to our recommendation, she would reemphasize to the field the need to enter data into the Promotion Report System, which is the source of the data for the AFTS. Also she stated that once the data are complete and reliable, they can be used as a tool to identify the point that impedes the promotions of applicants to high-level EAS positions. On January 28, 1999, Aguirre provided written comments stating that it found our report to be instructive and informative. Aguirre noted the conditions under which its study was done, such as a charged atmosphere at the Service and the short time frame for the study. Aguirre also noted differences between the scope of its study and ours, such as its (1) use of fiscal year 1996 data compared to our use of fiscal year 1997 data and (2) inclusion of PCES data while our review did not. Aguirre also pointed out that it found clear distinctions in perceptions about the types of positions within the EAS levels, and that to do a thorough analysis, one should look at these differences. For example, Aguirre said it found that women were overrepresented in the attorney area and in rural postmaster jobs and underrepresented in more “power and influence” positions. We believe that Aguirre was suggesting that these differences in scope could account for differences between the results of its study and ours. We used fiscal year 1997 data in our analysis because it was the latest period for which complete data were available. We did not include PCES positions in our analysis because we were asked to analyze the Service’s EAS workforce. An analysis of any perceived or actual differences in representation of women and minorities among types of EAS positions was beyond the scope of our review. Nevertheless, even with these differences in scope, we do not believe that there were significant differences between the results of our work and Aguirre’s study results in those areas that we both addressed. Both reports point out that women and minorities were less represented in higher EAS positions than they were in lower EAS positions. In addition, our report does not take issue with Aguirre’s view that barriers may exist to the promotion of women and minorities to high-level EAS positions. Aguirre further stated that it stood behind its conclusion that there seemed to be a drop in the numbers of women and minorities somewhere around the EAS 17 through 22 level based on data presented in its report. Aguirre said that these data were coupled with the views of Service employees it interviewed who believed that a barrier, or “in their terms, a glass ceiling” existed near or around this EAS level. However, our concern is that Aguirre’s use of the term glass ceiling in its report could be misleading because (1) Aguirre did not define the term glass ceiling in its report; (2) the data in its report did not, in our view, support the existence of a glass ceiling as defined in the general sense, that is, an upper limit beyond which few or no women and minorities could advance; and (3) data in both Aguirre’s report and in our report showed that women and minorities were represented in and were promoted to levels above EAS 17, showing the advancement of women and minorities. The Postal Service raised a similar concern about Aguirre’s use of the term glass ceiling. Nevertheless, we agree with Aguirre that opportunity may exist for the Service to increase diversity at higher EAS levels, and our report recommends that the Service ensure that appropriate EEO group data are captured and used so that any barriers impeding the promotion of women and minorities to high-level EAS positions can be identified. Aguirre said that our report lacked a discussion of the “feeder flow” from which Postal employees move into higher level EAS positions. We believe, however, that our report addressed this issue, at least in part, through our analysis of the diversity of the Service’s EAS 11 through 16 workforce, which forms the pool from which promotions to EAS 17 and above positions would likely come. Finally, Aguirre provided several technical comments, which we considered and included in our report as appropriate. We are sending copies of this report to the Chairman and Ranking Minority Member of the Subcommittee on the Postal Service, House Committee on Government Reform; the Chairman and Ranking Minority Member of the Subcommittee on International Security, Proliferation, and Federal Services, Senate Committee on Governmental Affairs; the Postmaster General; and Aguirre International. We will also make copies available to others on request. If you have any questions concerning this report, please call me on (202) 512-8387. Major contributors to this report are listed in appendix IV. This report, which follows our previous letter on selected promotions of women and minorities to Executive and Administrative Schedule (EAS) management-level positions, provides (1) information about the overall extent to which women and minorities have been promoted to or are represented in EAS management-level positions in the Postal Service; (2) our observations on the methodology used by a private contractor, Aguirre International, to study workforce diversity at the U.S. Postal Service; (3) the status of the Service’s efforts to address the recommendations in the Aguirre report; and (4) our analysis of whether the Service could better capture and use data to achieve its diversity objectives. To determine the overall extent to which women and minorities have been promoted to or are represented in EAS management-level jobs, we obtained Service workforce statistics from the its Diversity Development Department and annual promotion statistics for career-level employees, with the exception of the Postal Career Executive Service (PCES), from the Human Resources Information Systems Office. The Diversity Development Department, in conjunction with the Service’s Minneapolis Data Center, provided us with data tapes containing information related to the equal employment opportunity (EEO) composition of the Service career-level workforce for Service fiscal years 1993 through 1997. We chose to focus our analysis on these years since major downsizing and other changes occurred in the Service in 1992 because of an extensive reorganization. Data from fiscal year 1998 were not available at the time of our analysis. The data we used included EAS level; race, national origin, and gender; location of employee; number of employees by EEO group; and civilian labor force (CLF) statistics for each EEO group. We did not verify these data by comparing them to original source documents. We obtained information on promotions from the Service’s Human Resource Information Office; this information was compiled from the Employee Master and Payroll Accounting files. Using the “nature of action” code from Forms 50, Notice of Personnel Action, we identified career-level employees who had been promoted, by EAS level, throughout the Service. We used this information to assess the extent of promotions to specific EAS positions by EEO groups in the Service. Our limited verification of this promotion data against the promotions reviewed at the three areasreported on in our previous letter showed it to be accurate. We used this information to construct a workforce profile by EEO group at three workforce levels—headquarters, area offices, and performance clusters. In our analysis, we included all career-level employees from each performance cluster; employees reporting to area offices, whether they were located in an area office or a cluster facility; and headquarters’ employees, including employees physically housed at L’Enfant Plaza in Washington, D.C., as well as those reporting to headquarters but located elsewhere. We analyzed data provided by the Service for the three groups of employees: (1) cluster-level employees, who represented 732,112 (or 95.7 percent) of the about 765,000 career-level employees at the Service at the end of fiscal year 1997; (2) area office employees, who represented 21,864 (2.9 percent) of the career-level employees; and (3) headquarters’ employees, who represented 10,707 (1.4 percent) of the career-level employees. We looked at employees in the three workforce levels because responsibility and authority for diversity is separated into these three levels. To provide some context for the results of our analysis, we first compared the 1997 Service data with CLF data from the 1990 decennial census separately for the three workforce levels of employees. We used figures from the 1990 census because this was the comparative baseline used by the Service and by Aguirre International in its study. We recognize there are more recent estimates that would have accounted for the changes in the population, especially in the Hispanic and Asian subpopulations in certain areas. However, these estimates are not broken down into a geographic level that is comparable to Service performance clusters. Regarding promotions to women and minorities as well as the Aguirre report’s finding of a glass ceiling at EAS 17 and above positions, we did several analyses: First, we considered how the representation of each of the 10 EEO groups in EAS 17 and above positions had changed between fiscal years 1993 and 1997. Second, we considered whether the percentage of employees in each of the 10 EEO groups (i.e., white, black, Hispanic, Asian, and Native American men and women) that were promoted to EAS 17 and above positions during fiscal year 1997 were greater or less than the percentages of employees in each of the 10 EEO groups that were employed in those positions at the beginning of fiscal year 1997 (before the promotions). We computed a ratio statistic to express the percentage of employees in each of the 10 EEO groups that were promoted to EAS 17 and above positions during fiscal year 1997 compared with the percentage of employees in each group already employed in EAS 17 and above positions before the promotions. The positive ratio of 1.23 for black men, for example, was the percentage of all promotions going to black men (10.85 percent) divided by the percentage of the cluster-level workforce, which was black men at EAS 17 and above (8.81 percent) at the beginning of fiscal year 1997. These same comparisons and ratios were done separately for cluster, headquarters, and area office employees. Finally, we considered how the representation of the various groups of women and minorities in higher level EAS positions (17 through 30) compared with their representation in the lower level EAS positions (11 through 16). To provide observations on the methodology used by Aguirre International in its study of workforce diversity at the Service, we reviewed the Aguirre report and the methodologies used in relation to the study’s objectives, limitations, and findings. In addition, we reviewed both the comments from the Advisory Diversity Team on Aguirre’s draft report and Aguirre’s response to Service questions. We also interviewed the Project Director for the Aguirre study. We reviewed a copy of the contract and statement of work between the Service and Aguirre International, and discussed the report with the two secretaries to the Board of Governors. We also looked at the Aguirre study’s methodology in relation to the U.S. Equal Employment Opportunity Commission’s guidance and our previous work on diversity-related issues. To provide information on the status of the Service’s efforts to address the Aguirre report’s recommendations, we reviewed the Service’s response to the study as well as several status reports prepared by the Diversity Oversight Committee, which is a Servicewide committee established to oversee the implementation of the Service’s response to the Aguirre report. We also interviewed the Vice President of Diversity Development as well as the manager in charge of the Supplier Development and Diversity program in the Purchasing and Materials Department concerning the Aguirre report’s recommendations, among other things. We reviewed the Service’s action plan, which laid out 23 initiatives and was prepared in response to the Aguirre report. We limited our verification of the implementation status of the 23 initiatives to obtaining and reviewing available relevant documents, such as plans and directives, prepared by the Service. To determine whether the Service could improve its capture and use of diversity-related data, we reviewed (1) diversity-related data historically collected and used by the Service; (2) Aguirre’s recommendations related to data collection and the Service’s response to them; (3) Service documents prepared in response to the Results Act; and (4) Service documents related to the AFTS. In addition, we interviewed knowledgeable Service officials and Aguirre’s Project Director. We did our work from July 1998 through January 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postmaster General and Aguirre International’s Director of Operations. The Postal Service’s oral comments and Aguirre’s written comments are discussed near the end of the letter. The following tables present information on women and minority representation at the three Service workforce levels—the cluster, headquarters, and area office levels—and includes the following comparisons for women and minorities: representation at the three workforce levels as of the end of fiscal year 1997 compared with their representation in the 1990 CLF (table II.1); changes in women and minority representation at EAS 17 and above positions at the three workforce levels for fiscal years 1993 and 1997 (table II.2); promotions to EAS 17 and above positions as of the end of fiscal year 1997 compared with women and minority representation in those positions at all three workforce levels during fiscal year 1997 before the promotions (table II.3); and women and minority representation in EAS 17 and above positions compared with their representation in EAS 11 through 16 positions (table II.4). Table II.1 shows that when comparing Service data as of the end of fiscal year 1997 with CLF data from the 1990 decennial census, black and Asian men and women were fully represented, while white and Hispanic women and Native American men were underrepresented at headquarters, in the area offices, and among cluster-level employees. Native American women were also underrepresented among the large group of cluster employees as well as among headquarters personnel. In addition, white men were underrepresented among area office employees, while Hispanic men were underrepresented at the headquarters and area office levels. As shown in table II.2, we determined how the representation of the 10 EEO groups in the higher EAS positions had changed between fiscal years 1993 and 1997. White and black men were the only EEO groups that decreased in their representation among all three workforce levels at EAS 17 and above positions during this period. Native American men also decreased in their representation among employees at high-level EAS positions at headquarters and area offices, and Asian men decreased slightly in their representation among employees at high-level EAS positions at the area offices. As shown in table II.3, we determined whether the percentages of employees in each of the 10 EEO groups that were promoted to EAS 17 and above positions during fiscal year 1997 were greater or less than the percentages of employees in each of the 10 EEO groups employed at those levels at the beginning of fiscal year 1997 (before the promotions). Asian women were the only group other than white men, among cluster- level employees, who were not promoted during fiscal year 1997 to EAS 17 and above positions in numbers that would have been sufficient to increase their representation in those higher EAS positions. This was also true for black men, Asian women, and Native American men among headquarters’ employees. Among area office employees, the percentages of white women and Hispanic and Native American men and women promoted to EAS 17 and above positions were not as large as the percentages employed at those higher levels. White men were the only group for which percentages of promotions to 17 and above positions were lower than the percentages of white men already employed in those positions across all three workforce levels. As shown in table II.4, we determined whether, as of the end of fiscal year 1997, the representation of various EEO groups of minority men and women employed in EAS 17 and above positions resembled their representation in EAS 11 through 16 positions. Among cluster-level employees and headquarters employees, all EEO groups of women—but none of the groups of men, except black men at headquarters and Asian men at the cluster level—were less well represented in EAS 17 through 30 positions than they were in EAS 11 through 16 positions. Among area office employees, Hispanic men and Asian and Native American men and women fared better while black men, similar to black and Hispanic women, were less well represented in EAS 17 and above positions compared with the EAS 11 through 16 positions. Table III.1 provides the details of the primary methodologies used by Aguirre researchers to develop answers to the eight research questions on which the study was based. As shown in the table, Aguirre researchers used multiple methods to research the questions, including extensive data analysis. Table III.1: Aguirre Study’s Eight Research Areas and the Methodological Approach Taken Eight research areas (1) How does the composition of the postal workforce by race/national origin and gender compare to the population nationally and locally? Methodologies used by Aguirre researchers Developed statistical analysis of (1) Census CLF dataand (2) Service workforce data at national and local levels Created models for mapping Census data into race and national origin Did Service workforce trend analysis Reviewed Service written policies and practices for hiring Interviewed Service national and local staff Analyzed Service workforce data Compared local Service workforce data with CLF data Interviewed potential employees (3) Does the Diversity Reporting System provide accurate information on the race and national origin of Service employees? Reviewed written Service policies and practices in assigning employees to race/national origin categories; also interviewed relevant Service staff at national and local levels Analyzed two data files: Active Employee Reference file and Personnel Actions file, extracted from Notice of Personnel Action, Form 50 Surveyed sample of employees selected from Diversity Reporting System to verify race and national origin (4) Do promotion policies and practices result in promotions that are proportionate to the number of minority groups represented in the workforce, nationally and locally? Reviewed Service’s written policies and practices for promotions Interviewed Service staff at national and local levels Analyzed Service workforce data for distribution of annual promotions by level, EEO group, and compared the data with CLF data (5) How well do Training and Development Programs address diversity needs? Interviewed training and diversity staff in each of the 10 sites as well as in (6) How effectively does Postal Service contracting and subcontracting with minority-owned business support diversity goals, nationally and locally? Eight research areas (7) How does the Postal Service Diversity Program compare with those of other large organizations? Methodologies used by Aguirre researchers Compared Service’s diversity program in the area of contracting with that of Compared Service’s diversity program with those of other companies that have achieved success with diversity (e.g., Motorola, Allstate, and Harvard Pilgrim Health Care) (8) What strategic direction should the Diversity Program take? Identified best practices used by other organizations in the private sector reported to have successful diversity programs Identified promising practices used in Service’s Diversity program Identified certain organizations’ diversity programs/objectives as models against which the Service can compare its strategies, etc. William R. Chatlos, Senior Social Science Analyst Douglas Sloane, Senior Social Science Analyst Hazel Bailey, Evaluator (Communications Analyst) Sherrill H. Johnson, Assistant Director Billy W. Scott, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO reviewed the promotion of women and minorities to high-level Executive and Administrative Schedule (EAS) management positions (EAS 17 and above) in the U.S. Postal Service (USPS), focusing on: (1) the overall extent to which women and minorities have been promoted to or are represented in EAS 17 and above positions in USPS; (2) GAO's observations on the methodology used by a private contractor, Aguirre International, to study workforce diversity at USPS; (3) the status of USPS' efforts to address the recommendations contained in the Aguirre report; and (4) GAO's analysis of whether USPS could better capture and use data to achieve its diversity objectives. GAO noted that: (1) at the end of fiscal year (FY) 1997, black and Asian men and women and Hispanic men were fully represented while Hispanic women, Native American men and women, and white women were underrepresented in USPS at the cluster level when compared with the civilian labor force; (2) representation of women and minorities at the cluster level in EAS 17 and above positions increased between fiscal years (FY) 1993 and 1997, with the exception of black men whose representation decreased; (3) in FY 1997, women and all minority groups, except Asian women, at the cluster lever were promoted to EAS 17 and above positions at higher rates than women and minority groups were represented in those EAS positions; (4) despite this progress, the overall representation of women and minorities at the cluster level in EAS 17 and above positions was almost 20 percent lower than their representation in EAS 11 through 16 positions at the end of (FY) 1997; (5) similar comparisons at the headquarters and area office workforce levels showed some variations regarding the representation of specific equal employment opportunity (EEO) groups; (6) GAO believes that the methodologies used by Aguirre International were generally reasonable, appropriate, and relevant given the parameters established for the study and the complexities surrounding the sensitive issue of diversity in such a large organization; (7) however, GAO believes that Aguirre's finding of a glass ceiling beginning at EAS 17 positions could be misleading; (8) USPS reviewed the Aguirre report and developed 23 initiatives that it believed addresses the report's major issues and recommendations; (9) USPS believes its 23 initiatives will significantly strengthen its diversity program and address most of Aguirre's concerns; (10) USPS believes that it is generally on or ahead of its schedule for implementing these initiatives; (11) by the spring of 1999, USPS plans to create an ongoing monitoring process to ensure full implementation of its initiatives, which will result in revised scopes, completion dates, and implementation status for some of the initiatives; (12) USPS has recently developed broad goals and objectives for its diversity program, but it has not yet established specific targets and measures for determining its progress toward meeting its diversity goals and objectives; and (13) USPS officials said that specific targets and measures would be established no later than March 30, 1999.

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DOD defines an MWD as any canine bred, procured, or acquired to meet DOD’s requirements to support operations in the protection of installations, resources, and personnel. These requirements include explosive and illegal narcotic detection capabilities, patrol, tracking, and other requirements. As part of their duties, MWDs can be deployed to assist in operations outside of their assigned military installation. MWDs are removed from service when they can no longer perform their duties due to medical or behavior problems, when they are no longer needed by the military, or in other circumstances, such as when a handler dies in action. In 2000, a law commonly known as “Robby’s Law” was enacted to promote the adoption of MWDs after their military service. According to this law, the military shall make an MWD that is suitable for adoption available for adoption at the end of the dog’s “useful life” or when the dog is no longer needed by the department. Robby’s Law has been amended a number of times since first enacted. Most recently, the NDAA for FY 2016 established priorities among the authorized recipients of MWDs that are removed from service. The amendment generally requires that MWDs be made available first to former handlers, who care for and train the MWDs. The amendment gives second priority to others capable of humanely caring for the MWD, and, finally, it gives the lowest priority to law enforcement agencies. After an MWD is adopted, Robby’s Law provides that “the United States shall not be liable for any veterinary expense associated with (an adopted MWD) for a condition of the military animal before transfer” regardless of whether the condition is known at the time of adoption. While DOD is authorized to establish and maintain a veterinary care system for adopted MWDs, no federal funds may be used for this purpose. DOD uses the term “disposition” to describe the process of removing MWDs from service. Disposition of MWDs can be initiated at any military location that has an MWD program. All the military services follow the same process outlined in Air Force Instruction 31-126, which includes the policies and procedures for the MWD program. (See fig. 1.) All decisions regarding the removal of MWDs from service are made by a review board, which includes the Commander of the Air Force’s 341st Training Squadron, a representative of the 341st Training Squadron or designee, a Veterinary Corps Officer (Army veterinarian), and a Veterinary Corps Officer behavioral representative (an Army veterinarian who is trained in animal behavior). Air Force officials told us that the review board may also consult with the Kennel Master, who manages the kennel at the military installation where the MWD is located, as well as the veterinary staff at Joint Base San Antonio, Texas, when making decisions about removing an MWD from service. Air Force officials told us that handlers who are interested in adopting an MWD must communicate their interest to the Kennel Master where the MWD is located. The Kennel Master is responsible for annotating WDMS to show the handler’s interest in adoption, including adding the handler’s name and contact information. The handler is responsible for maintaining contact with the Kennel Master and updating this contact information, if needed. In the event that multiple handlers are interested in adopting the MWD, the Unit Commander of the entity that owns the MWD is responsible for determining which handler is in the best interest of the MWD. Air Force officials told us that in these cases, the most recent handler would typically adopt the MWD. Air Force officials told us that they are in the process of updating their adoption policy. For example, the new policy outlines a method for recording whether or not the MWD was adopted by a former handler. They also told us they plan to update the MWD service record to include a checkbox to indicate whether the MWD was adopted by a handler, and that these service records will be scanned into WDMS. Officials have told us that these procedures will be implemented when the updated Air Force Instruction becomes effective, likely in the spring of 2017. The Army Veterinary Service has the lead responsibility for the medical care of all DOD-owned animals, including MWDs. Specifically, the Army provides medical care for MWDs through its Public Health Command Regions and Activities and the DOD MWD Veterinary Service at Joint Base San Antonio, Texas. During the MWD disposition process, Army Veterinary Corps Officers are responsible for providing a recommendation letter and a consultation/referral form that describes each MWD’s medical condition and suitability for adoption. The Army also maintains a veterinary care system that provides medical care to privately owned animals of individuals with access to medical services at a military installation, including adopted MWDs. The Army charges individuals with privately owned animals for the medical care of their pets. According to Army officials, the charges for veterinary care were developed based on a review of supply costs, estimated manpower costs, historical costs for services, and recommended guidance on cost considerations established by the American Animal Hospital Association. DOD uses three systems to track different types of information about MWDs, including information related to their removal from service. The number of MWDs that have been adopted, transferred, or euthanized has varied over the past 5 years. Officials from the Air Force and Army use three separate systems to track information on MWDs. Two of the systems—WDMS and the Central Repository—are maintained by the Air Force, while ROVR, the electronic medical record system, is maintained by the Army. (See table 1.) Each of these systems has a different role in documenting information related to an MWD’s removal from service. WDMS documents the MWD’s status when it is removed from service, including whether the MWD is adopted, transferred, or euthanized. This status of the MWD can be verified using documents maintained in the Central Repository, which is used to store copies of records for MWDs that have been removed from service—most of which are not contained in WDMS. Lastly, ROVR is used to provide medical information for consideration of an MWD’s removal from service and to document an MWD’s euthanization, if needed. Based on our review of data from these systems and related documentation, the number of MWDs adopted or transferred during 2011 through 2015 varied, with the highest numbers in 2012 and 2013. An Air Force official explained that these higher numbers of adoptions and transfers in 2012 and 2013 were due to a decreased need for MWDs during deployments. The number of euthanized MWDs varied to a lesser extent. (See figure 2.) Some of the adopted MWDs included in these data were likely never deployed outside of their assigned military installations. According to Air Force officials, some MWDs may have been acquired by the military but then did not qualify for enrollment in the MWD program due to performance or medical reasons. Other MWDs were enrolled in the program but were removed from service for similar reasons before they were 3 years old. According to Air Force officials, these dogs were also likely never deployed into service. (See table 2.) Available data for 55 percent of the MWDs adopted in 2014 and 2015 indicate that prevalent medical conditions included skin, dental, and musculoskeletal issues. The potential costs for treating these prevalent medical conditions are difficult to determine due to variations in potential courses of treatment and other factors. However, we did obtain information on recommended preventative care and estimated costs for older breeds used by the MWD program from the chief of staff of a network of private veterinary hospitals. Based on our analysis of electronic medical records with master problem lists—available for approximately 55 percent (421 of 772) of the MWDs adopted in 2014 and 2015—we found that the most prevalent medical conditions were as follows: skin conditions or ear infections, dental disease or injury, arthritis or degenerative joint disease, degenerative lumbo-sacral stenosis. Some MWDs had more than one medical condition, and as a result, they may have been included in more than one category. (See table 3.) An Army veterinarian told us that “skin conditions or ear infections” and “dental disease or injury”—the two most prevalent medical conditions we identified—are unlikely to result in removal from service as these conditions generally can be treated or resolved. (See prevalent medical conditions 1 and 2 in table 3.) The remaining three prevalent medical conditions we identified are associated with musculoskeletal issues and are more likely to result in MWDs’ removal from service. (See prevalent medical conditions 3, 4, and 5 in table 3.) According to an Army veterinarian, these conditions are common in breeds maintained by the MWD program. For example, degenerative lumbo-sacral stenosis is common in German Shepherd dogs, one of the preferred breeds for the MWD program. The potential costs for treating these prevalent medical conditions may vary based on a number of factors, including the course of treatment, the underlying cause for the condition, and geographic location. According to an Army official and representatives from a national network of private veterinary hospitals, there are no standardized medical treatment protocols for animals that would dictate particular courses of treatment for specific medical conditions. Therefore, costs for these conditions would vary. Furthermore, the chief of staff of a network of private veterinary hospitals in New Jersey, which provides free specialty care to adopted MWDs in its area, told us that it would be difficult to estimate treatment costs because some of the prevalent health conditions we identified for MWDs could have different underlying causes, which would serve as the basis for treatment options and costs. For example, lameness could have different root causes, so it would be difficult to estimate treatment costs for this condition without knowing the contributing factors. Adopted MWDs need preventative care regardless of their medical conditions. Based on our analysis, the average age of most MWDs that had electronic medical records with master problem lists in ROVR and were adopted during 2014 and 2015 was about 9 years old, with a range from 1 to 14 years. The chief of staff of a private network of veterinary hospitals in New Jersey provided us with the types of preventative care they recommend for 9-year old Labrador Retrievers, Belgian Malinois, and German Shepherd dogs—the most common breeds used by the MWD program. The chief of staff also provided estimated costs for these procedures, which are specific to this private network of veterinary hospitals. (See table 4.) An Army veterinarian reviewed the information provided by the chief of staff and concurred that the identified procedures and costs were reasonable. Although owners of adopted MWDs are responsible for the costs of their care, some assistance with privately provided veterinary care is available through nonprofit organizations. Individuals with access to DOD medical care may also purchase care for their adopted MWDs at military installations. However, the types of available veterinary services vary by military installation, and some installations do not offer veterinary services. Owners of adopted MWDs may obtain assistance with privately provided veterinary care through nonprofit organizations. Assistance for adopted MWDs is primarily available through the U.S. War Dogs Association, an organization that offers (1) a prescription drug program (free prescription drugs for registered MWDs), (2) free specialty care through Red Bank Veterinary Hospital in New Jersey, and (3) financial assistance of up to $500 for emergency care and up to $100 for euthanasia. About 400 former MWDs were registered with the association as of August 2016, according to the association’s president. In addition to assistance with medical care, the association also finds new homes for adopted MWDs when the owners are no longer able to take care of them. According to Air Force officials, individuals who adopt MWDs receive information about the U.S. War Dogs Association at the time of adoption. These officials told us that this is the only nonprofit organization’s information they provide to individuals adopting MWDs. Other nonprofit organizations that inquire about adopted MWDs are directed to contact the U.S. War Dogs Association. Some assistance with privately provided medical care is also available through other organizations, such as the American Humane organization, which helps cover some medical costs for adopted MWDs when their owners are unable to pay for their care. Officials from this organization told us they currently cover medical care costs for about 21 former MWDs. Information about potential services provided by the American Humane organization is available on its website. Owners of adopted MWDs may purchase veterinary services through DOD if they have access to medical services at military installations. According to an Army official, access to medical care is generally available for active duty servicemembers, their dependents, retirees and their dependents, as well as reservists on active orders. However, the types of veterinary services offered vary by military installation, and some installations do not offer any veterinary services. (See table 5.) The Army’s Public Health Center maintains an interactive map on its website that provides information about the types of veterinary services that are available at military installations. According to an Army official, the link for this interactive map is listed on all veterinary service newsletters, brochures, and posters. This website has also been publicized in an Army newsletter for retired soldiers, surviving spouses, and family. We provided a draft of this report to DOD for comment. DOD concurred with the report and provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committee, and the Secretaries of Defense, the Air Force, and the Army. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in the appendix. In addition to the contact named above, Bonnie Anderson, Assistant Director; Danielle Bernstein, Analyst-in-Charge; Jennie Apter; and Kenisha Cantrell made key contributions to this report. Also contributing were Jennifer Rudisill and Mary Denigan-Macauley.

DOD has used MWDs since World War II to assist and protect servicemembers at installations within the United States and at deployment sites worldwide. As of October 2016, about 1,800 MWDs were in service. The Air Force is responsible for procuring and assigning all MWDs for the military. The Army is responsible for the medical care of all military animals, including MWDs. Questions have been raised as to whether MWDs' experiences during deployment may result in conditions that pose future health challenges. Based on those questions, a House Report accompanying the proposed version of the National Defense Authorization Act for Fiscal Year 2017 included a provision for GAO to assess end-of-service veterinary care for MWDs. This report examines (1) how DOD tracks information about MWDs, and how many MWDs were adopted, transferred, or euthanized over the past 5 years (2011-2015); (2) prevalent medical conditions of adopted MWDs for 2014 and 2015; and (3) what assistance is available for individuals who adopt MWDs. GAO obtained and analyzed data from the three systems used to track information on MWDs, observed system demonstrations, interviewed Air Force and Army officials, and reviewed related documentation. GAO also interviewed relevant nonprofit organizations that provide assistance to individuals who adopt MWDs. DOD concurred with the report and provided technical comments, which GAO incorporated as appropriate. The Department of Defense (DOD) uses three systems to track information about Military Working Dogs (MWDs), including information related to their removal from service at which time they can be put up for adoption, transferred to a law enforcement agency, or euthanized for health or behavioral reasons. According to an Air Force official, the number of MWDs adopted or transferred over the past 5 years (2011 through 2015) varied based on changes in deployment needs. The number of euthanized MWDs varied to a lesser extent. Based on medical data available for 421 of 772 MWDs adopted during 2014 and 2015, GAO found that the most prevalent medical conditions included skin and dental issues. An Army veterinarian told GAO that these medical conditions are unlikely to result in MWDs' removal from service as these conditions generally can be treated or resolved. Other prevalent medical conditions, such as arthritis, are associated with musculoskeletal issues, which are more likely to result in MWDs' removal from service. The veterinarian told us these types of musculoskeletal issues are common in breeds maintained by the MWD program, which include Labrador Retrievers, Belgian Malinois, and German Shepherd dogs. While owners of adopted MWDs are responsible for the costs of veterinary care, some assistance with these costs is available through nonprofit organizations, such as the U.S. War Dogs Association. Individuals with access to DOD medical care—such as active-duty servicemembers and their dependents—may also purchase care for their adopted MWDs at veterinary clinics located at military installations. However, the types of veterinary services vary by installation, and some installations do not offer any veterinary services.

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The Comanche program was established in 1983 to replace the Army’s light helicopter fleet. The contractor team of Sikorsky Aircraft Corporation and Boeing Helicopter Company were expected to design a low-cost, lightweight, advanced technology helicopter capable of performing the primary missions of armed reconnaissance and attack. Critical to achieving these capabilities are the successful development of advanced technologies, including composite materials, advanced avionics and propulsion systems, and sophisticated software and hardware. The Army must meet ambitious maintainability goals in order to (1) realize significantly lower operating and support costs predicted for this program and (2) achieve a wartime operational availability for the Comanche of 6 hours per day. In December 1994, the Secretary of Defense directed the Army to restructure the Comanche helicopter program as part of efforts to meet budgetary constraints. The Secretary’s restructure decision reduced funding for the program from $4.2 billion to $2.2 billion for fiscal years 1996 through 2001. In addition to extending the development phase by 3 years, it also called for two flyable prototypes to be produced and the Comanche production decision to be deferred. In response to the Secretary’s decision, the Army proposed a program restructure that would allow it to acquire, within the Secretary’s funding constraint, six aircraft in addition to the two prototypes by deferring developmental efforts to fiscal year 2002 and beyond. DOD approved the proposal in March 1995. The Army’s restructuring of the Comanche program continues risks (1) associated with making production decisions before knowing whether the aircraft will be able to perform as required and (2) of higher program costs. According to DOD’s April 1990 guidelines for determining degrees of concurrency, a program with high concurrency typically proceeds into low-rate initial production before significant initial operational test and evaluation is completed. Regarding the need to keep concurrency low, the guidelines note that establishing programs with no concurrency, or a low degree of concurrency, avoids the risks that (1) production items have to be retrofitted to make them work properly and (2) system design will not be thoroughly tested. As we recently reported, aircraft systems, including the T-45A and C-17, that entered low-rate initial production before successfully completing initial operational testing and evaluation experienced significant and sometimes costly modifications to achieve satisfactory performance. Under the Army’s restructured program, operational testing will not begin until after the low-rate initial production decision is made, continuing the risks associated with the highly concurrent Comanche program. In responding to the Secretary’s restructure decision, the Army proposed, and was subsequently granted approval, to buy six “early operational capability” aircraft, in addition to the two prototypes that were to be acquired under the Secretary’s decision. According to program officials, these aircraft are estimated to cost in excess of $300 million. The Army does not consider these aircraft as either prototype or low-rate initial production aircraft; however, program officials believe that when these aircraft are fielded, the Army will be able to better evaluate the Comanche’s mission capability. The Army intends to fund these aircraft by deferring additional developmental efforts to fiscal years 2002 and beyond. Under the Army’s restructured program, operational testing will not begin until well after funds are committed to buy production aircraft. Armed reconnaissance and attack mission equipment packages are to be integrated into the six early operational aircraft by fiscal year 2004. The Army plans to use these aircraft to start operational testing by about August 2005. However, long-lead production decisions are scheduled for November 2003, and low-rate initial production is planned to start in November 2004, about 9 months before operational testing begins. According to DOD’s guidelines, the amount of risk associated with concurrency can be limited by reducing production aircraft to the minimum necessary to perform initial operational testing. The Army maintains that under the stretched out program it can conduct initial operational testing with the six early operational aircraft. Because the restructure has provided the additional time and aircraft, the Army has an opportunity to significantly reduce or eliminate program concurrency and its associated risks by completing operational testing before committing funds to any production decisions. The Comanche was originally justified to the Congress as a relatively inexpensive aircraft. However, since 1985, the program has experienced significant increases in program acquisition unit cost. Funding reductions have caused the program to undergo significant restructuring, resulting in sharp decreases in planned acquisition quantities and lengthening of development schedules, thereby increasing Comanche program costs. In 1985, the Comanche had estimated total program acquisition costs of about $61 billion for 5,023 aircraft (or $12.1 million per aircraft). In 1992, we reported that (1) as of October 1991, the program acquisition unit cost had increased to $27.4 million, (2) acquisition quantities had been reduced to 1,292 aircraft, and (3) future increases in cost per aircraft were likely.As of February 1995, the Comanche’s estimated program acquisition unit cost was $34.4 million per aircraft, a 185-percent increase from the 1985 estimate. The estimated total program acquisition cost for the planned acquisition of 1,292 aircraft is now more than $44 billion. Both the Secretary’s decision and the Army’s restructure would extend the development program by about 3 years and, under either, increase the risk of higher total program cost and cost per aircraft. However, in reviewing the Army’s restructure proposal, DOD noted some concern over Comanche program costs for fiscal year 2002 and beyond and the large increase in investment programs projected to occur about that time. We are also concerned that the Army’s plan to defer additional developmental efforts to fiscal year 2002 and beyond may increase the risk that needed funds may not be available to perform the deferred developmental effort. The Comanche program’s uncertainties in software development and aircraft maintainability increase the risk that the aircraft will not perform successfully. We believe the restructuring provides additional time to resolve these issues before the decision to enter production is made. The Comanche will be the most computerized, software-intensive Army helicopter ever built. The Army estimates that about 1.4 million lines of code are required to perform and integrate mission critical functions. With additional ground support and training software to be developed, the total program will have more than 2.7 million lines of code. This compares to about 573,000 lines of code for the upgraded Apache attack helicopter with fire control radar. The Army estimates 95 percent of the Comanche’s total software will be written in Ada, a DOD-developed programming language. The Army plans to demonstrate initial software performance with the mission equipment package, which includes the flight control system, during first flight of the Comanche, scheduled for November 1995. The development and integration of on-board, embedded computer systems is a significant program objective. The Comanche’s performance and capability depend heavily on these systems and efforts have been ongoing to solve the problems associated with these systems. Nevertheless, (1) software development problems still exist with the Ada compilation system, (2) delays in software development and testing are occurring, and (3) improvements are needed in configuration management. If these issues are not resolved, the aircraft’s performance and capability will be degraded and first flight could be delayed. Almost all of the Comanche software will be developed in the Ada programming language; however, software developers are not using the same version of the Ada compilation system. The Ada compilation system translates Ada code into machine language so that software can be used by the Comanche’s computers. For example, it is being used to help develop software for use on the mission equipment package that is critical for first flight. Subcontractors and the contractor team should be using the same, qualified version of this compilation system to ensure effective software integration. However, fixes to individual compiler software problems are not being shared with all developers; therefore, they are not using a common compilation system. These problems have already delayed qualification testing of the compilation system by 1 year. The lack of a uniform, qualified compilation system among software developers could put first flight at risk, according to the Defense Plant Representative Office. Problems with software integration may show up once integration testing begins in the June to November 1995 time frame. If that occurs, there may not be time to fix problems prior to scheduled first flight. The program is experiencing high turnover of software engineers at one of the contractor team’s facilities. In its December 1994, monthly assessment report, the Defense Plant Representative Office, which is responsible for contract oversight, observed that high turnover of software personnel was putting scheduled first flight at risk. Loss of key personnel has already contributed to schedule slippage in several critical software development areas. Software development for the following areas has been affected: the airborne engine monitoring system, aircraft systems management, control database, and crewstation interface management. The contractor team has formulated a “get well” plan that is dependent on being able to hire additional personnel in these areas. However, hiring additional qualified personnel is difficult, according to the Defense Plant Representative Office, because employment would be short term. The flight control system software verification testing is also being delayed. As of February 8, 1995, Boeing had conducted only 163 of approximately 500 tests originally planned to be completed by that date. The subcontractor responsible for developing this software has been late delivering software for testing and has provided faulty software to Boeing, according to the Defense Plant Representative Office. Boeing established a recovery plan for this area that would have resulted in a completion date in March 1995—about a 1-month delay from the original plan. However, in February 1995, the contractor revised the recovery plan to reflect a completion date of July 1995—a 5-month delay. The flight control system is critical to first flight, according to the Defense Plant Representative Office. However, because of delays with verification testing, the Defense Plant Representative Office is concerned that the remaining verification testing, as well as, the validation and formal qualification testing will not be completed in a timely manner. As a result, first flight may be delayed. Boeing is scheduled to complete these tests prior to first flight. According to the program office, Boeing’s plan to complete the testing calls for it to be conducted concurrently. If major problems occur in any one of the testing phases, there may not be enough time to fix the problem and complete all testing before first flight. Configuration management is the discipline of applying technical and administrative direction and surveillance to (a) control the flow of information between organizations and activities within a project; (b) manage the ownership of, and changes to, controlled information; (c) ensure information consistency; and (d) enable product release, acceptance, and maintenance. The part of configuration management used to report software problems and changes among the contractor team and subcontractors has shortcomings that put software development at risk. In its November 1994 monthly assessment report, the Defense Plant Representative Office observed that the lack of a common problem reporting system made proper handling of software related changes difficult. Furthermore, the report noted that this situation could adversely impact scheduled first flight of the Comanche. As of February 1995, the contractor team still did not have a common, automated database available to track problem change reports. Thus, the contractor team, as well as subcontractors, did not have visibility over changes made to software. Maintainability requirements are important to achieving lower operating and support costs and wartime availability goals. However, these goals are at risk because key maintainability requirements such as direct maintenance man-hours per flight hour (MMH/FH), the mean time to repair (MTTR), and fault isolation may not be achievable. Individually, failure to meet these parameters may not be a significant problem; however, collectively they affect the ability of the Comanche to achieve lower operating and support cost and wartime availability objectives. In March 1987, the Army established a 2.6 direct MMH/FH requirement for the Comanche. It represents the corrective and preventive maintenance per flight hour expected to be performed at the unit level. The Army formulated its planned wartime operating tempo for a Comanche battalion based on 6 hours a day per aircraft, or 2,200 flying hours per year. It then determined the maintenance factor needed to support this operating tempo—2.6 MMH/FH. As the MMH/FH level increases, the number of maintainers needed to sustain the 2,200 wartime flying hour goal increases, as do operating and support costs. Conversely, if the Army could not increase the number of maintainers, the planned operating tempo would have to be reduced. The reasonableness of the Comanche’s 2.6 direct MMH/FH requirement has been debated for several years within the Army and DOD. Representatives from the program office; the Army Materiel Systems Analysis Activity, which independently evaluates program testing results; the Office of the Assistant Secretary of the Army for Research, Development, and Acquisition; and the Army Cost and Economic Analysis Center met on October 28, 1994, to discuss the direct MMH/FH goal for the Comanche program. They agreed that the 2.6-MMH/FH requirement was not a realistic, achievable goal. Consequently, Army officials reached consensus and agreed on 3.2 direct MMH/FH as the Army-wide position for this parameter. However, during these discussions, Army Materiel Systems Analysis Activity personnel noted that attaining a 3.2-MMH/FH goal represented a medium to high risk, while a 4.3-MMH/FH goal had a low to medium risk. Increasing the maintenance factor increased the number of maintainers needed and will increase estimated operating and support costs by about $800 million over a 20-year period. The direct MMH/FH requirement does not represent the total maintenance burden for the Comanche because it does not include indirect maintenance time. The Army does not normally collect data on indirect maintenance time. According to the program office, its best estimate of indirect maintenance time, following Army guidance, is 2.5 MMH/FH, and this figure has been used for calculating manpower needs for crew chief personnel on the Comanche. Thus, the total maintenance burden assumed for the Comanche is currently 5.7 MMH/FH (3.2 direct MMH/FH plus 2.5 indirect MMH/FH). To minimize turnaround time for repairs at the unit and depot, the Army established MTTR requirements of 52 minutes for repairs at the unit level and up to 12 hours at the depot level for the Comanche. These requirements represents the average time expected to diagnose a fault, remove and repair an item, and perform an operational check and/or test flight. We determined that any increase in MTTR above 1 hour will begin to impact the Army’s wartime availability goal of 2,200 hours per year, unless additional maintenance personnel are available. As of January 1995, the contractor team was estimating that the Army would achieve 59 minutes for unit level repairs. According to contractor team officials, the requirement was not being met because the cure time required for composite material used on the aircraft was greater than expected. The contractor team discussed changing the MTTR requirement to 1 hour; however, the program office believes the problem could be resolved and did not believe the specification should be changed. The contractor team has not yet developed MTTR estimates for depot-level repair. The Comanche’s diagnostic system is required to correctly isolate failed mechanical and electrical components at least 80 percent of the time with a high degree of accuracy. A high level of accuracy is essential as it allows maintainers to isolate and fix problems at the unit level. If the fault isolation requirement is not met, the Comanche is unlikely to achieve its MTTR requirement, thereby adversely affecting the Army’s ability to execute its maintenance concept and its wartime availability goals. Contractor team officials stated the fault isolation requirement was very optimistic, and although they are striving to meet this requirement, it may eventually have to be changed. As of January 1995, the contractor team predicted the system could achieve an overall 69-percent fault isolation rate; however, this rate would not meet the specification for mechanical and electrical component fault isolation. There are design limitations on two components, according to the program office, and changes to bring these components into conformance with specifications would be costly and increase the weight of the aircraft. Therefore, as of January 1995, the contractor team and the program office have agreed not to take action on these components. The Army established a requirement of a 1-percent false removal rate for the Comanche. A false removal occurs when a part removed from the aircraft shows no evidence of failure when tested. This requirement is dependent, to a large extent, on the success of the fault detection/isolation system in detecting and isolating failed components. Program personnel characterize the 1-percent requirement as stringent and one that will be challenging to achieve. An Army Materiel Systems Analysis Activity official believes some design improvements have occurred in this area, but the risk associated with achieving this requirement still remains high. If the Comanche does not meet this requirement, estimated operating and support costs for the Comanche will be higher than previously predicted. The Army has not had good experience in developing fault detection/isolation and false removal systems for other aircraft. In September 1990, we reported that the fault detection and isolation system on the Apache aircraft did not always accurately detect the component that caused a particular fault, and the system detected faults that did not actually exist about 40 percent of the time. As a result, Apache maintainers had to perform additional work to locate failed components. Recently, through a reliability program, the false removal rate for the targeting and night vision systems on the Apache improved to about 10 to 15 percent, according to Army officials. This is still significantly higher than the 1-percent requirement established for the Comanche program. Although the program is experiencing technical problems, it is currently meeting its goals of reducing maintenance levels and keeping overall weight growth within acceptable limits for the Comanche. The Army’s maintenance concept for the Comanche program is predicated on two levels of maintenance—unit- and depot-level maintenance. This concept is important to achieving operating and support savings predicted for the program because it eliminates the intermediate level of maintenance. Unit-level maintenance entails removing and replacing components required to return the aircraft to a serviceable condition. Depot-level maintenance requires higher level maintenance skills and sophisticated capital equipment and facilities not found at the unit level. The Army traditionally uses a three-level maintenance concept that includes intermediate-level maintenance to handle component repairs. Intermediate-level maintenance is usually located close to the battalion. It is performed on components that cannot be easily repaired at the unit level and do not require the more sophisticated repairs done at the depot level. As of January 1995, no Comanche component had been designated for repair at the intermediate level, according to the program office. Contractor team personnel are conducting repair level analysis on Comanche components to determine whether components should be repaired at unit, intermediate, or depot facilities, according to program and contractor team officials. Any candidates identified for intermediate-level repair are reviewed for possible design changes that could allow maintenance at the unit or depot level. If economically feasible, the contractor team will make design changes to the component to preclude the need for intermediate-level repair. As of February 7, 1995, the Comanche’s empty weight increased from its original specification of 7,500 pounds to 7,883 pounds. Although the Comanche’s weight continues to increase, it remains within the allowable design limit of 7,997 pounds. Weight increases affect vertical rate of climb performance on the Comanche. The Army established a limit of 500 feet-per-minute as the minimum acceptable vertical rate of climb performance. If the Comanche’s weight exceeds 8,231 pounds, the engine will have to be redesigned to produce enough power at 95 percent maximum rated engine power to sustain the minimum 500 feet-per-minute vertical rate of climb requirement. We recommend that the Secretary of Defense require the Army to complete operational testing to validate the Comanche’s operational effectiveness and suitability before committing any funds to acquire long-lead production items or enter low-rate initial production. DOD generally concurred with the findings and original recommendations in our draft report. In commenting on the draft report, DOD offered explanations about why the problems that we identified were occurring and what they were doing to fix those problems. DOD disagreed with the report’s conclusion about false removals and stated that we had not presented any evidence that the Comanche’s 1-percent false removal rate may not be achievable. We still believe that the false removal goal is high risk and adjusted the report to more clearly reflect our concern. Regarding our draft report recommendation that DOD develop program fixes that achieve program goals and reduce the risks we identified, DOD concurred and noted that the approved restructuring will significantly reduce risk. DOD concurred with our other draft recommendation not to commit production funds to the program until performance and mission requirements are met and noted that the program would be reviewed by DOD before approving the Army’s request to proceed to the engineering and manufacturing development phase—the Milestone II decision scheduled for October 2001. Because DOD concurred in our draft report recommendations and is taking action on them, we are no longer including them in this report. However, our analysis of information on the restructuring obtained after we had submitted our draft report to DOD has further heightened our concerns about the risk of concurrency; therefore, we have revised the report and added a new recommendation. Under the stretched out, restructured Comanche program, operational testing is not even scheduled to begin until after the low-rate initial production decision is made. This approach continues the risks associated with making production decisions before knowing whether the aircraft will be able to perform as required. Prior to the restructure, the Army planned to start operational testing with eight aircraft in May 2003. Under the restructured program, the Army plans to start operational testing with six helicopters by about August 2005. We believe that the stretched out time frame and the six aircraft acquired under the restructure provide sufficient time and aircraft to operationally test the Comanche prior to making any production decisions. Additionally, because operational testing is not scheduled until about August 2005, DOD will not be in a position at Milestone II in October 2001 to adequately address whether the Comanche program is meeting its performance requirements. DOD’s comments are presented in their entirety in appendix I, along with our evaluation. To assess cost changes, software development, maintainability, and weight growth issues, we reviewed program documents and interviewed officials from the Department of the Army headquarters, Washington, D.C.; the Comanche Program Manager’s Office, St. Louis, Missouri; the U.S. Army Materiel Systems Analysis Activity, Aberdeen Proving Ground, Maryland; the Ada Validation Facility, Wright-Patterson Air Force Base, Ohio; and the Office of the Assistant Secretary of Defense for Program Analysis and Evaluation, Washington, D.C. We also reviewed program documents and interviewed contractor and Defense Plant Representative Office officials at the Boeing Helicopter Company, Philadelphia, Pennsylvania; the Sikorsky Aircraft Corporation, Stratford, Connecticut; and the Comanche Joint Program Office, Trumbull, Connecticut. We conducted our review between August 1994 and February 1995 in accordance with generally accepted government auditing standards. We are also sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations, the Senate Committee on Governmental Affairs, and the House Committee on Government Reform and Oversight; the Director, Office of Management and Budget; and the Secretaries of Defense and the Army. We will also provide copies to others upon request. This report was prepared under the direction of Thomas J. Schulz, Associate Director, Systems Development and Production Issues. Please contact Mr. Schulz at (202) 512-4841 if you or your staff have any questions concerning this report. Other major contributors to this report are listed in appendix II. The following are GAO’s comments on the Department of Defense’s (DOD) letter dated April 20, 1995. 1. As DOD’s comments note, there are many measures of unit cost, such as average unit flyaway cost, program acquisition unit cost, and unit procurement cost. We believe that the program unit cost that we used in the report—which the footnote in the report defines as total research, development, and acquisition costs in current dollars—is as valid as flyaway cost to portray program cost growth over time. We have adjusted the report to more clearly define the basis of the unit cost we use. 2. These comments are dealt with on pages 11 and 12 of the report and in our responses to the specific DOD comments that follow. Report material on costs and concurrency has been revised to reflect information obtained after our fieldwork had been concluded. 3. The report does not say that maintainability goals will never be met. We pointed out that some key maintainability requirements are not being met and, therefore, there is a risk that the Army may not achieve the lower operating and support costs and wartime availability goals that it has established for this program. We also said that individually, failure to meet these parameters may not be a significant problem; however, collectively they affect the ability of the Comanche to achieve the cost and availability goals. This point is clearly illustrated in DOD’s comments on the failure of the fault isolation system. According to DOD, “Fault isolation is one of the key diagnostic system requirements. The DOD agrees that if the fault isolation requirement is not met, the Comanche is unlikely to achieve its mean-time-to-repair requirement, . . .”. 4. We still believe that this goal is very aggressive. DOD acknowledges that this goal is stringent and the Army has not had good experience in the past with false removals on other aircraft. Additionally, as noted in the report, Army Materiel Systems Analysis Activity said the risk associated with achieving this requirement remains high. We changed the section heading to emphasize the high risk. Gary L. Billen Robert D. Spence Lauri A. Bischof Michael W. Buell Karen A. Rieger The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO reviewed the Army's Comanche helicopter program, focusing on cost and technical issues associated with the restructured program. GAO found that: (1) the past risks associated with the Comanche's development and production will continue under the Army's restructured program; (2) production decisions will be made before operational testing of the Comanche begins and the development phase will be extended beyond fiscal year 2002; (3) the acquisition of six additional aircraft will allow the Army to conduct operational testing before committing funds to any further production decisions; (4) the Comanche's unit costs have tripled in the last 10 years due to program restructuring and a 74-percent decrease in procurement quantities; (5) the Comanche may not meet its wartime availability and operating cost requirements due to technical problems; and (6) the Comanche program is currently meeting its maintenance requirements and weight growth limits.

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The Food Stamp Program provides eligible low-income households with paper coupons or electronic benefits that can be redeemed for food in stores nationwide. FNS funds food stamp benefits and about half of the states’ administrative costs and establishes regulations for implementing the Food Stamp Program. FNS regulations require that states certify household eligibility at least annually and establish requirements for households to report changes that occur after they are certified. Recently, FNS introduced several options and waivers to food stamp rules and regulations in order to increase program access and reduce the reporting burden on working families while minimizing the potential for payment errors. These include options and waivers related to program eligibility, reporting requirements, extending food stamp benefits to households leaving TANF, and options related to TANF recipients. To monitor program accountability, FNS’s quality control system measures states’ performance in accurately determining food stamp eligibility and calculating benefits. States implement the Food Stamp Program by determining whether households meet established limits on gross income and assets, calculating monthly benefits for eligible households, and issuing benefits to households. The actual amount of the food stamp benefit is based on household income after certain deductions—including shelter, dependent care, and child support. To be eligible for benefits, a household’s gross income may not exceed 130 percent of the federal poverty level and the value of its assets may not exceed $2,000. If the household owns a vehicle worth more than $4,650, the excess value is included in calculating the household’s assets. Recipients of TANF cash assistance are automatically eligible for food stamps—a provision referred to as “categorical eligibility” — and do not have to go through a separate food stamp eligibility determination process. In the wake of welfare reform, many needy families that are no longer receiving TANF cash assistance may receive other TANF- funded services or benefits. FNS gave states the option to extend categorical eligibility to families receiving TANF-funded benefits or services. States can determine which TANF-funded services or benefits confer categorical eligibility to food stamps. FNS offers two options that states can use to allow households to own a vehicle worth more than the amount allowed in current regulations and remain eligible for food stamp benefits. One option allows states to replace the federal food stamp vehicle asset rule with the vehicle asset rule from any TANF assistance program, as long as the rule is more liberal than the federal rule. States adopting the rule of a TANF-funded program must apply it to all applicants for food stamp benefits. States can also use the categorical eligibility option as a way to exclude all vehicles, as well as other assets the family may have, from the determination of eligibility for food stamps. This option affects the food stamp eligibility only of families authorized to receive a TANF-funded service or benefit. After eligibility is established, households are certified to be eligible for food stamps for periods ranging from 1 to 24 months, with 3-, 6-, and 12- month periods the most common. The length of the certification period depends on household circumstances, but only households in which all members are elderly or disabled can be certified for more than 12 months. Once the certification period ends, households must reapply for benefits, at which time eligibility and benefit levels are re-determined. Households with stable income are generally given longer certification periods than households with fluctuating income. Prior to welfare reform, federal regulations required households to have a face-to-face interview with an agency worker at each re-certification. Current regulations give states the option to require only one face-to-face interview a year regardless of the length of the certification period. Between certification periods, households must report changes in their circumstances—such as household composition, income, and expenses— that may affect their eligibility or benefit amounts. States determine how frequently households must file reports. A state may require a household to submit a monthly report on their financial circumstances along with required verification even if nothing changed. If a household is not required to file a monthly report, it is required to report changes in income and other circumstances as they occur—called “change reporting.” States can require different types of reporting for different household types and generally require households with earnings to report more frequently than households with no earned income. FNS offers alternatives to monthly and change reporting: quarterly and semiannual reporting. Both of these reporting methods decrease the frequency with which households with earnings are required to report. FNS also offers three waivers to change reporting that reduce the reporting burden on households with earnings. (See table 1.) USDA now provides a transitional benefit option to states to help families leaving TANF retain their food stamp benefits. Because families leaving TANF are no longer automatically eligible for food stamps based on their receipt of TANF cash assistance, they cannot receive food stamps without a re-determination of eligibility. The Transitional Benefit Alternative, introduced in November 2000, gives states the option to continue to provide families with their same food stamp benefit amount for 3 months after they leave welfare. As part of its deliberations on food stamp reauthorization, the Congress is considering extending the transitional benefit to 6 months. Finally, recognizing that TANF and the Food Stamp Program generally are administered by the same agency at the local level, the 1996 welfare reform legislation provided an option for states to merge their TANF and Food Stamp Program rules into a single set of eligibility and benefit requirements for households receiving both TANF and food stamps. This option, called the Simplified Food Stamp Program, allows states to align all of their TANF and Food Stamp Program rules. The option also allows states to implement a portion of the simplified program in which only the food stamp work requirement is replaced by TANF’s work requirement. FNS monitors states’ performance by assessing how accurately they determine food stamp eligibility and calculate benefits. Under FNS’s quality control system, the states calculate their payment errors by drawing a statistical sample to determine whether participating households received the correct benefit amount. The states review case information and make home visits to determine whether households were eligible for benefits and received the correct benefit payment. FNS regional offices validate the results by reviewing a subset of each state’s sample to determine its accuracy and make adjustments to the state’s overpayment and underpayment errors as necessary. States are penalized if their payment error rate is higher than the national average, which was 8.9 percent in fiscal year 2000. Food Stamp Program payment errors occur for a variety of reasons. Overpayments can be caused by inadvertent or intentional errors made by recipients and caseworkers. According to FNS’ quality control system, the states overpaid food stamp recipients about $976 million in fiscal year 2000 and underpaid recipients about $360 million. A little over half of these errors occurred when state food stamp workers made mistakes, such as misapplying complex food stamp rules in calculating benefits. The remaining errors occurred because participants, either inadvertently or deliberately, did not provide accurate information to state food stamp offices. According to USDA, about half of all payment errors are due to an incorrect determination of the household’s income. In 1999, every state except one had a higher payment error rate among households with earnings as compared with households without earnings. Because their hours of work per week vary and they change jobs frequently, low-wage workers often have fluctuating incomes. Recipients are required to report these income changes, and eligibility workers must adjust their food stamp benefits correctly to avoid payment errors. In order to minimize payment errors, states usually certify households with earnings for shorter periods and require them to report more frequently than households with no earned income. Almost all states used one or more options or waivers to change their food stamp eligibility determination process. More than half of the states chose to confer categorical eligibility for food stamps to households receiving certain TANF-funded services or benefits. Thirty-three states used available options to exempt some or all vehicles from counting as assets. States used these options to increase the number of households to be eligible for food stamps, to simplify the administrative process for eligibility workers, and to support working families; however, most of these states considered them a cumbersome way to increase access to food stamps. Thirty-four states extended eligibility for food stamps to households that are eligible to receive TANF-funded services or benefits. Many states conferred categorical eligibility only to households receiving TANF-funded benefits such as emergency assistance and childcare; while some states conferred categorical eligibility to food stamp applicants simply by providing them with information and referral services paid for with TANF funds. For example, during the food stamp application process, clients who may be financially ineligible for food stamps could become categorically eligible for benefits by virtue of having received a referral to a specific TANF-funded program. Although the primary reason states gave for conferring categorical eligibility was to increase access to food stamps by making households who are eligible for a TANF-funded service automatically eligible for food stamps, states cited other benefits of this option. For example, by eliminating the need to calculate the value of a food stamp applicant’s assets, the eligibility worker’s administrative burden is reduced. Furthermore, five states noted that conferring categorical eligibility for food stamps makes children eligible for the school lunch program, even if the household does not actually qualify for a food stamp benefit. (See fig. 1.) While about two-thirds of the states used the categorical eligibility option, some states pointed out difficulties that the option created. For example, many individuals made categorically eligible for food stamps through receipt of a pamphlet or referral to a service may in fact not actually qualify for a food stamp benefit, possibly increasing the administrative burden on food stamp workers. In addition, several officials said they would like the food stamp rules pertaining to categorical eligibility simplified. They noted that categorical eligibility is determined in part by the source of the funding for the program under which the household receives noncash benefits or services. Because many programs have multiple funding sources, it can be difficult to determine whether a particular program meets the TANF funding requirements. Another official said that categorical eligibility is difficult to explain to staff. Other officials noted problems tied to the variation from state to state that the option creates. One official commented that allowing states to determine which of their welfare-funded services to use in granting categorical eligibility for food stamps could create a great deal of national variation in who can access this federal entitlement program. Using TANF-funded services as a basis for categorical eligibility, a state official explained, is a complicated way of excluding vehicles when determining food stamp eligibility. Thirty-three states used available options to exempt some or all vehicles from counting as assets in determining food stamp eligibility in order to increase access, support clients’ work efforts, or simplify eligibility determination for food stamp workers. (See fig. 2.) Twenty-nine of these states chose to replace their food stamp vehicle rules with their TANF program rules.While most of these states replaced their food stamp vehicle asset rules with their TANF cash assistance rules, a few states used rules from their TANF noncash assistance childcare programs. Seven states told us that they used the option to confer categorical eligibility to recipients of TANF-funded services as a way to exclude all vehicles and other assets from eligibility determination. Specifically, six of the seven states told us that they used categorical eligibility to increase access to food stamps and three said that they used it to support client work efforts. (See fig. 3.) While most states used available options to liberalize the way vehicles are considered in the food stamp eligibility determination process, 17 states used existing Food Stamp Program rules regarding vehicles. Seven of these states said that they could not replace their food stamp vehicle rules with TANF vehicle rules because their TANF rules were more restrictive than their food stamp rules. In at least one of these states, changes to TANF rules required approval by the state’s legislative body. State officials in almost half of the states told us that the Food Stamp Program’s vehicle asset rules should be changed to exempt at least one vehicle per household. Other state officials wanted the exemption value of a vehicle increased to reflect the current cost of vehicles. Almost all states used a reporting option or waiver to change the way households with earnings are required to report changes in their circumstances that could affect their eligibility for food stamps as well as their benefit amount. These options and waivers allowed states to alter the standard reporting methods of monthly and change reporting. Many states told us that they used reporting options and waivers to reduce their payment errors, to ease program administration, and to simplify paperwork requirements for households. Because some reporting options applied to specific households only, many states considered them somewhat restrictive. The most frequently used reporting alternatives were those that eliminated the requirement to report changes in earned income of $25 or more per month. Eighteen states chose a waiver allowing households to report changes in employment status, which includes changes in wage rates, number of hours worked in a week, and a move from part-time to full-time employment or vice-versa. Seventeen states chose the waiver to require recipients to report only changes in income that exceeded $80 or $100. (See fig. 4.) States are allowed to use more than one reporting option or waiver. Thirteen states used two or more alternatives. However, some states chose not to use any reporting options or waivers, citing concerns over payment errors and the cost and burden of implementation, such as the cost of reprogramming computer systems to implement a new reporting system. Ten states used the semiannual reporting option, and 5 states used the waiver allowing quarterly reporting. In these states, households with earned income are allowed to report semiannually or quarterly without reporting changes in between. Households subject to semiannual reporting are required to report if their gross income exceeds 130 percent of poverty. Should a household report a change that would increase the household’s food stamp benefit, the state must make the change; however, the state is generally not allowed to make changes that would reduce the food stamp benefit amount. States are held responsible only for errors resulting from miscalculating benefits at certification, or if income exceeds 130 percent of poverty and the change is not reported. State agencies are not held responsible for errors if the household experienced a change in its circumstances that the household did not report if the state’s policies do not require the household to report the change. States selecting the semiannual reporting requirement must certify households for at least a 6-month period, and they have the option to eliminate every other face- to-face interview because of the new rule requiring only one face-to-face interview a year. Although the semiannual reporting option provides states with an opportunity to reduce the reporting burden on working families with some impunity from payment errors, some states want to adjust the food stamp benefit in response to all reported changes in household income. Half of the states using the semiannual option requested and received a waiver allowing them to adjust benefits based on all changes reported by families. State officials gave various reasons for requesting this waiver to semiannual reporting. In some states, the Food Stamp Program shared the same computer system and database used for determining eligibility for other programs, such as TANF and Medicaid. Since these states link their programs, changes that families report to one program often automatically change the food stamp data, and states wanted the ability to adjust benefits according to this new information. Other states said that the waiver was useful because their food stamp workers have always adjusted food stamps based on reported changes; not to do so for all food stamp recipients would be confusing. Officials in 28 states said they are considering the semiannual reporting option. Nine states would implement the option only with the waiver allowing them to act on all reported changes in part because of computer integration issues. Others would consider the option with a waiver allowing them to apply it to all food stamp households, not just households with earnings. Twelve states are not using or considering the semiannual reporting option. Officials in these states told us the option is either too burdensome to implement, the rules are too complicated, or that it might increase payment errors. Officials from 38 states said that additional changes to the reporting requirements were needed. Some noted that states should be allowed to use the same reporting requirements for all households, not just households with earnings. Although states told us that a primary reason they used reporting options and waivers was to minimize the payment error associated with earnings, concern over payment accuracy affected states’ decisions regarding other options and waivers as well. For example, although FNS gave states the option to limit face-to-face interviews to once a year, some states continue to require households with earnings to come in more frequently because of concerns over payment accuracy. Officials in 45 states told us that the effect on their payment error rate was either the most important factor or a contributing factor in their decision to use particular options and waivers. As a result, officials in many states said that USDA’s quality control program should not focus solely on payment accuracy. State officials also suggested changes in the way that payment errors are calculated. For example, they noted that client and agency error should be counted separately from client error, because the agency had no control over whether the client reported required information correctly. Although only three states reported using the Transitional Benefit Alternative, many states told us they plan on using it. At the time of our interviews, the 3-month Transitional Benefit Alternative was not yet fully implemented, but states could request this option. Twenty states said that they were considering it. Twenty-seven states said they would implement the proposed 6-month Transitional Benefit Alternative if it became available. The primary reason that states would provide a transitional benefit is to support working families. Many states said that the option helped with the transition from welfare to work by stabilizing the families after they leave welfare by guaranteeing a fixed food stamp benefit regardless of how their income fluctuates during the transitional benefit period. (See fig. 5.) Some states that would use the 6-month option but not the 3-month option said that the additional 3 months of support to families making the transition from welfare to work would make the implementation costs worthwhile. The 12 states that had decided not to use transitional benefits said they were concerned about the implementation costs. At least eight of these states indicated that the computer changes required to implement the transitional benefit would be extensive. (See fig. 6.) Eighteen states said they were undecided about the 3-month option, and 14 states had not yet decided about the 6-month option. Several of the undecided states indicated that they were concerned about potential costs associated with reprogramming their computers. No state is implementing or plans to implement all aspects of the Simplified Food Stamp Program option. The main reason states gave for not choosing this option was that it was too complex and difficult to implement. The simplified program option was to be a vehicle for creating conformity between TANF and the Food Stamp Program by merging the programs’ rules into a single set of requirements for individuals receiving both types of assistance. However, as we reported earlier, since not all needy households receive both TANF and food stamps, the states selecting the simplified program option would, in effect, be operating three programs: one program for TANF recipients following state TANF rules; one program for food stamp recipients following federal food stamp regulations; and the simplified program for recipients of both food stamps and TANF. Furthermore, to whatever extent the states use the simplified program, they must also have demonstrated that total federal costs would not be more than the costs incurred under the regular Food Stamp Program—that is, the program has to be “cost neutral.” Figure 8 shows the reasons states gave for not choosing the option. In addition, while states are not planning to use the simplified program, some state officials indicated that it might be worthwhile to develop such a program if it could apply to all food stamp households, not just households receiving both TANF and food stamps. While no state is implementing all aspects of the simplified program option, nine states reported using some of the flexibility offered under the program. Eight states are aligning their food stamp and TANF work requirements. One state is aligning its TANF and food stamp reporting requirements to reduce the reporting burden on households participating in both programs. We provided USDA with the opportunity to comment on a draft of this report. While USDA did not provide formal comments, it did provide technical comments, which we incorporated where appropriate. We are sending copies of this report to the Secretary of Agriculture, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. If you or your staff have questions about this report, please contact me on (202) 512-7215 or Dianne Blank on (202) 512-5654. Individuals making key contributions to this report include Margaret Boeckmann, Elizabeth Morrison, and Lara Carreon. U.S. General Accounting Office. Food Stamp Program: Implementation of Electronic Benefit Transfer System. GAO-02-332. Washington, D.C.: 2002. U.S. General Accounting Office. Food Stamp Program: Program Integrity and Participation Challenges. GAO-01-881T. Washington, D.C.: 2001. U.S. General Accounting Office. Food Stamp Program: States Seek to Reduce Payment Error and Program Complexity. GAO-01-272. Washington, D.C.: 2001. U.S. General Accounting Office. Welfare Reform: Few States are Likely to Use the Simplified Food Stamp Program. GAO/RCED-99-43. Washington, D.C.: 2001. U.S. General Accounting Office. Food Stamp Program: Various Factors Have Led to Declining Participation. GAO/RCED-99-185. Washington, D.C.: 2002).

To help states administer their Food Stamp Programs, the Food and Nutrition Service (FNS) offers options and waivers to their program rules and regulations. Almost all states used options or waivers in their food stamp eligibility determination process. More than half of the states chose to make households receiving Temporary Assistance for Needy Families (TANF) services automatically eligible for food stamps. Thirty-three states exempted some or all vehicles in the determination of food stamp eligibility. Although most states used these options and waivers, they considered them a cumbersome way to increase access to the program for families owning a vehicle. Almost all states used at least one option or waiver to change the reporting methods required of food stamp household earnings. The most frequently used reporting waivers exempted recipients from reporting changes in earned income of $25 or more per month. States used these options and waivers to simplify paperwork requirements for both the food stamp recipient and eligibility worker. Although few states were using the new option to provide food stamp benefits to families leaving TANF, 20 other states planned to implement the option. No state was implementing or planning to implement all aspects of the simplified program option, which allows states to merge their TANF and Food Stamp Program for families receiving both types of assistance. States told GAO that the simplified program option would make administering the programs more difficult because it creates a separate program, covering only a subset of food stamp recipients. However, nine states were using a portion of the simplified program to align their food stamp and TANF work or reporting requirements.

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Established in 1965, HUD is the principal federal agency responsible for programs in four areas—housing assistance, community development, housing finance, and regulatory issues related to areas such as lead-based paint abatement and fair housing. To carry out its many responsibilities, HUD was staffed by 9,386 employees as of February 1999. Housing Assistance: HUD provides (1) public housing assistance through allocations to public housing authorities and (2) private-market housing assistance under section 8 of the U. S. Housing Act of 1937 for properties—referred to as project-based assistance—or for tenants—known as tenant-based assistance. In contrast to entitlement programs, which provide benefits to all who qualify, the benefits of HUD’s housing assistance programs are limited by budgetary constraints to only about one-fourth of those who are eligible. Community Development: Primarily through grants to the states, large metropolitan areas, small cities, towns, and counties, HUD provides community planning and development funds for local economic development under its Community Development Block Grant (CDBG) and Empowerment Zone/Enterprise Community Programs (EZ/EC), housing development under its HOME Program, and assistance to the homeless under its McKinney Act Homeless Programs. The funding for some programs, such as those for the homeless, may also be distributed directly to nonprofit groups and organizations. Housing Finance: The Federal Housing Administration (FHA) insures lenders—including mortgage banks, commercial banks, savings banks, and savings and loan associations—against losses on mortgages for single-family properties, multifamily properties, and other facilities. The Government National Mortgage Association, a government-owned corporation within HUD, guarantees investors the timely payment of principal and interest on securities issued by lenders of FHA-insured and VA- and Rural Housing Service-guaranteed loans. Regulatory Issues: HUD is responsible for regulating interstate land sales, home mortgage settlement services, manufactured housing, lead-based paint abatement, and home mortgage disclosures. HUD also supports fair housing programs and is partially responsible for enforcing federal fair housing laws. The Congress supports HUD’s programs through annual appropriations that are subject to spending limits under the Budget Enforcement Act, as amended. For fiscal year 2000, HUD is proposing a total budget of about $28 billion in new discretionary budget authority, which, in combination with available budget authority from prior years, will help support about $34 billion in discretionary outlays. This request represents a 9-percent increase in budget authority over fiscal year 1999. In its Fiscal Year 2000 Budget Summary, HUD states that its proposed budget will allow the renewal of all Section 8 rental assistance contracts, increases to virtually all program areas, and continued increases to programs, such as CDBG and Homeless, that address communities’ worst case needs. The summary also states that many program enhancements will be initiated, and, as we discuss below, HUD proposes to fund many set-asides within existing programs. HUD’s fiscal year 2000 budget request includes 19 new initiatives and programs that were not funded during fiscal year 1999. Some, however, may have been funded in prior years. These fall under various programs, including Community Development and Planning, Public and Indian Housing, and Housing Programs. This request includes seven set-asides totaling $210 million. Five of the set-asides ($60 million) will be funded within the CDBG Program and two ($150 million) in the HOME Program. See appendix I for a list of the proposed fiscal year 2000 initiatives and their status in fiscal year 1999. We also note that HUD’s fiscal year 2000 request includes significant funding increases in several ongoing programs, including Section 8 contract renewals. See appendix II for a list of these programs. While the budget impact—a net increase of about 9 percent in new budget authority—of the new programs and increases to existing programs that HUD proposes is not overwhelming, the proposed budget does raise questions about HUD’s capacity to manage such an increase. Questions arise for two reasons: First, HUD is currently going through a significant, complex, and time-consuming organizational reform in which many functions that it once managed in many field offices will be managed in one or more “centers” in various parts of the country. This reform is necessary to improve the efficiency and effectiveness of HUD’s operations and to address long-standing yet basic problems in program management. To accommodate this reform, HUD is moving and retraining many of its staff. Second, new initiatives and programs require a certain amount of dedicated resources to plan, implement, and manage over the long term. It is questionable whether these resources are available at this point in the reinvention of HUD. Therefore, we are concerned about whether HUD has the capacity to effectively initiate and oversee the set of new programs it is proposing for fiscal year 2000 while it is also trying to develop for itself a new operating style and way of doing business. One of the largest program increases in HUD’s fiscal year 2000 budget proposal is in its Section 8 housing assistance program (see app. II). For the past few years, we have reviewed the accuracy of HUD’s budget proposals for the tenant-based and project-based components of this program and have found many inconsistencies. For example, in July 1998, we reported that the Department had not identified all available Section 8 project-based unexpended balances and accounted for them in its budget process. As a result, HUD requested $1.3 billion in its fiscal year 1999 request for project-based funding that it did not need to cover shortfalls in current contracts. To remedy such overstatements, we recommended that HUD’s future funding requests for the Section 8 program—both the tenant-based and the project-based components—fully consider unexpended balances that may be available to offset funding needs. HUD has improved its annual review of unexpended balances. Although HUD’s budget justification shows that funding needs to cover contract shortfalls will be met by existing unexpended balances, it does not identify the estimated funding shortfall or the amount of unexpended balances available in each of the project- and tenant-based components. As a result, we cannot assess the extent to which the Department’s budget request includes the use of unexpended project-based balances. Therefore, we have requested information from HUD on its shortfall estimates and on the unexpended balances that may be available to fund these shortfalls. Balances in excess of those needed to fund shortfalls could be used to offset HUD’s request for contract renewal funding. HUD’s fiscal year 2000 budget justification raises other issues about its Section 8 program request that we believe warrant review. These issues include the basis for the contract renewal costs for the Section 8 project-based program for fiscal year 2000—more than $3 billion—as well as the basis for renewal costs beyond 2000. The budget proposal shows that HUD’s estimates of the unit costs of some project-based housing are substantially higher than HUD projected just a year ago. Moreover, unlike prior years, HUD’s fiscal year 2000 budget does not provide estimates of Section 8 costs in the years following 2000. Therefore, we have requested information that would support HUD’s assumptions and source data for both the number of units and average unit costs for this program in fiscal year 2000 and for several years thereafter. We also believe that the basis for the substantial increase in total Section 8 project-based and tenant-based outlays—$2.5 billion—should be examined, as well as HUD’s rationale for the $4.2 billion advance appropriation for fiscal year 2001 requested in the fiscal year 2000 budget request. HUD’s CDBG Program provides communities with grants for activities that will benefit low- and moderate-income people, prevent or eliminate slum or blight, or meet urgent community need. While CDBG is largely allocated on a formula basis, funds are also set aside for specific purposes such as Community Outreach Partnership, Hispanic Serving Institutions, and Historically Black Colleges and Universities. HUD’s fiscal year 2000 budget request for the CDBG Program proposes set-asides for 10 projects or initiatives totaling about $428 million. Of the 10 set-asides, half are for new initiatives totaling about $60 million. These new set-asides include Metropolitan Job Links, Homeownership Zones, EZ/EC Technical Assistance, EZ Round II Planning and Implementation, and a Citizens Volunteer Housing Corps. The CDBG Program is HUD’s most flexible tool for assisting communities to meet local development priorities. To help monitor it and other formula grant programs like HOME and Housing Opportunities for Persons With AIDS, HUD developed the Integrated Disbursement and Information System (IDIS) to provide current information on how grantees are using federal funds and what they are achieving with those funds. However, our recent work shows that IDIS, as implemented, does not provide detailed performance information. Also, because of its design, the information in IDIS is incomplete, inaccurate and untimely. Many states are apprehensive about using the problem-plagued system and plan to adopt it only if forced to do so by law. To broaden IDIS, HUD plans a replacement system, called the Departmental Grants Management System that HUD plans to design to track every grant. However, HUD plans to convert the current version of IDIS for use in the new grants management system, which may occur over the next several years. Also of immediate concern is the fact that IDIS is not secure, which opens up the possibility of unapproved access to program funds. Because of the poor quality of information in IDIS and a replacement system not being readily available, we are concerned that the activities and projects under CDBG may not be sufficiently reported and considered for budget request offsets. This is of particular concern because past budget requests show that actual CDBG unobligated balances have been increasing at a rate well over $50 million annually since fiscal year 1996. Moreover, in 1998, the authority to use about $7.6 million in CDBG funds expired. Although a reasonable explanation for this expiration may exist, we would not expect funds to expire without benefiting grantees, given the flexibility for the uses of CDBG funds and the discretion grantees have for their use. Contract Administration is a new initiative in fiscal year 2000 under HUD’s Housing Certificate Fund. HUD is requesting $209 million for this program, of which $42 million will be available to contractors who have not formerly participated in this activity. According to HUD, the use of contract administrators to manage project-based Section 8 housing assistance contracts will relieve HUD field staff of many duties they currently perform in this regard, allowing them to concentrate on their direct responsibilities, such as monitoring program effectiveness and ensuring that property owners are accountable for the rental subsidy payments they receive. Duties to be shifted to the new contract administrators include conducting annual physical inspections of the properties, reviewing project financial statements, and verifying tenants’ income and eligibility for program rental assistance benefits. HUD’s Section 8 Financial Management Center would oversee the work of contract administrators, and the Department would select contract administrators through a competitive procurement process. However, because of the documented weaknesses in HUD’s contracting practices in other areas, we question whether HUD is prepared to administer a new contracting initiative of this size. We, HUD’s Inspector General, and the National Academy of Public Administration have cited weaknesses in HUD’s contracting and procurement practices: inadequate oversight of contracted services because of a lack of skilled, trained staff; workload imbalances; and unclear duties, time frames, costs, and products. In addition, the Department has been under an investigation by its Inspector General for allegations of improper contract solicitation and administration of its contracts in the Department’s Note Sales program. Therefore, we believe that to ensure the success of HUD’s contracting for the new Section 8 contract administration initiative, HUD may need to provide some assurances to the Congress that the Department will have an adequate administrative structure and sufficient staffing in place to provide proper oversight of a new contracting program of this magnitude. HUD is also proposing an increase in its EZ Program. HUD’s $150 million request for Urban Empowerment Zones includes $45 million that would be distributed to the 15 communities that were designated as Strategic Planning Communities. These communities, which submitted applications for Round II EZ designation but were not chosen, could use the funds to support activities proposed in their EZ applications. Eligible activities include those covered by HUD’s CDBG and the Social Services Block Grant Program administered by the Department of Health and Human Services. However, under CDBG, HUD has already included a $10 million set-aside for meritorious communities that applied for Round II EZ designation but were not chosen. It is unclear why HUD needs to fund the same communities with two different programs. We provided a draft of this statement to HUD for its review and comment. Departmental officials, including HUD’s Chief Financial Officer, provided comments on several issues, including the number of programs or new initiatives that we listed and categorized as new for fiscal year 2000. HUD officials stated that programs that were funded in the past, such as Section 8 vouchers, should not be considered new, although they meet our criterion of not receiving funding in fiscal year 1999. We have included these programs because our purpose in listing new programs and initiatives is to provide an indication of the additional workload HUD may have in the approaching year. We believe that a 1 or more year break in a program’s funding can create administrative workload, even though the Department retains programmatic expertise among its staff and contractors. HUD officials also suggested that we check some of the budget figures that we reported in the statement. We did so and made adjustments where necessary. This concludes my prepared testimony, Mr. Chairman. I would be happy to respond to any questions that you or the Members of the Subcommittee might have. (Table notes on next page) For this table, GAO defined new programs and initiatives as any program or initiative that the Congress did not fund in fiscal year 1999. However, some of these programs or initiatives may have been funded in prior years. FHA Mutual Mortgage Insurance and Cooperative Management Housing Insurance Funds program account Mortgage Insurance Limitation in FHA’s Mutual Mortgage Insurance and Cooperative Management Housing Insurance Funds 105 (Table notes on next page) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO discussed the Department of Housing Urban Development's (HUD) fiscal year (FY) 2000 budget request, focusing on: (1) new initiatives or significant increases proposed by HUD; and (2) observations about HUD's request for funding related to several areas GAO has reported on in the past year. GAO noted that: (1) to support 19 new programs and initiatives, HUD is requesting nearly $731 million of its $28 billion total request for FY 2000; (2) in each case, Congress did not provide funding for the activity in FY 1999, although in some cases the program has been funded in prior years; (3) GAO is concerned about HUD's overall capacity to plan for, administer, and oversee this many new programs, particularly when HUD itself is undergoing significant organizational reform and when some of the new initiatives are in areas, such as contracting, that HUD's performance has been questioned in the past; (4) one of the most significant increases in HUD's current programs for FY 2000 is a $1 billion increase in its Section 8 rental housing assistance program; (5) however, the budget does not provide sufficient information to evaluate this request; (6) GAO believes a number of associated issues exist that warrant review; (7) HUD's tracking and oversight of its Community Development and Planning grants are made difficult because information in its grants management information system is unreliable; (8) although HUD plans to replace the current system for managing and tracking Community Development Block Grants, a new system is several years away from implementation; (9) in the meantime, HUD's FY 2000 budget request proposes to continue adding set-asides to the block grant; (10) however, HUD cannot be assured that financial tracking of the individual grants and grantees will be adequate; (11) in one of its largest new initiatives, HUD is requesting over $200 million in FY 2000 to fund contract administrators for the contracts it has with owners of multifamily properties in HUD's project-based Section 8 housing assistance program; (12) however, work that GAO, HUD's Inspector General, and the National Academy of Public Administration have done in the past on HUD's contracting activities identified weaknesses in HUD's ability to administer contracts and monitor contractors' performance; (13) however, GAO believes that the success of this program will depend on the adequacy of HUD's contract selection, administration, and oversight of these contracts; (14) HUD is proposing both a new initiative and a program increase in the area of empowerment zones as well as two set-asides in the Community Development Block Grant Program for empowerment zones; and (15) these proposals raise questions about how the programs will coordinate with and benefit from each other because they target similar beneficiaries.

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The Military Health System operated by DOD is large and complex and has a dual health care mission—readiness and benefits. The readiness mission provides medical services and support to the armed forces during contingency operations and involves deploying medical personnel and equipment, as needed, around the world to support military forces. The benefits mission provides medical services and support to members of the armed forces, their family members, and others eligible for DOD health care, such as retired servicemembers and their families. DOD’s health care mission is carried out directly through military medical centers, hospitals, and clinics throughout the United States and overseas, commonly referred to as military treatment facilities, as well as by civilian health care providers through TRICARE. Military treatment facilities make up DOD’s direct care system for providing health care to beneficiaries. DOD’s delivery of health care services includes, among other things, inpatient and outpatient care. Inpatient care refers to care for a patient who is formally admitted to a hospital or an institution for treatment, or care. Outpatient care, also known as ambulatory care, refers to health care services for an actual or potential disease, injury, or lifestyle-related problem that does not require admission to a medical treatment facility for inpatient care. The Assistant Secretary of Defense (Health Affairs) is responsible for ensuring the effective execution of DOD’s health care mission and exercises authority, direction, and control over medical personnel authorizations and policy, facilities, funding, and other resources within DOD. The TRICARE Management Activity operates under the authority, direction, and control of Health Affairs. In 2008, the TRICARE Management Activity approved plans to renovate LRMC and the 86th MDG clinic at their existing locations. The initial LRMC plans included renovation of the inpatient tower; construction of an additional tower for emergency medicine, inpatient nursing units, and other clinical and support activities; and demolition of older facilities. The initial plans for the 86th MDG clinic included construction of a single building to consolidate health care services provided at separate facilities that currently make up the 86th MDG clinic. In 2009, the Office of the Deputy Under Secretary of Defense (Installations and Environment), together with Health Affairs, conducted a cost-benefit analysis that included consideration of alternative sites as well as consolidation of the two projects into a single medical center, and determined that consolidating the aging LRMC and 86th MDG clinic into one new facility that provides tertiary care in an area adjacent to Ramstein Air Base, known as the Weilerbach Storage Area, would be more efficient and cost- effective than pursuing two separate renovation or reconstruction projects. The replacement medical center will be operated and maintained by the Army, with the Air Force to provide clinical services that are currently offered at the 86th MDG clinic. The version of DOD’s guidance governing the planning and acquisition of military health facilities (DOD Instruction 6015.17) that was in effect when the facility requirements for the replacement medical center were determined in 2010 described the procedures to be used by the military departments to prepare project proposals for military treatment facilities. This instruction also identified the types of documentation needed to support a project proposal. The documentation includes, among other things, the current and projected beneficiary population served in a military treatment facility’s catchment area, as well as current and projected staffing and workload data. Army Medical Command, with input from the Air Force Medical Support Agency, developed a report that summarizes the projected health care requirements for Military Health System beneficiaries in the areas served by the proposed medical center. Generally, the combination of workload data and staffing requirements are key considerations for determining the size and configuration of military treatment facilities. These facility space requirements are identified in a Program for Design document, which lists square footage requirements per medical department and room. The estimated square footage is then used as the basis for developing overall project cost estimates as reflected on DD Form 1391 (Military Construction Project Data), the standard format used throughout DOD to support the planning and execution of military construction projects. Figure 1 provides an illustration of the process used in determining project costs for the replacement medical center. In planning for the proposed replacement medical center, DOD officials considered beneficiary population data, contingency operations, and changes or expected changes in troop strength known at the time. However, more recent posture changes, announced in January 2012, are currently being assessed by military medical officials for their impact on the replacement medical center. DOD used beneficiary population data as of March 2010 and data on historical patterns of patient migration to identify the areas served by the proposed replacement medical center. A majority of the beneficiaries expected to receive health care from the replacement medical center are located within a 55-mile radius of it. DOD officials told us that because the replacement medical center was designed for peacetime operations—with the capacity to expand to meet the needs of contingency operations—reductions in ongoing contingency operations in Afghanistan would not have an impact on facility DOD posture in Europe has been reduced over the past requirements.few years, and DOD had previously announced that one of four brigade combat teams currently stationed in Europe would be removed by 2015. According to DOD officials, this posture change was not expected to have a significant impact on the size of the replacement medical center because DOD plans to continue to use the facilities at Baumholder, Germany, which will be vacated by the brigade combat team, for other DOD personnel. In January 2012, DOD announced its decision to remove a second brigade combat team currently stationed in Europe, thereby reducing the remaining number of brigade combat teams in Europe to two—one stationed in Germany and the other in Italy. At the time of our review, DOD officials told us that they were in the process of assessing these proposed changes in posture to better understand their ramifications for DOD’s medical facility needs. The replacement medical center will serve as the only tertiary-level referral hospital for the EUCOM, Central Command, and Africa Command theaters of operation. Because of these unique aspects, according to medical planners they did not use typical DOD catchment area standards. Military treatment facilities are typically designed to offer sufficient health care for active duty beneficiaries and their dependents within a 40-mile radius of the military treatment facility. In the case of LRMC, medical planners determined that the historical patterns of care indicated that this area should be a 55-mile radius. Medical planners in the Office of the Secretary of Defense, the Army, and the Air Force analyzed historical patterns of patient migration and contingency operations at LRMC and the 86th MDG to define four catchment areas. See figure 2 for the location of these four catchment areas. The four catchment areas, as defined by military medical planners, are based on populations of patients who are enrolled as beneficiaries or who are eligible to enroll for the following locations: 1. The Kaiserslautern Military Community catchment area includes all beneficiaries enrolled in LRMC, 86th MDG, and Kleber/Kaiserslautern military treatment facilities. This catchment area is approximately 55- miles in radius surrounding the proposed facility’s site. 2. The Germany-wide catchment area includes all beneficiaries enrolled in the Kaiserslautern Military Community catchment area plus beneficiaries enrolled in the military treatment facilities in Germany. This catchment area definition was essential in determining the patterns of enrolled beneficiaries’ use of German health care.3. The Europe Regional Medical Command catchment area includes all beneficiaries in the Germany-wide catchment area plus beneficiaries enrolled in all military treatment facilities in Italy and Belgium. This catchment area reflects historical inpatient referral patterns at LRMC. 4. The EUCOM catchment area includes all enrolled beneficiaries and eligible beneficiaries in Europe, including all beneficiaries in the other three catchment areas. Table 1 shows the beneficiary population, by catchment area and beneficiary category, as of March 2010. In appendix II we include catchment area populations by beneficiary category, for fiscal years 2006 through 2011. According to DOD officials, the flow of patients from theaters of operation, including contingency operations, minimally affects the volume of inpatient care at LRMC and outpatient care at both LRMC and 86th MDG. Table 2 shows that approximately half of all inpatient care at LRMC, a little more than 77 percent of outpatient care at LRMC, and almost 96 percent of outpatient care at the 86th MDG is provided to beneficiaries located within the Kaiserslautern Military Community catchment area as well as the Germany-wide catchment area. According to DOD officials, the replacement medical center is being sized for peacetime operations, not for contingency operations. However, these officials told us that the replacement medical center is being designed with the flexibility to expand capacity during surges to be able to handle casualties that result from contingency operations. DOD officials determined that the replacement medical center should be able to accommodate contingency operations’ medical needs similar to those experienced in Fallujah, Iraq, during November 2004, in which the United States sustained about 100 casualties and 600 wounded over a 2- month period. For this reason, the new medical center is designed to be able to nearly double its medical/surgical bed capacity if needed to support contingency operations. According to Army officials, to mitigate the increase in patient workload resulting from surges caused by contingency operations, the new medical center will follow the procedures currently in use at LRMC. These procedures require that priority be given to active duty servicemembers, and therefore, other beneficiaries normally treated at LRMC would be directed to German health care facilities during a time when surge capability is needed (and capacity is constrained) and then redirected back to LRMC when the workload from contingency operations lessens. DOD has been reducing its military posture in Europe since German reunification in 1990. At its peak, the United States had approximately 350,000 active duty servicemembers stationed in EUCOM’s area of responsibility. The size of DOD’s military posture in EUCOM’s area of responsibility is currently estimated at about 78,000 active duty servicemembers. DOD has been reducing its medical treatment capacity over time to correspond to the reduction in the number of military servicemembers stationed in Europe. Today, LRMC is DOD’s only remaining tertiary care medical center in Europe. Furthermore, it is the only medical center in Europe, Asia, or Africa that serves beneficiaries from the EUCOM, Central Command, Africa Command, and Special Operations Command areas of responsibility. In 2004, DOD announced its plans for an overseas basing strategy that called for reducing the number of Army brigade combat teams stationed in Europe from four to two. However, in the February 2010 Quadrennial Defense Review, DOD decided that it would retain all four Army brigade combat teams in Europe, rather than returning two to the United States as originally planned. Moreover, in April 2011, based on several factors, including consultations with allies and the findings of the North Atlantic Treaty Organization's new Strategic Concept, DOD announced that it planned to remove by 2015 only a single brigade combat team from Europe. According to DOD officials, the brigade they anticipated removing from Europe was stationed at U.S. Army Garrison (USAG) Baumholder, Germany, initially leaving brigades at USAG Grafenwoehr and USAG Vilseck, which are located close to one another in Germany and at USAG Vicenza, Italy. There are also elements of the Grafenwoehr brigade at USAG Schweinfurt, Germany. DOD also has plans to eventually close four Army locations in Germany—Heidelberg, Mannheim, Bamberg, and Schweinfurt. As a result of these closures, the elements of the Grafenwoehr brigade at Schweinfurt were expected to move to Grafenwoehr when Schweinfurt closed. As of the date of this report, the four brigade combat teams are still assigned at their original locations in EUCOM. The April 2011 announcement also included a DOD decision to station four Aegis Cruisers in Spain, a change that would increase the military beneficiary population in Europe. Figure 3 shows the locations of DOD military installations in Europe where posture changes are expected to take place that could affect the facility requirements for the replacement medical center. The brigade combat team currently located at Baumholder is within the Kaiserslautern Military Community catchment area and is expected to reduce the beneficiary population when it leaves. According to Army officials, the brigade consists of approximately 4,200 soldiers, who are accompanied by about 6,300 dependents. However, according to DOD officials, when this brigade leaves Baumholder other DOD personnel will be restationed there because Baumholder is considered an enduring installation with accessible joint military training facilities nearby. Army officials also told us that because some of the housing at Baumholder is substandard, they expect only 2,300 to 3,500 servicemembers to move to Baumholder. Using the Army ratio of 1.5 dependents to each military member indicates that as approximately 10,500 servicemembers and their dependents who are medical beneficiaries of LRMC leave the catchment area, they will be replaced by 5,750 to 8,750 new servicemembers and their dependents—an overall reduction in the Kaiserslautern Military Community catchment area of from 4,750 to 1,750 beneficiaries. DOD officials told us that even though the beneficiary population at Baumholder will be reduced, they expect this change to have little impact on the workload and sizing requirements for the replacement medical center. In October 2009, DOD hired an independent contractor, Noblis, to perform a sensitivity analysis that would provide an order of magnitude estimate of potential changes to the beneficiary population that would need to occur to affect the size of the facility. This sensitivity analysis was further refined and updated in 2010. It specifically assessed the type of population changes that would require the addition or subtraction of intensive-care unit (ICU) and medical/surgical beds, as well as specialty care exam rooms for outpatients. The analysis concluded that the planned capacities for the replacement medical center would be resilient to sizable changes in the population served. A population change of up to 70,000 beneficiaries—a change in the total EUCOM beneficiary population of about 29 percent—would necessitate resizing of the requirements for ICU or medical/surgical beds by the addition or subtraction of a 20-bed module. A population change of 25,000 to 31,000 beneficiaries—a change in the total EUCOM beneficiary population of between 10 percent and 13 percent would necessitate re-sizing requirements for specialty care exam rooms by the addition or subtraction of an 8 to 10 exam room module. DOD officials told us that changes in the beneficiary population are expected to occur in the EUCOM catchment area through 2015. Although some of these changes will increase the population in certain locations, the overall change will be a reduction in the overall number of beneficiaries in EUCOM’s area of responsibility. The following beneficiary changes are expected: The Army expects a reduction in the Europe Regional Medical Command’s active duty servicemembers and their dependents’ population of about 21,000—a reduction in the total EUCOM beneficiary population by about 8 percent—by fiscal year 2015, according to the Updated (FY10) Health Care Requirements Analysis. However, it does not expect a significant change to the beneficiary population in the immediate Kaiserslautern Military Community catchment area. The Air Force does not expect a change in its beneficiary population through fiscal year 2015. The Navy expects to gain about 1,200 sailors from the stationing of the Aegis Cruisers in Rota, Spain, along with about 1,300 additional dependents—for a total increase of about 2,500 beneficiaries, or a 1 percent gain in the total EUCOM beneficiary population. Based on the results of DOD’s 2009 sensitivity analysis, the expected changes would not necessitate a change in the number of ICU beds, medical/surgical beds, or outpatient exam rooms. In January 2012, however, DOD announced new posture decisions that will further reduce EUCOM’s troop strength. According to DOD, these posture decisions are part of a deficit reduction package based on the Budget Control Act of 2011 requirement to reduce the department’s future expenditures by approximately $487 billion over the next decade. EUCOM data indicate that by 2015 approximately 71,500 active duty military servicemembers will remain in Europe following the latest changes to DOD’s European posture. According to the January 2012 DOD publication Defense Budget Priorities and Choices, DOD has updated its April 2011 plans for its European basing strategy and has stated that it intends to now remove two brigade combat teams from Europe. These two brigades are currently located at Baumholder and Grafenwoehr with elements of the brigade in Grafenwoehr located in Schweinfurt. As a result, the elements in Schweinfurt will not relocate to Grafenwoehr as previously planned. DOD’s decision to remove two brigades from Europe and how this shift in troop numbers will affect health care requirements in the EUCOM area of responsibility have yet to be fully determined. However, DOD officials noted that they did not believe the removal of a second brigade combat team would affect the beneficiary population of the replacement medical center because the second brigade is currently stationed outside the immediate Kaiserslautern Military Community catchment area. DOD officials told us that they have started a review to confirm that the shift in DOD posture will not affect the requirements for the proposed replacement medical center. They noted that recent troop reductions are being studied to determine what impact, if any, they will have on the proposed size of the replacement medical center. They also noted that they are developing a sensitivity analysis to accommodate the information and will include it as part of DOD’s statutorily required recertification of the facility. As of the date of this report, they had not completed the study because along with the recertification, DOD must also submit a plan for implementing GAO’s recommendations with respect to the LRMC facility. When developing facility requirements for the replacement medical center, DOD officials incorporated many patient quality of care and environmentally friendly design standards. However, our review of the documentation DOD provided in support of these facility requirements revealed gaps, inconsistencies, and calculation errors that required extensive explanation by DOD officials to understand the deviations and decisions made to develop the requirements. Without clear documentation that explains how the analyses were performed and any adjustments made, stakeholders and decision makers lack reasonable assurance that the proposed replacement medical center will be appropriately sized to meet the needs of the expected beneficiary population in Europe. DOD officials used checklists and discussions with external health care providers to incorporate updated patient quality of care standards into the facility requirements for the replacement medical center; they also incorporated environmentally friendly design standards. They used DOD’s military hospital construction checklists to ensure that they incorporated updated patient quality of care standards, such as evidence-based design and world-class standards, when determining the size of the replacement medical center. For example, DOD officials told us they used the Evidence Based Design Checklist—which DOD created in August 2007 and updated in 2009—to incorporate design concepts into health care construction projects that have impacts on patient-centered care. Examples of evidence-based design include single-patient instead of multiple-patient rooms to better accommodate family involvement in the provision of care and to better control infections, and studying layouts and workspace ergonomics to maximize work pattern efficiency. Additionally, DOD officials and the architectural and engineering firm contracted for the design of the replacement medical center used DOD’s Military Health Service World-Class Checklist to ensure that world-class standards were integrated into the facility’s design. The checklist identifies areas for DOD officials to research to help ensure that world-class standards are systematically developed, validated, and communicated with project teams. The completed checklist described examples of how world-class standards—which encompass many of the evidence-based designs from the Evidence Based Design Checklist—were integrated into the facility’s design. Some of the world-class standards incorporated into the facility requirements were (1) optimizing the size and position of the patient windows to provide exterior views for the patient from the bed, (2) providing patient and family control over the environment in the patient room (e.g., heating and cooling), and (3) providing full height walls with higher noise transmission ratings (a higher noise transmission rating blocks more noise from transmitting through a wall) in spaces where patients would be asked to disclose personal information. DOD officials told us they also met with officials from Department of Veterans Affairs’ hospitals, private sector hospitals, and German hospitals to obtain information on evidence-based practices for providing health care that could be applied to the replacement medical center’s design. DOD has also incorporated additional environmental and efficiency features into the design of the replacement medical center and expects to exceed the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) green building standards, which have been adopted by several federal agencies. The LEED system awards points for meeting a variety of standards and certifies buildings as silver, gold, or platinum. The replacement medical center’s current design will likely qualify for a “silver” certification. However, the facility’s extensive energy efficiency and renewable energy features indicate that it may qualify for a “gold” certification once it has met the more stringent German design requirements. For example, the project will use low water plumbing fixtures and commercial kitchen equipment available in Germany to reduce water use and achieve higher efficiency. DOD sized the replacement medical center based on projected patient workload data. However, our review of the planning documentation DOD provided in support of its facility requirements showed that there were (1) inconsistencies in how DOD projected patient workload and applied the planning criteria, (2) some areas where the planning documentation did not clearly show how DOD officials had applied the formulas provided in the criteria to generate requirements, and (3) calculation errors throughout. DOD guidance in effect when the facility was designedprovided that when designing medical facilities, planners should develop patient workload factors—both current and projected—and use these factors to determine the sizing requirements for the facility. While DOD officials acknowledged that inconsistencies, gaps in documentation, and calculation errors existed in the requirements documentation, they did not think the identified issues alone would necessitate a revision of the facility requirements. However, because DOD has not yet determined the effects of the newly proposed posture changes on projected patient workload— which in turn drives the requirement for the facility size—it is not known if the inconsistencies, gaps, and calculation errors coupled with the posture change will require DOD to revise its facility requirements. DOD officials plan to examine these concerns in their recertification process. The Updated (FY10) Health Care Requirements Analysis report for LRMC captures some of these data and steps DOD used to determine the sizing requirements for the replacement medical center (see table 3 for the sizing requirements that DOD developed, by medical center department). Inconsistencies in projecting workload and applying criteria. To project most inpatient and outpatient workload for the replacement medical center, DOD officials used fiscal year 2010 estimated patient workload data as a baseline. However, they used different baseline data in different parts of the analysis. For example, in determining the number of labor and delivery rooms, DOD officials did not use workload data from fiscal year 2010 as the baseline. According to DOD officials, the obstetrician workload has historically been relatively stable. Therefore, they used the labor and delivery room workload data from the Health Care Requirements Analysis, which had been conducted in fiscal year 2008 to support the original plan for renovating and reconstructing LRMC and determined that the data were accurate enough for their purposes. Once DOD officials determined what projected workload data to use in their calculations for the new facility, they were to use the criteria in DOD Space Planning Criteria for Health Facilities to calculate the facility’s requirements, for example, the appropriate number of inpatient beds and outpatient exam rooms. DOD officials generally used the formulas provided in this document, but they applied them inconsistently when determining the appropriate size for individual departments within the facility. For example, the space planning criteria direct DOD officials to divide an inpatient department’s projected workload—in this case, the average daily census—by a particular occupancy rate to determine the number of inpatient beds that would be required. The criteria specify that certain inpatient beds should be designed in modules of 4, 6, or 8 beds. DOD generally followed these criteria in calculating the number of nursing unit medical/surgical beds, a type of inpatient bed. The criteria specify an occupancy rate of 85 percent for inpatient medical/surgical beds. Following this formula, DOD officials divided the projected average daily census (48.7 patients) by 0.85. This calculation resulted in a requirement for 57.3 beds. To conform to the modular grouping criteria, DOD officials rounded to 60 beds. However, in determining the number of inpatient behavioral health beds DOD officials deviated from these criteria. The projected average daily census for behavioral health was 24 patients. The space planning criteria specify a 70 percent occupancy rate for psychiatric (i.e., behavioral health) beds when the average daily census is fewer than 25 patients, instead of the 85 percent occupancy rate specified for nursing unit medical/surgical beds. Nevertheless, DOD officials used an 85 percent occupancy rate to calculate the requirement for behavioral health beds. This resulted in a requirement for 28.2 beds—rounded to 30 beds to conform to the modular grouping criteria. According to DOD officials, they chose to use a different occupancy rate factor because they reasoned that since space planning criteria had not been updated to reflect the shift to single occupancy rooms, the 70 percent rate would likely result in a requirement for a higher number of beds. Following the space planning criteria’s guidance would have produced a requirement for 34.3 beds, which would have been rounded to 36 beds to account for the modular grouping criteria. As a result, the need for behavioral health beds may actually be higher than DOD officials determined. The documentation did not clearly convey the reasons for the deviations or adjustments DOD officials made when applying the criteria, and as a result, decision makers may lack reasonable assurances that the number of beds required would be sufficient to meet the needs of the expected beneficiary population in Europe. Although these deviations or adjustments may not adversely affect the size of the replacement medical center, their effect when combined with the yet to be assessed posture changes remains unknown. Inadequate documentation of how facility requirements were estimated. DOD’s documentation of its processes for determining the replacement medical center’s sizing requirements did not always clearly indicate how DOD officials had generated these requirements and omitted details that would have helped demonstrate how DOD officials had determined the size of the replacement medical center. For example, DOD’s planning documentation reported contradictory methods for projecting patient workload. According to the Updated (FY10) Health Care Requirements Analysis, DOD used three different scenarios to project the facility’s workload, resulting in a low, a midrange, and a high projection; all three scenarios used estimated patient workload data from fiscal year 2010 as the baseline: Scenario A excluded the workload attributable to the conflicts in Iraq and Afghanistan, and assumed that the change in patient workload would continue to follow the trend set over the previous 5 years. Scenario B adjusted for potential future decreases in beneficiary population, and assumed that the change in patient workload would continue to follow the trend set over the previous 5 years. Scenario C assumed that the change in patient workload would continue to follow the trend set over the previous 5 years and made no exclusions or adjustments. The Updated (FY10) Health Care Requirements Analysis first reported using Scenario B—the scenario that resulted in midrange projections—to project inpatient and outpatient workload for the replacement facility. However, later sections of the document report the use of different methods to project patient workload. DOD officials confirmed that they had used a combination of methods to project inpatient and outpatient workload, and that they had used Scenario B only to validate these projections after they had calculated them. These officials acknowledged that the Updated (FY10) Health Care Requirements Analysis could have better documented how these projections were developed. The lack of clear documentation makes it difficult to understand the processes used without extensive explanation by DOD officials. In addition, the Updated (FY10) Health Care Requirements Analysis omitted details on how DOD officials developed certain data. For example, the document does not show how DOD officials projected inpatient workload for behavioral health beds, only noting that the projected average daily census was 24 patients. Although the Updated (FY10) Health Care Requirements Analysis did not document how the average daily census was calculated, DOD officials told us that the historical data on inpatient behavioral health workload were not sufficient for projecting workload because LRMC’s behavioral health inpatient capacity was such that any beneficiaries other than active duty servicemembers were referred to the German economy for treatment. Therefore, the officials said they used another method (Scenario C) to project workload, so that the facility would have the inpatient behavioral health capacity to treat additional patients. The planning documentation also does not show how DOD officials projected the number of providers required for outpatient ambulatory departments. The Updated (FY10) Health Care Requirements Analysis contains a table with the number of outpatient ambulatory providers but does not show how or whether projected outpatient workload data for the replacement medical center were used to determine the number of outpatient providers that would be required. These gaps in documentation make it unclear whether the size of the replacement medical center will be adequate to meet the needs of the beneficiary population, and when combined with potential posture changes and previously discussed deviations or adjustments, the extent to which they may affect the size of the facility is unknown. Calculation errors in the planning documentation. We also found several calculation errors within the Updated (FY10) Health Care Requirements Analysis report. One table in the report that shows historical (5-year average), baseline, and projected workload for inpatient and outpatient care had errors in the 5-year average column for inpatient and bed days of care. When we spoke with DOD officials, dispositionswe pointed out these errors. DOD officials acknowledged the errors and noted that the correct numbers could be found in a separate table in the report’s appendix—although the appendix table was not listed as a reference to support the historical workload numbers. Additionally, a table in the report’s appendix, which illustrated the different projected inpatient and outpatient workload data, calculated using the three different scenarios, had many calculation errors in the projected outpatient workload columns. Specifically, in calculating projected workload using Scenarios A and B, DOD incorrectly used the 5-year average—instead of the fiscal year 2010 data—as a baseline, and when using Scenario C, DOD adjusted for potential decreases in the beneficiary population, although this scenario did not call for such an adjustment. As a result, outpatient workload data using Scenario B, for example, was calculated to be 288,534 encounters instead of 328,944 (a 14 percent difference). The projected data derived by incorrectly applying Scenario B were then used in another table in the report’s appendix to verify that the projected outpatient provider staffing would be sufficient to treat the projected number of outpatients. DOD officials acknowledged the error and provided us with correct data. According to DOD officials, even though there was a 14 percent difference in the projected outpatient workload data, the outpatient provider staffing levels would still be sufficient. Although these calculation errors may not adversely affect the size of the replacement medical center, it remains unknown to what extent this error will affect facility requirements when combined with the yet to be assessed posture changes, previously discussed deviations or adjustments, and gaps in documentation. Standards for internal controls include, among other things, control activities. Control activities include policies, procedures, techniques, and mechanisms that enforce management’s directives. They can include a wide range of activities—such as authorizations, verifications, and documentation—that should be readily available for examination. Detailed and appropriate documentation is a key component of internal controls. Without clear documentation of key analyses, and of how adjustments to facility requirements were made, stakeholders lack reasonable assurances that the proposed replacement medical center will be able to provide the appropriate health care capacity to meet the needs of the beneficiary population it is expected to serve. In developing the cost estimate for the replacement facility, DOD followed many of the best practices in developing estimates of capital projects, but DOD minimally documented the data sources, calculations, and estimating methodologies used in developing the cost estimate. Further, it is anticipated that the replacement medical center will become the hub of a larger medical-services-related campus, for which neither cost estimates nor time frames have yet been developed. The GAO Cost Estimating and Assessment Guide contains cost estimating best practices that have been identified by GAO and cost experts within organizations throughout the federal government and industry. These best practices can be grouped into four general characteristics of sound cost estimating: 1. “Accurate” refers to being unbiased and ensuring that the cost estimating is not overly conservative or overly optimistic and is based on an assessment of most likely costs. 2. “Credible” refers to discussing any limitations of the analysis because of uncertainty or bias surrounding data or assumptions used in the cost estimating process. 3. “Comprehensive” refers to ensuring that cost elements are neither omitted nor double counted, and all cost-influencing ground rules and assumptions are detailed. 4. “Well documented” refers to thoroughly documenting the process, including source data and significance, clearly detailed calculations and results, and explanations of why particular methods and references were chosen. See appendix III for detailed information on each of these cost estimating characteristics. In addition, Office of Management and Budget (OMB) best practices note that programs should maintain current and well-documented estimates of program costs, and that these estimates should encompass the full life cycle of the program. The characteristics of sound cost estimating are divided into individual criteria, which we used to assess DOD’s process for developing its cost estimate. Our process for evaluating the cost estimate consisted of assigning an assessment rating for the various criteria evaluated on a 1 to 5 scale: not met = 1, minimally met = 2, partially met = 3, substantially met = 4, and met = 5. Then, we took the average of the individual assessment ratings to determine an overall rating for each of the overarching characteristics: accurate, credible, comprehensive, and well documented. Criteria assessed as not applicable were not given a score and were not included in our calculation of the overall assessment. Furthermore, our review of DOD’s process for developing the cost estimate does not reflect an assessment of how facility requirements were developed or their quality, but only a determination of whether they are described in technical documentation and reflected in the estimate.However, as discussed previously in this report, during our assessment of DOD’s process for determining facility requirements for the replacement medical center, we found some calculation errors in the facility requirements. Table 4 provides a summary of our assessment of DOD’s cost estimating process. We determined that the cost estimate for the replacement medical center had been updated as project requirements were better defined. The overall cost estimate was broken down into costs per square foot, which were based on historical records of costs and actual experiences from other comparable programs. Although the DD Form 1391 does not include documentation regarding how inflation was factored into the estimated costs for the replacement medical center, DOD officials told us that costs on the DD Form 1391 have been adjusted for inflation using departmental guidance. We found no evidence indicating that the cost estimate is biased. However, it is not possible to fully assess the accuracy and reliability of a cost estimate without conducting a risk analysis that indicates the confidence level associated with the project’s estimated cost. Yet, the independent estimate and estimate validation that are further described below are sufficient to meet the requirements of this criterion. DOD hired an architecture and engineering firm to validate the cost estimate using a cross-check of major cost elements to determine whether alternative methods would have produced similar results. The contractor concluded that the cost estimate was valid. It also developed an independent cost estimate and determined that the design of the facility was within 1 percent of the size listed on the DD Form 1391, and that the resulting cost was also within 1 percent of DOD’s cost estimate. DOD officials told us that they also hired a separate firm to develop sensitivity and risk analyses that were designed to meet GAO cost estimating standards as published in the Cost Estimating and Assessment Guide. However, we found some limitations in these analyses. The only cost drivers evaluated were the exchange rate, German inflation, the cost of various raw materials, and a composite labor rate. The analyses did not evaluate the potential cost impact of variations in the beneficiary population, catchment area, level of care provided, or amount of battle-related injuries. Moreover, the analyses did not evaluate the cost impact of varying the square footage requirements documented in the Program for Design.credible, key cost elements should be tested for sensitivity, and other cost estimating techniques should be used to cross-check the reasonableness of the ground rules and assumptions. It is also important to determine how sensitive the final results are to changes in key assumptions and parameters. DOD’s cost estimating methodology for the replacement medical center substantially met best practice criteria for overall comprehensiveness, but some costs and assumptions were not included in the individual criteria that make up the comprehensive cost estimating characteristic. The cost estimate generally includes categories of costs for the design, construction, and outfitting of the replacement medical center. Additionally, DOD provided an appropriate work breakdown structure for the facility to help ensure that cost elements were neither omitted nor double counted. DOD also provided us with technical baseline documentation, including the Updated (FY10) Health Care Requirements Analysis report and the Program for Design, which defines the technical and programmatic requirements of the project. DOD officials told us that technical baseline documentation was developed by qualified personnel—including a multidisciplinary team of health care planners, architects, and engineers—and has been updated as the project has evolved. We found no instances in which any costs for design, construction, and outfitting of the replacement medical center were omitted. Although DOD provided us with some cost information as well as technical baseline documentation, additional recurring life cycle costs were, for the most part, not available, resulting in this subcategory criterion for comprehensiveness being rated as minimally met. The cost estimate does not include any facility sustainment costs, costs for supporting infrastructure, or any operation and maintenance costs for personnel or equipment required to operate the facility. In addition, the cost estimate does not include costs associated with the disposition or retirement of proposed medical center facilities at the end of their life cycles, such as demolition or renovation costs. In addition, DOD officials said costs associated with the disposition of the current LRMC or 86th MDG are not included in the cost estimate. Army officials told us that the facilities that make up the current LRMC will remain under the auspices of the Army. These officials noted that following completion of the replacement medical center, ownership of the current LRMC facilities will transfer to Army Installation and Management Command. Under this arrangement, these facilities will no longer be classified as part of the Military Health System. Therefore, Army officials told us that any costs associated with their disposition should not be included in the overall estimate for the replacement medical center. The 86th MDG clinic consists of 13 separate buildings. The remaining components that make up the current 86th MDG clinic will be transferred to Ramstein Air Base. According to 86th MDG officials, some of these buildings will remain in use following completion of the replacement medical center, while others will be demolished. However, it has not been decided how the remaining clinic buildings will be used; the officials said that this decision will be made by the installation commander at Ramstein Air Base. Since demolition or continued use of the remaining facilities will require DOD funding, these costs should be captured; they will help to show the full cost impact of the replacement medical center project. Further, the cost estimate contains minimal documentation of cost-influencing ground rules and assumptions. DOD officials noted that some of the ground rules and assumptions have been included in the technical baseline documentation. However, we could not find a documented reference or link in the technical baseline documentation we examined to specific cost elements in the DD Form 1391. We also found no evidence of documentation of the risks associated with assumptions, which should be traced to specific cost elements. A life cycle cost estimate should encompass all past (or sunk), present, and future costs for every aspect of the program, regardless of funding source, including all government and contractor costs. Without a full accounting of life cycle costs, management will have difficulty successfully planning program resource requirements and making wise decisions about where to allocate resources. Cost estimates are typically based on limited information and therefore need to be bound by the constraints that make estimating possible. These constraints are usually defined by ground rules and assumptions. However, because such assumptions are best guesses, the risks associated with a change to any of these assumptions must be identified and assessed. Many assumptions profoundly influence cost; the subsequent rejection of even a single assumption could invalidate many aspects of the cost estimate. Unless ground rules and assumptions are clearly documented, a cost estimate will not provide a basis for developing resolutions concerning areas of potential risk. Furthermore, it will not be possible to reconstruct the estimate when the original estimators are no longer available. A well-documented cost estimate is essential if an effective independent review is to ensure that it is valid. However, the documentation DOD provided in support of its cost estimate did not clearly demonstrate how facility requirements had been factored into cost elements. DOD’s cost estimate lacked documentation that described, in detail, the calculations performed and the estimating methodology used to derive the cost for each element of the replacement medical center. None of the documents provided to us included detailed documentation of how DOD developed and refined the cost estimate. A complete documentation of source data would include, for each line item in the cost estimate, a reference to a specific data source or sources (including the document and page number) used as the basis for each square footage and unit cost amount. For example, the cost estimate contains line item estimates for electricity, water/sewer/gas, steam/chilled water distribution, and storm drainage. However, from the documentation provided, it is not possible to determine how these requirements were used to develop cost estimates. The technical baseline description and data in the technical baseline documentation are spread across several documents, including the Updated (FY10) Health Care Requirements Analysis report, Program for Design, and a Planning Charrette Discussion. However, only the Planning Charrette Discussion is referenced in the cost estimate on the DD Form 1391. Moreover, we found minor differences between the square footage requirements in the Program for Design and the cost estimate as described on the DD Form 1391. For example, the Program for Design reports a total gross square footage requirement of 1,293,409 and the cost estimate reports a total requirement of 1,340,731 square feet. It was not possible to compare square footage amounts for various components of the facility because of the differing levels of detail in the Program for Design and the cost estimate. The difference in square footage numbers between the Program for Design and the DD Form 1391 is not documented; therefore, the reasons for the difference are unclear. Since the technical baseline is intended to serve as the basis for developing a cost estimate, it should be discussed in the cost estimate documentation. Cost estimators should provide a briefing to management about how the estimate was constructed—including specific details about the program’s technical characteristics, assumptions, data, cost estimating methodologies, sensitivity, risk, and uncertainty—so management can gain confidence that the estimate is accurate, complete, and high in quality. However, we found no documentation of a detailed review and approval that included the estimate’s technical foundation, ground rules and assumptions, estimating methods, data sources, sensitivity analysis, risks and uncertainty, cost drivers, cost phasing, contingency reserves, or affordability. DOD officials confirmed our conclusion that their cost estimating process was not fully documented. They told us that they had developed supporting facility costs using expert opinion and parametric models; however, these were not listed in the cost estimate. According to DOD officials, DOD guidance does not require detailed documentation as part of the DD Form 1391 cost estimate. Under DOD’s cost methodology, as the project design matures, so does the level of cost analysis. DOD officials asserted that the current cost estimate is appropriate for the current level of design. DOD officials acknowledged that better documentation would have provided more support and information to the various decision makers in the process and would be a good practice to follow. If the cost estimate for the replacement medical center does not include detailed documentation, stakeholders cannot reasonably conclude that it is reliable. In addition, DOD and Congress may not have the information they need to make fully informed decisions about the facility. If a cost estimate does not fully account for life cycle costs, management will have difficulty successfully planning program resource requirements and making wise decisions. Poorly documented cost estimates can cause a program’s credibility to suffer, because the documentation cannot explain the rationale of the methodology or the calculations underlying the cost elements. Further, without clear technical baseline documentation, the cost estimate will not be based on a comprehensive program description and will lack specific information regarding technical and program risks. Unless the cost estimate is fully documented, it cannot be reconciled with an independent cost estimate. DOD officials told us that the replacement medical center will be a fully functioning military treatment facility and not require any additional support facilities to fulfill its mission of providing inpatient and outpatient care. However, in the Strategic Concept of Operations section of the Updated (FY10) Health Care Requirements Analysis report for the replacement medical center, the center is described as being the hub of a medical-services-related campus at Weilerbach Storage Area. The medical campus is expected to be an integrated health care campus that would include hospital and ancillary components as well as outpatient, administrative, and educational components. The other facilities that DOD expects to develop for this campus under separate military projects include warrior transition unit facilities, medical transition detachment housing, and possibly medical troop barracks, among other facilities. At this time, DOD has not determined the additional costs for these facilities, nor has it developed a time frame for their construction. However, Army officials told us that plans for the campus concept are still predecisional and that certain facilities would only be replicated at Weilerbach Storage Area following the expiration of their useful life. For instance, the child care center near the current LRMC will remain there until it requires renovation or reconstruction. At that point, a similar facility would be constructed at Weilerbach Storage Area to replace it, so that staff working at the replacement medical center would not have to leave the area for day care services for their children. The need to replace the outdated LRMC and the 86th MDG clinic to ensure that military servicemembers and their families receive the care they deserve is widely recognized. A critical step toward meeting this goal is the development of a credible and comprehensive assessment of the facility requirements and the cost of the replacement medical center. DOD’s evolving posture in Europe will likely have an impact on the size of the beneficiary population served by the replacement medical center. However, DOD’s current needs assessment contains inconsistencies and errors in how it used patient workload and staffing data to determine facility requirements, such as facility size. In several situations, DOD officials adjusted the criteria being used but failed to document their rationale or need for taking these steps. Moreover, the documentation used to support the determination of the facility requirements does not clearly describe the methodology or calculations used to develop the requirements, and these requirements provided the basis for the cost estimate. DOD officials have indicated that the issues GAO has identified may not have a substantial impact on the size of the replacement medical center, but they have not yet taken specific action to determine what the individual or cumulative effects would be. DOD’s cost estimating methodology substantially met many best practices criteria but was only minimally documented. Congress has required the Secretary of Defense recertify to the Appropriations Committees in writing that the replacement medical center is properly sized and scoped to meet current and projected health care requirements. With this recertification, DOD has an opportunity to determine the impact the proposed posture changes will have on the proposed facility requirements and revise its documentation to provide clear support for how it developed its facility requirements. Without clear documentation of how key requirements were developed and how they factored into the development of facility requirements and cost, DOD cannot fully demonstrate that the proposed replacement medical center will provide adequate health care capacity at the current estimated cost. To ensure that the replacement medical center is appropriately sized to meet the health care needs of beneficiaries in a cost-effective manner, we recommend that as part of the facility’s recertification process, the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to take the following two actions: provide sufficient and clear documentation on how medical planners applied DOD criteria to determine the facility’s requirements, including how and why medical planners made adjustments to the criteria, and correct any calculation errors and show what impact, if any, these errors had on the sizing of the facility. Furthermore, in light of recently announced posture changes and potential adjustments that may need to be made in facility requirements based on correcting identified calculation errors in the original documentation, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to revise the cost estimate for the center, incorporating the best practices outlined in the GAO Cost Estimating and Assessment Guide to reflect these potential posture changes, update it with the revised calculations as part of the recertification more thoroughly document the data, assumptions, calculations, and methodology used to develop specific cost elements. In written comments to a draft of this report, DOD agreed with our conclusions and each of our recommendations. DOD stated that it recently conducted a reassessment of the original $1.2 billion project submitted in the Fiscal Year 2012 President’s Budget request that responds to GAO’s recommendations by utilizing the most current data, including recently announced force structure changes, and providing a documented audit trail of how the size, scope, and cost of the alternatives were developed. Although we are encouraged that DOD has performed a reassessment, DOD did not make it available for our review. DOD’s comments noted that the reassessment will be provided once approved by the Secretary of Defense. As a result, we are unable to confirm at this time that these actions have been taken. Therefore, we believe our recommendations are still appropriate until the reassessment is released and documentation made available. DOD also provided technical and clarifying comments, which we incorporated as appropriate into this report. DOD’s comments are reprinted in their entirety in appendix IV. We are sending copies of this report to the interested congressional committees, Secretary of Defense; the Secretaries of the Army and the Air Force; and the Director of the Office of Management and Budget. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact us at (202) 512-7968 or [email protected] or (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. To describe how DOD officials considered potential changes to DOD’s posture in Europe—and their possible effect on the beneficiary population—when developing facility requirements for the replacement medical center, we obtained available posture planning documentation, including population estimates, and compared it with the beneficiary population data used in planning assumptions for the replacement medical center. We also obtained and reviewed Health Care Requirements Analysis documentation containing beneficiary population information and requested and reviewed more recent updates of this information. We met with officials from the Offices of the Assistant Secretary of Defense (Health Affairs) and the Deputy Under Secretary of Defense (Installations and Environment), U.S. European Command, U.S. Army Europe, and U.S. Air Forces Europe to gain insight into possible scenarios that are being considered for posture changes in Europe. In addition we talked with some of the above individuals and met with officials with the U.S. Army Corps of Engineers Europe and with the U.S. Army Installation Command Europe to discuss how the location for the replacement medical center was selected. We also discussed with some of the officials above the steps they had taken to ensure reasonable accuracy of DOD beneficiary data and determined that the data specifically related to the proposed replacement medical center were sufficiently reliable for the purposes of this report. To assess DOD’s process for determining facility requirements for the replacement medical center to determine to what extent it incorporated quality standards into its design and adhered to DOD guidance, we obtained and reviewed documents detailing the process and any data used in the development of the requirements for the replacement facility. Specifically, we obtained and reviewed documentation used to develop plans for the proposed replacement medical center, such as health care requirements analyses and facility designs. We also reviewed relevant documentation—including checklists—to determine whether DOD included quality and environmentally friendly standards, such as world- class standards and Leadership in Energy and Environmental Design (LEED) green building standards. We also identified key assumptions used to determine facility requirements for the replacement medical center and obtained and reviewed applicable legal and departmental guidance, including DOD instructions and directives, and compared them with the documented assumptions and methods used to develop the facility’s requirements. Additionally, we reviewed their facility requirements documentation for calculation errors and attempted to duplicate their results. We also met with medical and construction planners with the Office of the Assistant Secretary of Defense (Health Affairs), the TRICARE Management Activity, U.S. Army Medical Command, the Landstuhl Regional Medical Center (LRMC), the Air Force Medical Support Agency, and the 86th Medical Group (MDG) to discuss how they determined the size of the replacement medical center. To review the process used to develop the cost estimate for the facility to determine to what extent DOD followed established best practices for developing its cost estimate, we obtained and reviewed available cost estimates for the proposed replacement medical center as well as supporting documentation that was used to determine overall costs. We evaluated this information using GAO’s standardized methodology of cost estimating best practices. For our reporting needs, we collapsed these best practices into four general characteristics for sound cost estimating: accurate, credible, comprehensive, and well documented. We determined the overall assessment by rating whether DOD followed best practices that make up each of the four characteristics. We assigned a number to our ratings: not met = 1, minimally met = 2, partially met =3, substantially met = 4, and met = 5. We took the average of the individual assessment ratings to determine the overall rating for each of the four characteristics. Criteria assessed as not applicable were not given a score and not included in the overall assessment calculation. We met with officials from the Office of the Assistant Secretary of Defense (Health Affairs), the TRICARE Management Activity, Army Medical Command, the Air Force Medical Support Agency, and the U.S. Army Corps of Engineers prior to our evaluation to explain our approach for reviewing DOD’s cost estimating process and to discuss project costs. We also met with these officials to discuss the results of our evaluation. To determine the overall costs of the replacement medical center, we obtained and reviewed planning documents. We also met with officials from LRMC and 86th MDG to discuss what the future plans are for the current facilities following construction of the replacement medical center. We conducted this performance audit from July 2011 through May 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The GAO Cost Estimating and Assessment Guide contains cost estimating best practices that have been identified by GAO and cost experts within organizations throughout the federal government and industry. For our reporting needs, we collapsed these best practices into four general characteristics of sound cost estimating: accuracy, credibility, comprehensiveness, and well documented. Table 5 provides detailed information on each of these cost estimating characteristics. In addition to the contacts named above, Laura Durland, Assistant Director; Marcia Mann, Assistant Director; Josh Margraf; Jeff Mayhew; and Richard Meeks made key contributions to this report. Joanne Landesman assisted in the message and report development, Amie Steele assisted in developing the report’s tables and graphics, Jennifer Echard and Dave Brown provided methodological support, and Michael Willems provided legal support.

Landstuhl Regional Medical Center (LRMC) is DOD’s only tertiary medical center in Europe that provides specialized care for servicemembers, retirees, and their dependents. Wounded servicemembers requiring critical care are medically evacuated from overseas operations to the 86th Medical Group clinic at Ramstein Air Base to receive stabilization care before being transported to LRMC for intensive care. According to DOD, both facilities were constructed in the 1950s and are undersized to meet current and projected workload requirements. DOD plans to consolidate both facilities into a single medical center at an estimated cost of $1.2 billion. In this report, GAO (1) describes how DOD considered changes in posture and the beneficiary population when developing facility requirements, (2) assesses DOD’s process for determining facility requirements, and (3) reviews DOD’s process to develop the facility’s cost estimate. GAO examined posture planning documentation, beneficiary demographic data, plans for the replacement medical center, and relevant DOD guidance, as well as interviewed relevant DOD officials. Department of Defense (DOD) officials considered current beneficiary population data, contingency operations, and most of the expected changes in troop strength when planning for the replacement medical center. However, recently announced posture changes in January 2012 have yet to be assessed for their impact on the facility. DOD estimates that the replacement medical center will provide health care for nearly 250,000 beneficiaries. A majority of those who are expected to receive health care from the center come from within a 55-mile radius of the facility. DOD officials told us that because the replacement medical center was designed for peacetime operations—with the capacity to expand to meet the needs of contingency operations—reductions in ongoing contingency operations in Afghanistan would not have an impact on facility requirements. At the time of this review, DOD officials said they were in the process of assessing proposed changes in posture to better understand their possible impact on the sizing of the replacement medical center. DOD officials incorporated patient quality of care standards as well as environmentally friendly design elements in determining facility requirements for the replacement medical center. DOD also determined the size of the facility based on its projected patient workload. Internal control standards require the creation and maintenance of adequate documentation, which should be clear and readily available for examination to inform decision making. However, GAO’s review of the documentation DOD provided in support of its facility requirements showed (1) inconsistencies in how DOD applied projected patient workload data and planning criteria to determine the appropriate size for individual medical departments, (2) some areas where the documentation did not clearly demonstrate how planners applied criteria to generate requirements, and (3) calculation errors throughout. Without clear documentation of key analyses—including information on how adjustments to facility requirements were made—and without correct calculations, stakeholders and decision makers lack reasonable assurances that the replacement medical center will be appropriately sized to meet the needs of the expected beneficiary population in Europe. DOD’s process for developing the approximately $1.2 billion cost estimate for the replacement medical center was substantially consistent with many cost estimating best practices, such as cross-checking major cost elements to confirm similar results. However, DOD minimally documented the data sources, calculations, and estimating methodologies it used in developing the cost estimate. Additionally, DOD anticipates that the new facility will become the hub of a larger medical-services-related campus, for which neither cost estimates nor time frames have yet been developed. Without a cost estimate for the facility that includes detailed documentation, DOD cannot fully demonstrate that the proposed replacement medical center will provide adequate health care capacity at the current estimated cost. Further, DOD and Congress may not have the information they need to make fully informed decisions about the facility. GAO recommends that DOD provide clear and thorough documentation of how it determined the facility’s size and cost estimate, correct any calculation errors, and update its cost estimate to reflect these corrections and recent posture changes. In commenting on a draft of this report, DOD concurred with GAO’s recommendations and stated that it has conducted a reassessment of the project that will be released once approved by the Secretary of Defense.

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Estimates of the size of the alien population subject to removal vary. A report from the Pew Research Center estimated the population of unauthorized aliens in the United States to be approximately 12 million as of March 2006. According to DHS, the population of aliens subject to removal from the United States has grown in recent years. DHS’s Office of Immigration Statistics estimated that the population of aliens subject to removal has increased by half a million from January 2005 to January 2006. Additionally, DHS has estimated that the removable alien population grew by 24 percent from 8.5 million in January of 2000 to 10.5 million in January of 2005. Aliens who are in violation of immigration laws are subject to removal from the United States. Over 100 violations of immigration law can serve as the basis for removal from the United States, including, among other things, criminal activity, health reasons (such as having a communicable disease), previous removal from the United States, and lack of proper documentation. ICE investigations resulted in 102,034 apprehensions, or about 8 percent of the approximately 1.3 million DHS apprehensions in 2005. Four main categories constituted the basis for aliens removed by DHS in 2005: (1) aliens entering without inspection, by, for example, illegally crossing the border where there is no formal U.S. port of entry; (2) aliens attempting to enter the United States without proper documents or through fraud, at U.S. ports of entry; (3) aliens with criminal convictions or believed to have engaged in certain criminal activities, such as terrorist activities or drug trafficking; and (4) aliens who are in violation of their terms of entry (e.g., expired visa). Our review of ICE policies and procedures, along with interviews at ICE field offices, showed that officers exercise discretion throughout various phases of the alien apprehension and removal process, but the initial phases of the process—initiating removals, apprehending aliens, issuing removal documents and detaining aliens—involve the most discretion. Officers in OI and DRO field offices told us that they exercise discretion for aliens with humanitarian issues and aliens who are not investigation targets on a case-by-case basis with guidance and approval from supervisors. Officers told us they typically encounter (1) aliens who are the target of an investigation and (2) aliens who are not the target of an investigation but who are encountered through the course of an operation and are subject to removal. While officers told us that discretion with regard to aliens who are fugitives, criminals, and other investigation targets is limited by clearly prescribed policies and procedures, they told us that they have more latitude to exercise discretion when they encounter aliens who are not fugitives or criminals and are not targets of ICE investigations, particularly when encountering aliens with humanitarian issues. The alien apprehension and removal process encompasses six phases: (1) initial encounter, (2) apprehension, (3) charging, (4) detention, (5) removal proceedings, and (6) final removal. Our review of federal regulations, ICE policies, guidance, and interviews showed the parts of the removal process from the time officers encounter aliens as part of an operation to the time they determine whether to detain an alien involve the most discretion. During removal proceedings and final removal, ICE attorneys and DRO officers can exercise discretion only in clearly delineated situations prescribed by ICE policies and statutory and regulatory requirements. Officers told us that during the initial phases of the apprehension and removal process, they encounter situations that require them to pursue alternate ways to initiate removals, in lieu of apprehending aliens. During encounters with aliens, officers told us that they decide how to exercise discretion for aliens on a case-by-case basis with input from supervisors or experienced officers. Specifically, officers told us that they exercise discretion when they encounter aliens who (1) present humanitarian concerns such as medical issues or being the sole caregiver for minor children or (2) are not the primary target of their investigations. DRO and OI officers told us that their primary goal is to initiate removal proceedings for any alien they encounter who is subject to removal. However, officers told us that in some instances, they might decide not to pursue any action against an alien who they suspect to be removable. Officers at two OI and one DRO field office told us that, in some instances, they are unable to initiate removal action against every alien they encounter during the course of an operation. Officers noted that several factors—such as the availability of detention space, travel time to an alien’s location, and competing enforcement priorities—affect their decisions to initiate removal action against an alien. Officers at one of the seven OI field offices we visited also told us that because of limited resources they have to make trade-offs between dedicating resources to aliens who pose a threat to public safety and those who do not—that is, noncriminal aliens—which in some instances result in decisions to not initiate removal action against noncriminal aliens. Our review of DHS and ICE guidance showed that officers’ ability to exercise discretion is limited for aliens who are investigation targets, such as criminal aliens and fugitive aliens who have ignored a final removal order. Discretion for apprehending these aliens is limited due to clearly prescribed policies, and procedures—such as requirements under the INA to detain terrorists or certain criminals—governing the handling of these aliens. By contrast, officers at all seven DRO and seven OI field offices we visited told us that they have discretion to process and apprehend aliens who are not investigation targets or aliens who present humanitarian circumstances. In such circumstances, officers told us that they can exercise discretion by deciding to (1) apprehend an alien and transport the alien to an ICE facility for processing, (2) issue the alien an NTA by mail, or (3) schedule an appointment for the alien to be processed at an ICE facility at a later date. For example, in looking for a criminal alien who is the target of an investigation, a fugitive operations team may encounter a friend or relative of the targeted alien—who is also removable—but not the primary target of an ICE investigation. If the friend or relative has a humanitarian circumstance, like being the primary caregiver for small children, the officers can decide to not apprehend the friend or relative and opt for processing at a later time after reviewing the circumstances of the case and determining that no other child care option is available at the time. In such instances, ICE headquarters officials told us that officers are to confirm child welfare claims made by an alien and determine whether other child care arrangements can be made. Headquarters officials also told us that aliens do not always divulge that they are the sole caretakers of children but explained that if ICE agents became aware of an alien’s child welfare responsibility, agents must take steps to ensure that the child or children are not left unattended. In addition, officers at two OI offices and one DRO office told us that in some instances, such as when aliens are sole caretakers for minor children or are ill, they will schedule appointments for aliens who are not investigation targets to process them at a later date. Officers at five of the seven OI field offices and two of the seven DRO offices we visited also told us that they will mail an NTA—as an alternative to apprehension—to aliens who present humanitarian issues such as medical conditions or child welfare issues. At another OI field office, officers told us that when determining whether to apprehend aliens or use an alternative to apprehension—for aliens who are not investigation targets—they also consider manpower availability. Our review of ICE guidance and procedures showed that most of an officer’s discretion in the charging phase relates to the decision to grant voluntary departure. Officers told us that when not statutorily prohibited from granting voluntary departure, they have some discretion in determining whether to issue an NTA and thus initiate formal removal proceedings or grant voluntary departure in lieu of initiating formal removal proceedings, which typically results in a hearing before an immigration judge. Officers told us that they may consider factors like humanitarian concerns and ICE priorities when exercising discretion to grant voluntary departure. On the basis of our review of ICE data, we noted significant variation in the use of voluntary departure across field offices. Our review of OI apprehension data also showed that three OI field offices near the U.S. southwestern border initiated a relatively higher number of voluntary departures (equal or greater than the number of NTAs issued). ICE headquarters officials noted that officers at field offices near the U.S. southwestern border employ voluntary departure generally because of their proximity to the U.S.-Mexico border, which enables them to easily transport Mexican nationals to Mexico. Figure 1 illustrates the number of NTAs and voluntary departure issued by OI field offices. Our review of procedures also showed that if detention is not mandated by the INA, officers have discretion to determine if an alien will be detained or released pending the alien’s immigration court hearing. When making this determination, ICE guidance instructs officers to consider a number of factors, such as humanitarian issues, flight risk, availability of detention space, and whether the alien is a threat to the community. Officers at two DRO field offices we visited told us that they exercise discretion to release aliens from custody if appropriate facilities are not available or if detention space is needed for aliens who pose a greater threat to public safety. At one OI field office, officers provided an example of an operation where they released two women and two children on their own recognizance because of the lack of appropriate detention space to house women and children. Officers at another DRO field office also noted that detaining women and juveniles can be challenging because of limited space to accommodate them. Detention determinations made by officers can be reexamined by immigration judges upon an alien’s request. Our review of ICE policy and DRO’s field operational manual showed that ICE attorneys—who generally enter the process once proceedings have begun—and officers have less discretion in the later phases of the apprehension and removal process. Once an alien’s case arrives at the removal proceedings phase and is being reviewed by ICE attorneys, we found that the use of discretion at this stage is limited by clear policy and guidelines. Our review of ICE policy and interviews with attorneys at 5 of 7 Chief Counsel Offices showed that most aliens have few alternatives to appearing before immigration court after entering the removal proceeding phase. Circumstances in which ICE might not pursue proceedings include a legally insufficient NTA; an alien’s eligibility for an immigration benefit, such as lawful permanent residency; and an alien’s serving as a witness in a criminal investigation or prosecution. In these specific cases, ICE attorneys can exercise discretion not to pursue proceedings by asking the immigration court to terminate removal proceedings if the NTA has been filed with the court. ICE OPLA guidance also permits ICE attorneys to take steps to resolve a case in immigration court for purposes of judicial economy, efficiency of process, or to promote justice. Examples in the guidance include cases involving sympathetic humanitarian circumstances like an alien with a U.S. citizen child with a serious medical condition or disability, or an alien or close family member who is undergoing treatment for a potentially life-threatening disease. ICE policy states that DRO may exercise discretion and grant some form of relief to the alien, such as a stay of removal and deferred action at the final phase of the process. A stay of removal is specifically authorized by statute and constitutes a decision that removal of an alien should not immediately proceed. Deferred action gives a case a lower removal priority, but is not an entitlement for the alien to remain in the United States. While some aliens could be granted a stay or deferred action by DRO field office managers, DRO officers told us that DRO seeks to execute removal orders in the vast majority of cases. DRO officers in field offices told us that they could recall only a handful of cases when DRO officers did not execute a removal order after it was issued by an immigration judge. Supervisors in one DRO field office recalled a case in which a stay was granted to an aggravated felon who had a serious medical condition. Officers at DRO and OI field offices who are responsible for apprehending, charging, and detaining removable aliens are to rely on formal and on-the- job training, guidance provided by supervisors, and guidance provided in field operational manuals to inform their decision making regarding alien apprehensions and removals. Consistent with internal control standards, which call for training to be aimed at developing and retaining employee skill levels to achieve changing organizational needs, ICE has updated some of the training it offers to officers responsible for making alien apprehension and removal decisions. Some of the updated training includes, among other things, implementing worksite enforcement training, supervisory training for OI supervisors, and Spanish language training for newly hired DRO officers. These updates have the potential to provide critical information to officers and supervisors to better support their decision making. However, ICE guidance, including ICE’s field operational manuals and ICE memorandums, on the exercise of discretion during the alien apprehension and removal process does not serve to fully support officer decision making in cases involving humanitarian issues and aliens who are not primary targets of ICE investigations. For example, ICE has not completed efforts to provide officers with complete and up to date guidance to reflect expanded worksite and fugitive operations enforcement efforts. ICE headquarters officials told us that they do not have a time frame for completing efforts to update available guidance in field operational manuals. In addition, although Chief Counsel Offices provide information regarding legal developments to DRO and OI officers to guide their decision making, ICE does not have a mechanism to ensure that such information is disseminated consistently to officers across field offices. The lack of comprehensive guidance and a mechanism by which to help ensure that officers receive consistent information regarding legal developments puts ICE officers at risk of taking actions that are not appropriate exercises of discretion and do not support the agency’s operational objectives. Internal control standards state that training should be aimed at developing and retaining employee skill levels to meet changing organizational needs. Officers at DRO and OI field offices who are responsible for apprehending, charging, and detaining removable aliens rely on formal and on-the-job training and guidance provided by supervisors to inform their decision making regarding alien apprehensions and removals. ICE has recently begun undertaking reviews and revisions of training that are consistent with these internal controls by updating and revising existing training curricula and implementing new training curricula for OI and DRO officers to provide critical information to officers and supervisors to better inform their decision making. These actions are important steps for providing officers with relevant information to inform their decision making. In early 2007, OI instituted a 2-week worksite enforcement training course geared toward informing ICE officers regarding criminal investigation techniques and procedures, which also provides information on the exercise of discretion regarding aliens who present humanitarian issues. OI headquarters officials identified worksite enforcement as a training need, since these operations are expanding, and an OI headquarters official told us that most OI officers had not participated in major worksite enforcement operations since 1998 and that many of the officers who participate are temporarily assigned to the operation from other duties or locations. Because of expanded worksite enforcement operations, officials told us that OI instituted worksite enforcement training, which will be offered to 100 OI officers per year. Headquarters officials told us that resource constraints preclude ICE from offering worksite enforcement training to all officers. In addition to worksite enforcement training, OI officials told us that they are also in the process of instituting additional changes to training curricula that could better support officer decision making: OI officials told us that they developed a 3-week training course for first-line supervisors, with 1 week of the course designed to provide information on legal issues pertaining to removal dispositions, such as instances when to issue an NTA or grant voluntary departure. An OI official told us that OI is developing a 3-week refresher training course for experienced OI officers, to reinforce these officers’ knowledge of alien apprehension and removal operations. According to OI’s chief of training, this course should be implemented by the second quarter of fiscal year 2008. OI officials have revised an “On the Job” training manual that tracks tasks that new officers must complete in their first 18 months on the job. According to an OI training official, by completing the tasks outlined in the manual, officers should have a full understanding of the requirements for processing aliens, which include exercising discretion throughout the apprehension and removal process (e.g., whether to immediately apprehend the alien or to mail an NTA). Like OI officials, DRO officials have also taken steps to strengthen training for DRO officers. In April 2007, DRO added a Spanish language course to its basic training curriculum. According to DRO headquarters training officials, this training will better equip officers to communicate with aliens and thus help ensure that officers make appropriate decisions about how to exercise discretion for aliens. In addition, DRO is developing a 3-week refresher training for experienced DRO officers designed to provide officers with skills, tactics and legal updates pertaining to alien apprehension and removal operations and plans to implement this course in October 2008. DRO headquarters officials also told us that they will institute a 2-year “On the Job” training program in September 2007. According to officials, this program is to provide newly appointed officers with additional training on immigration laws, competencies, and tasks related to their jobs. While the recent changes to the OI and DRO training curricula are positive steps in better aligning ICE training with operations, it is too soon for us to assess the effectiveness of these efforts. According to internal control standards, management is responsible for developing and documenting the detailed policies, procedures, and practices to ensure that they are an integral part of operations. DRO and OI officers generally rely on (1) OI and DRO field operational manuals; (2) DHS and ICE memorandums; and (3) an OI-developed worksite enforcement operational guidebook for guidance and policies to perform their duties, including making decisions regarding alien apprehensions and removals. However, ICE guidance to instruct officer decision making in cases involving humanitarian issues and aliens who are not primary targets of ICE investigations during the alien apprehension and removal process is not comprehensive and has not been updated by headquarters officials to reflect ICE’s expanded worksite and fugitive operations. In addition, although officers exercise discretion when deciding whether or not to take action to initiate the removal process, ICE does not have guidance on officers’ exercise of discretion on who to stop, question, and arrest when initiating the removal process. Without comprehensive policies, procedures, and practices, ICE lacks assurance that management directives will be conducted as intended and that ICE officers have the appropriate tools to fully inform their exercise of discretion. ICE’s OI and DRO field operational manuals were created by ICE’s legacy agency—Immigration and Naturalization Service (INS), which was reorganized under the newly formed Department of Homeland Security in March of 2003. Both of these manuals, which are largely unchanged from the guidance developed and employed by INS, are currently undergoing revisions. Our review of these manuals shows that they do not offer comprehensive and updated guidance to instruct officers on the exercise of discretion in cases involving aliens with humanitarian issues and aliens who are not targets of ICE investigations. For example, OI’s field operational manual offers some guidance on options for addressing aliens with caregiver issues who are encountered during worksite operations, such as ensuring that an alien’s dependents receive timely and appropriate care. However, the guidance does not include, for example, provisions for aliens with medical conditions. OI headquarters officials told us that they are in the process of revising OI’s field operational manual but have not yet updated the sections corresponding to alien apprehensions and removals. With respect to DRO’s field operational manual, some guidance is available to help officers decide whether to detain aliens pending their immigration hearings, but it does not clarify how officers should exercise discretion to determine detention for nonmandatory detention cases, especially for aliens with humanitarian issues or aliens who are not targets of ICE investigations. DRO headquarters officials told us that they are revising a chapter in the manual on fugitive operations but the revisions are not yet available to DRO officers in the field. For both the OI manual and the fugitive operations chapter in the DRO manual, headquarters officials told us that they did not yet know if the revisions would include guidance on the use of discretion for aliens with humanitarian issues or aliens who are not the targets of ICE investigations. Moreover, OI and DRO officials could not provide a time frame for when the revisions will be completed. The various ICE organizational units with removal responsibilities have issued some guidance to help guide their own officers’ and attorneys’ exercise of discretion for aliens with humanitarian issues, but the guidance either is not comprehensive with regard to the various circumstances the officers and attorneys may encounter or does not apply to officers who have the authority to initiate removal proceedings. A memo issued in 2006 by DRO to its field offices, outlines severe medical illnesses as a basis for exercising discretion when deciding whether to detain aliens who are not subject to mandatory detention. While this memo provides important guidance for exercising discretion during the detention phase for aliens with medical issues, it does not address child welfare and primary caretaker issues. In addition, a 2005 memo issued by OPLA permits ICE attorneys to take steps not to pursue proceedings by asking the immigration court to terminate removal proceedings if the NTA has been filed with the court. Examples in the guidance include cases involving sympathetic humanitarian circumstances like an alien with a U.S. citizen child with a serious medical condition or disability, or an alien or close family member who is undergoing treatment for a potentially life- threatening disease. However, this memo is directed at Chief Counsel attorneys, who do not have the authority to initiate removal proceedings. Instead, only supervisory DRO and OI officers can initiate removals, and as a result the memo is not clearly applicable to them. In addition, DHS, OI, DRO, and OPLA have also issued their own separate memorandums that guide officers’ actions at different points of the apprehension and removal process. Each memorandum is generally directed to officers and attorneys under the respective ICE unit that issues it, resulting in a number of memos distributed via a number of different mechanisms within each ICE unit. These memorandums do not offer comprehensive guidance on exercising discretion for aliens with humanitarian circumstances or aliens who are not the primary targets of ICE investigations. For example, OI issued a memo in May 2006, which instructs officers to schedule appointments as a last resort for juvenile aliens, elderly aliens, or aliens with health conditions to be processed at a later date, rather than apprehend these aliens at the time of the encounter or mail them an NTA. This guidance addresses important humanitarian issues, but it is only directed to ICE officers who are responding to calls from local law enforcement agencies. Furthermore, it does not define or fully delineate circumstances that might constitute “last resort.” Another memo issued by DHS in October 2004 provides officers and supervisors with flexibility on detaining aliens (who are not subject to mandatory detention) depending on the circumstances of the case, such as available bed space. However, this memo does not offer specific guidance on determining detention for aliens with humanitarian circumstances or aliens who are not primary targets of ICE investigations. In addition to ICE field operational manuals and various memorandums, an OI headquarters official told us that ICE has recently instituted a worksite enforcement operational guidebook to assist in the proper planning, execution, and reporting of worksite enforcement operations. Our review of this guidebook showed that it discusses, among other things, operational planning and coordination, including instructions on reporting requirements at the arrest site and working with other ICE units, like DRO. However, although ICE plans to regularly update its worksite enforcement operational guidebook based on lessons learned from past worksite operations, the current guidebook that ICE provided us in August 2007 does not include any guidance about how officers should factor humanitarian issues into their decision making during the apprehension and removal process. Finally, in our review of the worksite enforcement operational guidebook, we did not find guidance to inform officers’ exercise of discretion on whom to stop, question, and arrest when initiating the removal process—guidance that was also lacking in the various operational manuals and memorandums. In our review of documents from 26 OI field offices, we also noted that only 3 of these field offices have developed local guidance to guide officers’ discretion in the initial phases of the apprehension and removal process. However, the local guidance we reviewed is not comprehensive because the 3 offices do not have guidance that covers the use of discretion throughout the phases of the alien apprehension and removal process when officers can exercise discretion. For example, 1 of the 3 offices has guidance on scheduling appointments for future processing for aliens with humanitarian concerns. Another office has guidance that covers factors to consider when exercising discretion for cases involving humanitarian issues as well as guidance on deciding whether to detain aliens who are not investigation targets. ICE has recently expanded its worksite enforcement and fugitive operations, increasing the probability that officers in the field will have to exercise discretion in their encounters with aliens who present humanitarian issues or aliens who were not the targets of their investigations—particularly noncriminal aliens. With these expanded operations, the need for up to date and comprehensive guidance to reduce the risk of improper decision making becomes increasingly important. According to ICE data, in fiscal year 2006, ICE made, through its worksite enforcement operations, 716 criminal arrests, which include aliens subject to removal who are charged with criminal violations, and 3,667 administrative arrests, which refer to alien workers who are unlawfully present in the United States but have not been charged with criminal violations. These data show a sharp increase from fiscal year 2005, as noted in figure 2. Through July 2007 of fiscal year 2007, ICE made 742 criminal arrests and 3,651 administrative arrests in its worksite operations; these arrests surpassed the combined arrests for worksite enforcement operations from fiscal year 2002 to fiscal year 2005. According to a senior ICE headquarters official, from fiscal year 2003 through the third quarter of fiscal year 2007, ICE has also experienced over a six-fold increase in the number of new officers dedicated to worksite enforcement operations, many of whom are temporarily assigned to worksite operations. ICE reported that it has also expanded fugitive operations and plans to increase the number of fugitive operation teams from 18 in 2006 to 75 by the end of fiscal year 2007. Annual performance goals for each of these teams call for 1,000 apprehensions per team. As of April 27, 2007, ICE officers had arrested 17,321 aliens through its fugitive operation teams in fiscal year 2007, a 118 percent increase in arrests since fiscal year 2005. ICE’s expanding worksite enforcement and fugitive operations both present officers with circumstances that could require the use of discretion, specifically cases that involve aliens with humanitarian issues or aliens who are not ICE targets. Expanded fugitive operations may increase the number of encounters that officers have with removable aliens who are not the primary targets or priorities of ICE investigations. For cases involving these aliens, additional guidance could provide ICE with better assurance that its officers are equipped to exercise discretion and prioritize enforcement activities appropriately. In large-scale worksite enforcement operations, officers have encountered numerous aliens who have presented humanitarian issues. For this type of case, comprehensive guidance on how to weigh relevant aspects of aliens’ circumstances or humanitarian factors would provide ICE with enhanced assurance that officers are best equipped to appropriately determine whether aliens should be apprehended, how they should be charged, and whether they should be detained. A recent large-scale worksite enforcement operation in Massachusetts highlights the importance of having comprehensive and up to date guidance to help inform officers’ decision making when they encounter aliens with humanitarian issues. In this operation, ICE officers encountered aliens who had humanitarian issues, including aliens who were primary caretakers of children and had to assess the totality of the circumstances in numerous cases, in real time, to decide how to handle each case in coordination with other entities, such as social service agencies, state government, and local law enforcement. ICE issued a fact sheet about this operation on its external Web site that discussed difficulties in coordinating and communicating with these entities on issues of operational plans, detention space, access to detainees, and information about arrestees. The fact sheet noted that ICE arrested 362 removable aliens and transported over 200 of these aliens to detention facilities in Texas due to a lack of bed space in Massachusetts. In addition, 60 aliens were initially released during administrative processing at the time of the operation for child welfare or family health reasons, and additional aliens were released later for these reasons. According to ICE officials, another concern ICE officers face as they attempt to exercise discretion is that these officers encounter aliens who sometimes do not divulge their status as sole caregivers for children. Complex environments like the one described here demonstrate the need for up to date and comprehensive guidance that supports ICE’s operational objectives and use government resources in the most effective and efficient manner. Internal control standards state that effective communications should occur in a broad sense with information flowing down, across, and up the organization. This includes communicating information in a form and within a time frame that enables officials in carrying out their duties. In carrying out their duties, ICE officers require information on relevant legal developments—such as court decisions modifying existing interpretations of immigration laws—to help inform their decision making regarding removal dispositions (e.g., NTA or voluntary departure). However, ICE has not instituted a mechanism to ensure that legal developments are consistently disseminated to ICE officers across all field offices. For example, officers at only two DRO field offices and one OI field office we visited received current information on legal developments from their Chief Counsel Office, which is responsible for disseminating this information, while others did not receive such information at all or did not receive it when they needed it for case processing. In addition, officers at two of the seven OI field offices we visited expressed a need for more information regarding legal developments to better inform their decision making regarding removal dispositions. Officers at one OI field office told us that there are occasions when they do not receive the necessary legal guidance until they have already processed a case. Chief Counsel offices independently decide when and what information to disseminate regarding legal developments. Officers at seven DRO and six OI field offices we visited told us that they can consult Chief Counsel attorneys to seek guidance on legal issues. Although relying on Chief Counsel field offices to disseminate information and advise officers on legal issues can help officers when making decisions, without a formalized mechanism to consistently disseminate information that officers can use when they process cases, officers might not receive information necessary to make sound removal decisions that comply with the most recent legal developments. ICE has two control mechanisms in place to monitor its removal operations—established supervisory review practices and procedures and an inspection program. However, ICE does not have a mechanism to allow it to analyze information specific to the exercise of discretion. Internal control standards advise agencies to design internal controls to ensure that ongoing monitoring occurs in the course of normal operations. This monitoring includes regular management and supervisory activities, comparisons, reconciliations, and other actions people take in performing their duties. ICE relies primarily on the judgment of experienced field officers and supervisory reviews to provide assurance that officers’ decision making complies with established policies and procedures. In addition to supervisory reviews, ICE has recently taken steps to institute an inspection program designed to oversee field offices’ compliance with established policies and procedures. However, neither supervisory reviews nor ICE’s newly instituted inspection program offers a mechanism for management to collect and analyze information specific to officers’ exercise of discretion in alien apprehension and removal decisions across all field offices. The ability to collect and analyze data about the exercise of discretion across field offices could provide ICE with additional assurance that it can identify and respond to areas that may require some type of corrective action. Moreover, without these data and analyses, ICE is not positioned to compile and communicate lessons learned to help support officers’ decision making capacity. One way for agencies to help ensure that ongoing monitoring occurs in the course of normal operations is to design appropriate supervision to help provide oversight of internal controls. Consistent with this activity, ICE policy requires supervisory review of officer decisions on a case-by-case basis to ensure that officers’ decisions comply with established policies and procedures for alien apprehension and removal decisions. ICE officers are to document the specific immigration charges lodged against an alien, as well as the custody decision made by officers, on a standardized form. Throughout the alien apprehension and removal process, supervisors are responsible for reviewing and authorizing decisions made by officers. For example, when officers are determining whether to detain or release an alien from custody, ICE memorandums state that supervisors must approve an officer’s decision. In addition, according to ICE headquarters officials, supervisors at both DRO and OI field offices are to review officers’ apprehension and removal decisions to ensure that officers use the most appropriate removal disposition and to ensure that officers’ decisions comply with legal requirements, policies, and procedures. Headquarters officials also told us that supervisors are responsible for approving and signing off on decisions to grant voluntary departure and issue NTAs and other removal dispositions issued by officers. Officials at all seven DRO and seven OI field offices we visited also told us that supervisors are responsible for reviewing instances when officers have exercised discretion, such as when encountering aliens with humanitarian issues. Officers at field offices we visited also noted that they consult with experienced officers or supervisors when making these decisions and that operations are typically conducted by teams where officers’ collective knowledge is used to make discretionary decisions. Table 1 outlines the types of reviews conducted by experienced officers, supervisors, and managers at DRO and OI field offices. ICE’s Office of Professional Responsibility instituted an inspection program for OI field offices in July 2007, consistent with internal control standards for monitoring operations by designing mechanisms for identifying and communicating deficiencies to managers. According to the headquarters official responsible for overseeing the inspection program, ICE plans to implement a similar inspection program for DRO field offices in the fall of 2007. According to this official, the inspection program is designed to determine whether field offices are complying with the established policies and procedures selected for review. The inspection program consists of two areas: (1) an annual self-inspection process under which all field offices must respond to a Web-based questionnaire covering operational activities and (2) a field inspection program under which all OI and DRO field offices are to be inspected by headquarters officials at least once during a 4-year cycle. In instances where field offices are not compliant, field officials must develop a plan of action to address discrepancies that are identified. For OI offices, examples of areas that are to be reviewed include procedures for processing aliens, as well as methods for ensuring that operational plans are prepared and approved before arrests are conducted. For DRO field offices, areas that are to be reviewed, among other things, include compliance with procedures to ensure that aliens are served with a copy of an NTA, as well as procedures for completing and obtaining approval for operational plans in advance of fugitive operations. Our review of the self-inspection questionnaires and our discussion with the program manager showed that the inspection program is not designed to analyze information on officer decision making regarding alien apprehensions and removals. An important purpose of internal control monitoring is to allow agencies to assess the quality of performance over time. Specifically, internal control standards recommend that managers compare trends in actual performance to expected results throughout the organization in order to identify any areas that may require corrective action to help ensure operations support operational objectives. Although, ICE has some controls in place to monitor operations related to alien apprehensions and removals, neither supervisory review nor its inspection program offer managers information to specifically analyze officer decision making for trends across the 75 OI, DRO and Chief Counsel field offices that might indicate the need for a corrective action, such as additional training or clarification of procedures, or that might reveal best practices for achieving desired outcomes. ICE does not have a mechanism for collecting and analyzing data on officers’ exercise of discretion in determining what removal processing option to employ, such as officers’ basis for scheduling an appointment to process an alien at a later date for aliens who present humanitarian circumstances or the frequency of such actions. Additionally, ICE does not collect and analyze the actions taken by officers (e.g., scheduling an appointment, or mailing an NTA) in addressing aliens presenting humanitarian issues. Such information could be used by managers to identify trends in actions taken by officers to address aliens with humanitarian issues that could in turn be used to make any necessary modifications to guidance, policies or training. ICE policy outlines a mechanism to capture and analyze information regarding officers’ discretionary decisions made as part of worksite enforcement operations, but this inspection mechanism has not been used consistently. ICE officials told us that, as part of worksite enforcement operations, its officers make decisions in the field on a case-by-case basis in a time-constrained environment. In recent worksite operations, officers have apprehended thousands of aliens in operations conducted in various cities across the nation. Our review of ICE’s worksite enforcement training curriculum and OI’s field operational manual showed that ICE policy outlines a key internal control—after-action reports—which are to capture, among other things, information on significant or unusual incidents or circumstances that may have occurred during an operation; a listing of the number of aliens arrested, reasons for the release of detained or arrested aliens, and any allegations of civil rights violations or other complaints. However, a senior headquarters official responsible for overseeing OI’s worksite enforcement division told us that although after- action reports are still outlined as requirements in OI’s training curriculum (dated April 2007) and in the OI field operational manual, ICE has eliminated this requirement. According to OI headquarters officials, prior to the reporting requirement change, after-action reports had only been prepared for one worksite enforcement operation, which was conducted in 2006, since ICE was created. The senior headquarters official told us that, in lieu of after action reports, OI intends to collect information on lessons learned as part of its worksite enforcement guidebook. Our review of the guidebook provided to us by ICE showed that the guidebook did not yet reflect lessons learned. The scale and complexity of recent ICE worksite operations, such as an operation in Massachusetts involving difficulties coordinating and communicating with social service agencies, state government, and local law enforcement on issues of operational plans, detention space, access to detainees, and information about aliens who were apprehended, highlight the need for ICE to be able to learn from past experiences, thereby providing ICE officers with a richer knowledge base to inform their decision making under difficult circumstances. Moreover, since ICE has experienced a more than six-fold increase (between fiscal year 2003 and the third quarter of fiscal year 2007) in the number of new officers participating in worksite enforcement operations, more officers are making decisions and exercising discretion in these complex environments. Having a mechanism that provides ICE with information regarding its enforcement operations across all field offices would help identify areas needing corrective action regarding officer decision making. For example, having comprehensive information on factors considered by officers and actions taken by them (e.g., scheduling an appointment for later processing, or mailing an NTA) to address aliens with humanitarian issues could lead to revised policies and procedures. In addition, such a mechanism could help ICE protect its credibility and integrity against allegations of alien mistreatment by having readily available information to ensure that officer decision making complies with established policies and procedures. Without a mechanism to catalog and collect information— agencywide—on the exercise of discretion, ICE managers cannot analyze trends to provide additional assurance that officer decision making complies with established ICE policies and operational objectives, nor is ICE positioned to refine operational approaches based on a review of best practices across field offices. ICE relies on two databases to document officers’ decisions regarding alien apprehensions: (1) the Enforcement Case Tracking System (ENFORCE), which is primarily used to collect alien biographical information and removal option employed, such as voluntary departure or an NTA, and (2) the Deportable Alien Control System (DACS), which is used to track the location of detained aliens, as well as the status of aliens’ immigration court hearings. However, headquarters officials told us that the details of discretionary decisions (e.g., factors considered in deciding whether to apprehend an alien or detain an alien, based on humanitarian reasons) are not recorded in ENFORCE and DACS. Officials explained that officers may record information explaining their decisions in each of these systems’ narrative sections. However, according to officials, inputting this information is not a requirement, and information recorded by officers in the narrative sections of these databases is not analyzed by field managers or headquarters officials. Headquarters officials responsible for overseeing ENFORCE and DACS told us that ICE plans to update these systems to provide other capabilities. A headquarters official responsible for overseeing ENFORCE told us that ICE plans to integrate aspects of ENFORCE with another system—the Treasury Enforcement Communications System (TECS)— used by officers to track criminal investigations. According to this official, the proposed changes will allow officers to more easily access information pertaining to apprehended aliens and associated criminal investigations. In addition, a headquarters official responsible for overseeing the DACS system told us that ICE is piloting a program to merge DACS with ENFORCE, with the goal of creating one case management system for collecting information on alien apprehensions and for tracking the progress of alien removal proceedings. However, it is unclear whether these plans and the resulting systems would provide information ICE managers need to monitor and analyze officer decision making across all field offices. The DHS Office of Inspector General (OIG) has recognized the need to upgrade ICE data systems so that management has reliable data to make programmatic decisions and assess performance with regard to detention and removal programs, including identifying trends associated with underlying decisions made during the alien removal process. In April 2006, the OIG reported that DACS lacks the ability to readily provide DRO management with the data analysis capabilities to manage the detention and removal program in an efficient and effective manner because (1) the information stored in DACS was not always accurate or up to date and (2) DRO could not readily query DACS to obtain statistical reports on detentions and removals. The OIG stated that the lack of reliable program analysis capabilities could detrimentally affect DRO’s ability to identify emerging trends and identify resource needs. According to the OIG, this data system should, at a minimum, be able to provide quality immigration- related data on various factors including, among other things, the rationale underlying DRO’s decision to release an alien from detention or not to detain individual aliens. OIG recommended that ICE expedite efforts to develop and implement a system capable of meeting data collection and analysis needs relating to detention and removal, including a plan showing milestone dates, funding requirements, and progress toward completing the project. DHS and ICE concurred with the OIG’s recommendation and said that it would prepare a project plan for developing and deploying the system in an expedited manner. Although DHS and ICE said that the new system is to allow users to capture, search, and review information in specific areas, including information on detention and removal case details, the response was not specific about whether it would contain information on the rationale for making these decisions. Having information on officers’ exercise of discretion, including their rationale for making decisions, would provide ICE managers a basis for identifying potential problems, analyzing trends, and compiling best practices. ICE headquarters officials told us that collecting and managing data that detail decisions made by officers could be costly. However, ICE has not evaluated the costs or alternatives for creating a mechanism capable of providing ICE with usable information that it can analyze to identify trends in the exercise of discretion. For example, ICE has not considered the costs and benefits of such a mechanism in connection with planned or ongoing information system updates. Until ICE assesses costs and alternatives for collecting these data, it will not be in a good position to select and implement an approach that will provide ICE assurance that it can identify any best practices that should be reinforced or areas that might require corrective actions—by, for example, modifying policies, procedures, or training. Given that 75 field offices are involved in the alien apprehension and removal process and that oversight of these offices lies with three ICE units, a comprehensive mechanism for reviewing officers’ decision making could provide ICE with meaningful information to promote the appropriate use of discretion, identify best practices, and analyze any significant differences across field offices in order to take appropriate action. Appropriate exercise of discretion during the alien removal process is an essential part of ICE’s law enforcement efforts as it conducts operations in complex environments and with finite resources to identify, locate, and remove many of the estimated 12 million aliens subject to removal from the United States. Internal controls, like training, guidance, and monitoring that are designed to help ICE ensure that its officers are well equipped to consistently make decisions that support its operational objectives, are crucial for ICE to help provide assurance that its officers exercise discretion in a manner that protects the agency’s integrity, advances its mission, and provides the greatest value to the nation. Although ICE has taken steps in the area of training to develop and retain officer skills, ICE’s guidance does not comprehensively address key aspects of the alien apprehension and removal process, such as dealing with humanitarian issues and aliens who are not investigation targets. In light of the increased number of circumstances that might call for the exercise of discretion in ICE’s expanded enforcement efforts, comprehensive guidance—including factors that should be considered when officers make apprehension, charging, and detention determinations for aliens with humanitarian issues—to better support officers’ decision making to provide ICE with enhanced assurance that discretion is exercised appropriately. Without established time frames for updating guidance, ICE lacks a means to track progress and ensure accountability for accomplishing the updates. Moreover, developing a mechanism for consistently disseminating legal information would help to ensure that officers have the most recent information on legal developments that may affect the decisions they make. Finally, collecting information on officers’ exercise of discretion could provide ICE with enhanced assurance that officers and supervisors across field offices are making decisions that reflect the agency’s operational objectives regarding alien apprehensions and removals and could also help managers identify best practices or areas that may require management action. Although ICE officials have noted that collecting and managing data about the exercise of discretion could be costly, ICE has not evaluated the costs of and alternatives for collecting such information. For instance, as ICE updates the systems it uses to manage other operational data, it could consider the costs and benefits of integrating this data collection function as part of other planned system redesigns. However, without an assessment of the costs and alternatives for collecting data on officer decision making, whether in association with planned system updates or not, ICE is not in the best position to select and implement an approach that provides ICE assurance that it can identify best practices to support decision making capacity or, more importantly, recurrent or systematic issues that could jeopardize its mission. To enhance ICE’s ability to inform and monitor its officers’ use of discretion in alien apprehensions and removals, we recommend the Secretary of Homeland Security direct the Assistant Secretary of ICE to take the following three actions: develop time frames for updating existing policies, guidelines, and procedures for alien apprehension and removals and include in the updates factors that should be considered when officers make apprehension, charging, and detention determinations for aliens with humanitarian issues; develop a mechanism to help ensure that officers are consistently provided with updates regarding legal developments necessary for making alien apprehension and removal decisions; evaluate the costs and alternatives of developing a reporting mechanism by which ICE senior managers can analyze trends in the use of discretion to help identify areas that may require management actions—such as changes to guidance, procedures, and training. We requested comments on a draft of this report from the Secretary of Homeland Security. In an October 4, 2007 letter, DHS agreed with our three recommendations and discussed the actions ICE plans to take to address them, which are summarized below and included in their entirety in appendix II. With regard to our recommendation that ICE develop time frames for updating existing policies, including factors that should be considered when making apprehension, charging, and detention decisions, DHS said that ICE would reevaluate and republish all existing policies, guidelines, and procedures pertaining to the exercise of discretion during calendar year 2008. With regard to our recommendation that ICE evaluate the costs and alternatives of developing a mechanism by which to analyze trends in the use of discretion, DHS said that ICE anticipates initiating this evaluation by December 1, 2007. With regard to our recommendation to develop a mechanism to help ensure that officers are consistently provided with updates regarding legal developments, DHS explained that ICE believes that policies are in place to address the needs of the operational components for up to date legal guidance, and that officers rely primarily on local Chief Counsel Offices for information on legal developments. DHS said that this localized approach reflects the fact that significant developments in case law often result from decisions of the 12 United States Courts of Appeal and that such decisions are often inconsistent and only have application within the geographic boundaries where they arise. Nonetheless, DHS commented that ICE recognizes that consistency in the dissemination of legal updates is of great importance to agents and officers and said that ICE will look to develop best practices to ensure the latest legal updates are disseminated to agents and officers through each Chief Counsel’s office. We believe ICE identification and implementation of best practices would be important in helping ensure that updates on legal developments are consistently provided to officers. We are sending copies of this report to selected congressional committees, the Secretary of Homeland Security, the Assistant Secretary of U.S. Immigration and Customs Enforcement, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others on request. In addition, the report will be available on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report or wish to discuss them matter further, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors are listed in appendix III. This review examined how Immigration and Customs Enforcement (ICE) ensures that discretion is used in the most fair, reasoned, and efficient manner. Along these lines, we examined whether ICE has designed internal controls to guide and monitor officers’ exercise of discretion when making alien apprehension and removal decisions, consistent with internal control standards for the federal government. Specifically, this review addresses the following three questions: 1. When and how do ICE officers and attorneys exercise discretion during the alien apprehension and removal process? 2. What internal controls has ICE designed to guide officer decision making to enhance its assurance that the exercise of discretion supports its operational objectives? 3. What internal controls has ICE designed to oversee and monitor officer decision making during the alien apprehension and removal process to enhance ICE’s assurance that the exercise of discretion supports its operational objectives? To address these objectives, we obtained and analyzed information at ICE’s Office of Investigations (OI), Office of Detention and Removal Operations (DRO), and the Office of the Principal Legal Advisor (OPLA) within the Department of Homeland Security (DHS) in Washington, D.C. We also carried out work at 14 ICE field offices—seven OI and seven DRO field offices—located in seven cities throughout the United States: Chicago, Detroit, Los Angeles, New York, Philadelphia, Phoenix, and San Diego and seven ICE Chief Counsel Offices (which serve as OPLA’s field offices) at these same locations. We selected these locations considering field office size, ICE data on alien apprehensions, and geographic dispersion. Regarding alien apprehensions, about 40 percent of all ICE Office of Investigations apprehensions during fiscal year 2006 were made by the seven OI offices selected for our review. As we did not select a probability sample of field offices or Chief Counsels’ offices to review, the results of our work at these locations cannot be projected to field offices nationwide. To identify when and how officers and attorneys exercise discretion during the alien apprehension and removal process, we reviewed relevant laws and regulations as well as applicable policies, memorandums, operational manuals, and training materials developed by OI, DRO, and OPLA headquarters offices. We also spoke with headquarters officials in the OI, DRO, and OPLA operational divisions regarding the exercise of discretion in the alien apprehension and removal process. At each of the field locations we visited, we collected and reviewed available locally developed field guidance, memorandums, and training materials applicable to the exercise of discretion during the apprehension and removal process. We also conducted small group interviews with officers, supervisors, and managers at the 14 OI and DRO field offices we selected as part of our nonprobability sample to determine when and how officers at those locations exercise discretion, and when and how officers are expected to exercise discretion, during the alien apprehension and removal process. In addition, we conducted small group interviews with attorneys, supervisors, and managers at the 7 Chief Counsel offices we visited to determine when and how attorneys exercise discretion, and when and how they are expected to exercise discretion, once formal removal proceedings have been initiated by OI and DRO officers. As we did not select probability samples of ICE officers and attorneys, supervisors, and managers to interview at the field offices we selected, the results of these interviews may not represent the views of ICE officers and attorneys and their supervisors and managers nationwide. To address internal controls ICE has designed to guide officer decision making, we reviewed field operational manuals, policy memorandums, and training materials developed by OI, DRO, and OPLA headquarters offices. We also requested locally developed written guidance and policies and procedures regarding alien apprehension and removal procedures from all DRO, OI and Chief Counsel field offices. We received and reviewed locally developed guidance from 13 of OI’s 26 field offices and 12 of Chief Counsel’s 26 field offices. The purpose of this review was to identify the range of policies and guidance developed by field units that we did not capture as part of our nonprobability sample of ICE field offices. We did not receive locally developed guidance from DRO’s 23 field offices, as DRO headquarters officials told us that DRO field offices do not rely on locally developed guidance and instead rely on national policies and memorandums. As part of our work at the ICE field offices we visited, we also discussed and identified guidance and training provided to officers and attorneys with regard to the guidance and information available to them when exercising discretion during the apprehension and removal process, including guidance about nontargeted aliens, humanitarian issues, and updates on legal developments. We then compared the national and local guidance, memorandums, and training materials in place with internal control standards to determine whether these controls were consistent with the standards. In addition, we met with headquarters officials responsible for the development of policy and training of field unit operations for OI and DRO and we interviewed OPLA officials responsible for developing policy and training for Chief Counsel Offices to discern their role in developing and providing guidance and information to ICE officers, attorneys, supervisors, and managers involved in the alien apprehension and removal process. To address what internal controls ICE has designed to oversee and monitor officer decision making during the alien apprehension and removal process, we reviewed relevant laws, regulations, and field operational manuals. We also interviewed OI, DRO and OPLA headquarters officials, field officers, and field attorneys to identify the types of oversight that are in place. We examined what controls were in place to provide assurance that removal decisions are consistent with established policies, procedures, and guidelines across field offices, and examined whether these controls were designed to be consistent with the internal control standards. We did not test ICE controls in place as part of our review. We also interviewed headquarters officials responsible for overseeing ICE’s enforcement operations to examine controls in place to monitor enforcement activities. We met with ICE headquarters officials responsible for overseeing ICE databases containing information pertinent to alien apprehension and removal outcomes, and we inquired about information collected in these databases regarding officer decision making, including cases involving humanitarian issues and cases involving aliens who are not targets of ICE investigations. We also interviewed ICE officers, supervisors, and management personnel at the ICE field offices we visited to identify the types of supervisory reviews and approvals required for decisions made by ICE officers and attorneys and the documentation to be reviewed and approved by supervisors in regard to these decisions. We reviewed data on alien apprehensions for worksite enforcement operations, for fiscal year 2002 through fiscal year 2007, to identify trends in ICE’s expanded enforcement efforts. We also reviewed data on alien apprehensions resulting from fugitive operations. To determine the reliability of the data, we interviewed headquarters officials responsible for overseeing and verifying the data, reviewed existing documentation regarding the data, and interviewed headquarters officials responsible for tracking statistics pertaining to the data. We conducted our work between August 2006 and September 2007 in accordance with generally accepted government auditing standards. In addition to the above, John F. Mortin, Assistant Director; Teresa Abruzzo; Joel Aldape; Frances Cook; Katherine Davis; Kathryn Godfrey; Wilfred Holloway; and Ryan Vaughan made key contributions to this report.

Officers with U.S. Immigration and Customs Enforcement (ICE) within the Department of Homeland Security (DHS) investigate violations of immigration laws and identify aliens who are removable from the United States. ICE officers exercise discretion to achieve its operational goals of removing any aliens subject to removal while prioritizing those who pose a threat to national security or public safety and safeguarding aliens' rights in the removal process. The General Accountability Office (GAO) was asked to examine how ICE ensures that discretion is used in the most fair, reasoned, and efficient manner possible. GAO reviewed (1) when and how ICE officers and attorneys exercise discretion and what internal controls ICE has designed to (2) guide decision making and (3) oversee and monitor officers' decisions. To conduct this work, GAO reviewed ICE manuals, memorandums, and removal data, interviewed ICE officials, and visited 21 of 75 ICE field offices. ICE officers exercise discretion throughout the alien apprehension and removal process, but primarily during the initial phases of the process when deciding to initiate removals, apprehend aliens, issue removal documents, and detain aliens. Officers GAO interviewed at ICE field offices said that ICE policies and procedures limit their discretion when encountering the targets of their investigations--typically criminal or fugitive aliens, but that they can exercise more discretion for other aliens they encounter. Officers also said that they consider humanitarian circumstances, such as sole caregiver responsibilities or medical reasons, when making these decisions. Attorneys, who generally enter later in the process, and officers told GAO that once removal proceedings have begun, discretion is limited to specific circumstances, such as if the alien is awaiting approval of lawful permanent resident status. Consistent with internal control standards, ICE has begun to update and enhance training curricula to better support officer decision making. However, ICE has not taken steps to ensure that written guidance designed to promote the appropriate exercise of discretion during alien apprehension and removal is comprehensive and up to date and has not established time frames for updating guidance. For example, field operational manuals have not been updated to provide information about the appropriate exercise of discretion in light of a recent expansion of ICE worksite enforcement and fugitive operations, in which officers are more likely to encounter aliens with humanitarian issues or who are not targets of investigations. Also, ICE does not have a mechanism to ensure the timely dissemination of legal developments to help ensure that officers make decisions in line with the most recent interpretations of immigration law. As a result, ICE officers are at risk of taking actions that do not support operational objectives and making removal decisions that do not reflect the most recent legal developments. Consistent with internal control standards, ICE relies on supervisory reviews to ensure that officers exercise appropriate discretion and has instituted an inspection program designed to ensure that field offices comply with established policies and procedures. However, ICE lacks other controls to help monitor performance across the 75 field offices responsible for making apprehension and removal decisions. A comprehensive mechanism for reviewing officers' decision making could provide ICE with meaningful information to analyze trends to identify areas that may need corrective action and to identify best practices. ICE officials acknowledged they do not collect the data necessary for such a mechanism and said doing so may be costly. Without assessing costs and alternatives, ICE is not in a position to select an approach that will help identify best practices and areas needing corrective action.

govreport

Ground ambulance services are provided by a wide range of organizations that differ in organizational structure, staffing types, types of transports offered, and revenue sources. Medicare payments for ambulance services are made up of two components: a service-level payment for the type of transport provided and a mileage payment. Providers may be affiliated with an institution (such as a hospital or a fire department) and share resources and operational costs, or they may be independent and freestanding. In addition, providers may be for-profit, nonprofit, or government-based. Providers may rely heavily on volunteers, use both volunteers and paid staff, or use only paid staff. Providers may specialize in nonemergency transports, or offer both nonemergency and emergency (those responding to a 911 call) transports. Also, some providers offer only basic life support (BLS) services, while others offer advanced life support (ALS) services. ALS services require the skills of a medical technician who is more specialized and trained, such as a paramedic, than the technician who can provide BLS services. Revenue sources depend on the resources available in communities and communities’ choices about funding ambulance services. They may include community tax support, charitable donations, in-kind contributions, state and federal grants, subscription programs,payments from Medicare or Medicaid and private health insurance companies (including patient copayments or coinsurance). The mix and amount of revenues available may vary. Communities differ by the level of tax support for specific services, such as ensuring a minimum level of service in remote areas, sophistication of transport vehicles, and the training level of the staff. Medicare pays ambulance providers through a national fee schedule. (See fig. 5 in app. I for an overview of the Medicare ambulance payment formula.) Payments have two components: 1. service-level payment: for the type of transport provided, such as an ALS Level 1 transport;2. mileage payment. The mileage payment is determined by the number of miles traveled with a patient during an ambulance transport and the mileage base rate. Since 2002, CMS has increased the rural mileage rate (which also applies to super-rural transports) by 50 percent for miles 1 through 17. See 67 Fed. Reg. 9100 (Feb. 27, 2002) (adding subpart H to 42 C.F.R. part 414); 42 C.F.R. § 414.610(c)(5)(i)(2011) (this mileage rate increase is not set to expire). Also see fig. 5 in app. I for an overview of the Medicare ambulance payment formula. Improvement, and Modernization Act of 2003, temporarily extended by subsequent acts, and most recently extended through the end of 2012 by the Middle Class Tax Relief and Job Creation Act of 2012. Providers paid under a fee schedule generally have an incentive to keep their costs to deliver services at or below the fee schedule rate. Some providers rely heavily on Medicare revenues, and adequate Medicare margins for these providers may help ensure that beneficiaries have access to ambulance services. In our 2007 report, we found that providers with lower transport volumes generally had higher costs per Because of transport than providers with greater transport volumes.high fixed costs for maintaining readiness—the availability of an ambulance and crew for immediate emergency responses—providers with low volumes, which still need to maintain readiness, tended to have higher costs per transport. Other significant factors that affected cost per transport included level of volunteer staff hours, percentage of Medicare transports that are BLS, percentage of Medicare transports that are super-rural, and level of community tax support. Providers’ costs for providing ground ambulance transports were highly variable in 2010, ranging from a low of $224 per transport to a high of $2,204, with a median cost per transport of $429. The variability of costs per transport reflected differences in certain provider characteristics, such as volume of transports, intensity of Medicare transports, and level of government subsidies received. Providers reported that personnel costs accounted for the largest percentage of their total costs in 2010 and contributed the most to increases in total costs between 2009 and 2010. The median cost per ground ambulance transport for providers in our sample was $429 in 2010, but providers’ costs per transport ranged from a low of $224 to a high of $2,204. Five percent of providers had costs per transport that were less than $253, and 5 percent had costs per transport that were more than $924. Figure 1 shows the distribution of 2010 costs per transport for providers in our sample. Among the population of providers from which our sample was drawn, the estimated median cost per transport ranged from $401 to $475, which represents the 95 percent statistical confidence interval around the median and is the range within which we expect the population median cost per transport to fall in 95 percent of the samples we could have drawn. Super-rural providers had estimated median costs per transport that were significantly higher than urban providers (see table 1). The variability associated with our survey data did not allow us to conclude that rural providers’ estimated median costs per transport were significantly different from super-rural or urban providers. As will be discussed later, when we controlled for other provider characteristics that affected cost per transport using regression analysis, differences in cost per transport by service area were not significant.characteristics other than service area were more important in explaining the variation in cost per transport. The median Medicare margin, including add-on payments, was about positive 2 percent in 2010 for the 153 providers in our sample.removed the add-on payments, we found that payments decreased for the providers in our sample, resulting in a lower median Medicare margin of negative 1 percent for those providers. See table 2. Ambulance transports for all Medicare fee-for-service beneficiaries in the nation increased by 33 percent from 2004 to 2010. All three service areas—urban, rural, and super-rural—experienced growth. Transports per 1,000 beneficiaries in super-rural areas grew the most, by 41 percent, and transports per 1,000 beneficiaries in rural and urban areas increased by 35 percent and 32 percent, respectively. (See table 4.) The increase in ambulance transports from 2004 to 2010 is attributable primarily to an increase in BLS nonemergency transports, which rose by 59 percent from 2004 to 2010. Super-rural areas experienced the largest increase in BLS nonemergency transports (82 percent). The increase in Medicare beneficiaries’ use of ambulance services did not appear to be caused by changes in the demographic characteristics of beneficiaries. For example, factors such as age, race, and sex remained stable from 2004 to 2010 in urban, rural, and super-rural areas. Representatives we spoke with from one ambulance provider organization suggested that some of the increase in ambulance transports was attributable to increased billing for Medicare ambulance services at the local-government level. Some local governments that provided ambulance transports free of charge had been reluctant in the past to bill insurers such as Medicare because patients would then be financially responsible for out-of-pocket insurance costs, such as deductibles and copayments. The increased out-of-pocket costs for patients had the potential to result in less community support of ambulance providers through fewer charitable contributions and fewer volunteers. However, these local governments have begun to bill Medicare as well as other insurers because of increased budgetary pressures. Representatives we spoke with also added that the introduction of the national fee schedule in 2002 may have contributed to increased billing because it allowed providers to better anticipate the amount of revenue they could receive from Medicare. The Department of Health and Human Services (HHS) Office of Inspector General (OIG) has explored increases in ambulance utilization and has cited improper payments as one potential cause. For example, HHS OIG found that nonemergency transports, including BLS nonemergency transports, made up the majority of improper payments for ambulance services, and particularly transports for dialysis services. HHS OIG also found that Medicare’s ambulance transport benefit is highly vulnerable to abuse and found that many ambulance transports paid for by Medicare did not meet Medicare program requirements, including transports that were not medically necessary. We provided a draft of this report to HHS and invited representatives of AAA to review the draft. HHS had no general or technical comments on behalf of CMS. The AAA representatives provided oral comments and generally agreed with our findings; however, AAA had some questions regarding our methodology and conclusions, which we clarified in the report where appropriate and discuss below. In addition, AAA provided technical comments, which we incorporated as appropriate. AAA representatives questioned whether the Medicare margin results were comparable to those of the 2007 report and were concerned that readers would conclude that providers’ Medicare margins have increased over time. We clarified in the report that we do not consider the results reported in 2007 and in the current report to be directly comparable because the samples examined in each report were different and we reported median Medicare margins in the current report whereas in 2007 we reported average Medicare margins. AAA representatives noted that our sample contains providers that have been in business since at least 2003 and that the cost data from this sample may not be representative of all ambulance providers. We agree that the providers in our sample represent mature and well-established organizations—an advantage because this approach avoids start-up organizations with potentially high start-up costs, as described in our scope and methodology. Despite the differences in the samples and the type of measure used for reporting Medicare margins, both of these studies showed wide variation in costs per transport and Medicare margins. AAA representatives had some questions about the results of our regression analysis. For example, the regression results suggest that ambulance providers that receive a greater proportion of government subsidies tend to have higher costs. The representatives theorized that providers with higher costs seek additional government support and did not think this finding was consistent with how their industry operates. As described in the report, the Medicare Payment Advisory Commission found an association between increased resources and increased costs in the hospital industry and theorizes that such hospitals face less pressure to control costs. We found an association in the ambulance industry but determining causality was beyond the scope of our work. AAA representatives also questioned the regression analysis results that indicated that providers’ use of volunteer staff did not significantly contribute to differences in providers’ total costs, because our survey data indicated that personnel costs were, on average, 61 percent of providers’ total costs. The results may be a consequence of the relatively small sample size and, in addition, a small proportion of providers in our sample using volunteer staff (21 percent). Finally, the AAA representatives commented that ground ambulance providers’ current Medicare payments are lower than those we calculated for 2010 because of the expiration of a required temporary increase in Medicare payments for certain geographic areas, the implementation of a policy for reporting fractional mileage, and the introduction of a productivity adjustment relative to the annual inflation adjustment of the fee schedule. In addition, AAA noted that the cost of fuel has increased since 2010. We acknowledge that these factors likely lowered Medicare payments and increased costs for some providers after 2010, the most recent year for which data were available when we began our study. We are sending copies of this report to other congressional committees and the Administrator of CMS. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of the report. GAO staff who made major contributions to this report are listed in appendix II. This appendix describes the data and methods we used to respond to our research objectives. We conducted a survey of ambulance providers to collect data on their costs and other characteristics. We relied on these survey data for much of our analyses and supplemented our survey results with information from other sources, including Medicare claims data, as appropriate. We also analyzed Medicare claims data to determine payments to ambulance providers as well as to determine the number of Medicare ambulance transports. We tested the internal consistency and reliability of the data from our survey and the Medicare claims data and determined that all data sources were adequate for our purposes. We conducted our work from April 2012 through September 2012 in accordance with generally accepted government auditing standards. To collect data on ground ambulance providers’ costs, revenues, transports, and organizational characteristics for calendar year 2010, or for the fiscal year that corresponded to all or the majority of a provider’s calendar year 2010 data, we sent a web-based survey to a random, nationally representative sample of 294 eligible ambulance providers. We obtained data from 154 providers for a response rate of 52 percent, after excluding cost outliers and surveys with unreliable data. We determined that our sample was nationally representative of the approximately 2,900 ambulance providers that billed Medicare in 2003 and 2010, were still operational in 2012, and did not share costs with nonambulance services or air ambulance services. However, the small sample size and the variability of reported costs reduced the precision of our estimates. We drew potentially eligible providers for our survey from an existing sample, originally developed for our 2007 report, of 900 non-hospital- based ground ambulance providers that billed Medicare in 2003. Through Internet searches and phone contacts to ambulance providers, we excluded any providers that (1) were no longer in business; (2) shared costs with nonambulance services, such as those providers affiliated with a fire department; or (3) we were otherwise not able to contact.did for the 2007 report, we excluded ground ambulance providers that also provided air ambulance services. After all exclusions, we had 294 eligible providers for potential survey participation. On the basis of the number of providers that were eligible for our sample and the number of providers that responded to our survey, we calculated sample weights to estimate how many Medicare ambulance providers our sample represented. To develop our survey instrument, we modified the survey instrument used for our 2007 report, which was mailed to ambulance providers, to tailor it to our current objectives and format it for use as a web-based survey. We retained questions about ambulance providers’ costs, revenues, and transports, as well as questions to identify organizational characteristics that might affect ambulance providers’ costs, such as the use of volunteer staff. We added questions related to changes in total cost (increases or decreases) from 2009 to 2010 and the cost components that most contributed to the changes. We also asked providers for their National Provider Identifier (NPI), which providers use to bill Medicare, and their Provider Transaction Access Number (PTAN). These numbers enabled us to identify and analyze Medicare claims for We needed these current identifiers to link the providers we surveyed.the providers in our sample to Medicare claims data because our sample was based on the sampling frame of our 2007 report, and Medicare has implemented a new identification system since then. We sought feedback on our survey instrument from both internal and external sources. It was reviewed by internal survey experts and pretested on seven ambulance providers. We also consulted with the American Ambulance Association (AAA), an industry group that represents ambulance providers. On the basis of the feedback we received, we modified the survey instrument as appropriate. We sent our survey by e-mail to 294 eligible ambulance providers on April 12, 2012. We asked providers to complete the survey within 2 weeks of receipt. We later extended this deadline 2 weeks to give providers more time to complete the survey. Providers were encouraged to contact us by e-mail or a toll-free number so that we could resolve any questions or problems. We sent three reminder e-mails to providers that had not yet completed the survey (6, 14, and 21 days after sending the survey to providers) and made two rounds of reminder telephone calls to encourage participation. AAA and the National Association of Emergency Medical Technicians encouraged providers to participate in the survey. When providers returned surveys that were incomplete, invalid, or resulted in conflicting responses to key items, we conducted follow-up by phone and e-mail. We took steps to ensure that the data reported in the survey were valid and reliable. First, we included in the survey instrument questions intended to validate the reported cost data. For example, we asked providers whether certain cost components (such as personnel costs) were included in the total cost amount submitted, and we asked how confident providers were about the total cost amount submitted. As a result, we excluded from our analyses one provider that was not confident in the total cost amount. Second, we conducted analyses to identify any incomplete data or inconsistencies in responses. If we found such data, we contacted the provider to try to obtain complete or corrected data. We excluded three providers that were not able to provide complete data on total cost or total transports. Third, we used a lognormal distribution to exclude outliers with a cost per transport more than three standard deviations from the mean. We excluded three providers with costs per transport that were outliers. All computer programs we used for our analyses were peer reviewed to verify that they were written correctly and executed properly. On the basis of our efforts to validate the data, including computer testing and corrections, we concluded that the data were sufficiently valid and reliable for our purposes. All sample surveys are subject to sampling error—that is, the extent to which the survey results differ from what would have been obtained from the population instead of the sample. The sample is only one of a number of samples that we might have drawn. As a result, we reported the results of our analyses with their 95 percent confidence intervals. The 95 percent confidence interval refers to the range of values within which we would expect the true population value to fall in 95 percent of the samples we could have drawn. We analyzed 2010 Medicare claims data for the survey nonrespondents and compared this information with similar claims data for providers in our sample. Using Medicare claims data for all survey recipients, we were able to test for potential nonresponse bias for the characteristics contained in the claims data. The nonresponse analysis did not find any statistically measurable bias that would affect our analyses of providers’ costs. We used regression analysis to investigate the relationship between providers’ total cost and provider characteristics that may have affected their costs. We opted for a total cost model using a logarithmic functional form because it is well grounded in microeconomic theory. Although we considered using a similar model of the same functional form with cost per transport as the dependent variable, we determined that the parameter estimates of such a model would be similar to the total cost model. Provider characteristics included in our model were: (1) volume of transports, (2) cost of doing business, (3) mix of Medicare transports, (4) intensity of Medicare transports, (5) service area, (6) use of volunteer staff, (7) receipt of government subsidies, and (8) ownership type. We used those results to produce a graph illustrating the relationship between cost per transport and volume of transports. We also used the results of the regression analysis to estimate the effect on providers’ cost per transport of reducing the value of each of two variables that were significant in the regression. See table 5 for the characteristics included in the model, how each characteristic was measured, and the data source for each characteristic. Our regression analysis modeled total cost at the provider level as a function of the provider characteristics described above. We used ordinary least squares to model the log of total costs for a provider.model was specified in log-log form to conform to standard microeconomic theory regarding cost functions. The two continuous independent variables—transport volume and geographic practice cost index (GPCI)—were entered in log form. The remaining variables were not entered in log form because they were either indicator variables (value of 0 or 1) or percentage variables (values ranging from 0 to 1.00). Three of the explanatory variables in the regression were statistically significant at the 1 percent or better level in explaining the variation in providers’ total costs: total transports, percentage of revenues from The government subsidies, and percentage of Medicare transports that were nonemergency. Table 6 shows the regression results. We used the regression results to predict the log of total cost and then converted it to total cost by taking the antilog. We applied an adjustment to the resulting prediction of total cost to account for the fact that our regression was for log total cost rather than total cost. We then divided total cost by total transports to derive cost per transport. We used this method to produce predictions of cost per transport for the range of 1 to 20,000 transports shown in figure 2 of the report. We also used the regression results to estimate the effect on cost per transport of a reduced percentage of revenues from government subsidies and a reduced percentage of nonemergency transports. In each case, we held the other variables in the regression model at their regression sample mean and calculated cost per transport for the sample two ways: one with the value of the variable of interest set at its sample average and another with it set at a value 25 percent less. We reported the difference between these two values for each variable. To examine the relationship between Medicare payments and providers’ costs, we used Medicare claims data to calculate Medicare payments in 2010 for the providers in our sample, and we calculated Medicare margins—the percentage difference between providers’ Medicare payments per transport and their costs per transport. To examine ambulance transports per 1,000 Medicare beneficiaries, we used Medicare claims data and Centers for Medicare & Medicaid Services (CMS) 2010 Medicare enrollment data. We found CMS’s claims and enrollment data to be sufficiently reliable for the purposes of this report. We calculated 2010 Medicare payments for the providers in our sample using Medicare carrier claims data. We identified relevant ambulance claims for 153 providers by using the NPIs (which providers use to bill Medicare) and PTANs reported by providers on the survey. We excluded any Medicare claims without either service-level or mileage payments and any claims with service-level payments that were more than three standard deviations from the mean of the log distribution for all such claims. We also excluded any claims for transports with multiple patients because the calculations for these payments require additional information not available on Medicare claims. See figure 5 for the payment formulas specified in the Medicare ambulance fee schedule. To calculate service-level payments, we used the type of transport identified on the claim to determine the associated relative value unit, which is a constant multiplier that adjusts the service-level base rate to account for the mix and intensity of the service, and we used the 2010 service-level base rate of $209.65. We used the zip code where the transport originated to determine the adjustment from the geographic practice cost index (GPCI), which is used to account for the different costs of operating ambulance services in different regions of the country. In accordance with CMS’s payment methodology, we adjusted 70 percent of the service-level payment by the GPCI, and we did not adjust the other 30 percent by the GPCI. We also used the zip code where the transport originated to determine the applicable urban, rural, or super-rural add-on payment rate. To calculate mileage payments, we used the number of miles reported on the claim and the 2010 mileage base rate of $6.74. We used the zip code where the transport originated to determine the applicability of the permanent mileage increase for miles 1 through 17 for rural and super-rural transports and to determine the applicable urban, rural, or super-rural add-on payment rate. The total fee schedule payment for each transport is the sum of the service-level and mileage payments. We calculated payments with and without the applicable add-on payment rates, and we assumed that providers charged the maximum allowed amount under the ambulance fee schedule.that our payment calculations were comparable to actual payments made based on the claims, we compared the payments we calculated with add- ons to the payment amounts on the claims for a random sample of 6,000 urban, rural, and super-rural claims, and we found the difference in the amounts to be less than 1 percent. All payments are expressed in 2010 dollars. To ensure For the providers in our sample, we reported the median of providers’ Medicare payment per transport by predominant service area (urban, rural, or super-rural) and for all providers. Medicare payment per transport, we divided the sum of the provider’s Medicare payments by the sum of its Medicare transports. To calculate each provider’s Medicare margin, we used the provider’s cost per transport, as calculated from the survey responses, and its Medicare payment per transport, described in the previous section. We subtracted the provider’s cost per transport from its Medicare payment per transport, and we divided this amount by the provider’s Medicare payment per transport. For the providers in our sample, we reported the median Medicare margin and the distribution of providers’ Medicare margins by predominant service area (urban, rural, or super-rural) and for all providers. As we did in the 2007 report, we classified providers as super-rural if 60 percent or more of their Medicare transports in 2010 originated in a super-rural zip code. We classified providers as rural if they did not meet the super-rural definition and 60 percent or more of their Medicare transports in 2010 originated in rural or super-rural zip codes. We classified providers as urban if they did not meet the rural or super-rural classifications. Since some providers furnish transports in more than one area, there is likely to be some measurement error in identifying the full effect of service area on costs. excluded claims with service-level payments outside of three standard deviations from the mean of the log distribution for all such claims for each of these years. We counted Medicare beneficiaries as the number of months beneficiaries were enrolled in Medicare Part A or B in 2010 divided by 12. We then divided the number of transports by the number of enrolled Medicare beneficiaries and multiplied the quotient by 1,000. We also examined the change in transports per 1,000 Medicare beneficiaries from 2004 to 2010. Medicare claims data, which are used by the Medicare program as a record of payments made to health care providers, are closely monitored by both CMS and Medicare Administrative Contractors—contractors that process, review, and pay claims for Medicare Part B–covered services, including ambulance services. The data are subject to various internal controls, including checks and edits performed by the contractors before claims are submitted to CMS for payment approval. Although we did not review these internal controls, we assessed the reliability of Medicare claims data by reviewing related CMS documentation, interviewing agency officials about the data, and comparing payments in a sample of claims to expected payments based on Medicare’s published ambulance fee schedule. We determined that the Medicare claims data were sufficiently reliable for the purposes of this report. In addition, we assessed the reliability of CMS’s enrollment data by reviewing related CMS documentation and comparing the enrollment data to published sources. We determined that Medicare enrollment data were sufficiently reliable for the purposes of this report. In addition to the contact named above, Christine Brudevold, Assistant Director; Ramsey Asaly; Carl S. Barden; Stella Chiang; Carolyn Fitzgerald; Leslie V. Gordon; Corissa Kiyan; Rich Lipinski; Elizabeth T. Morrison; Aubrey Naffis; and Eric Wedum made key contributions to this report. Ambulance Providers: Costs and Expected Medicare Margins Vary Greatly. GAO-07-383. Washington, D.C.: May 23, 2007. Ambulance Services: Medicare Payments Can Be Better Targeted to Trips in Less Densely Populated Areas. GAO-03-986. Washington, D.C.: September 19, 2003.

Since 2004, Congress has authorized supplemental temporary payments, called "add-on" payments, to augment Medicare fee schedule payments to ambulance providers. The add-on payments increased payments for transports in urban, rural, and super-rural (the least densely populated) areas by $175 million in calendar year 2011, according to the Medicare Payment Advisory Commission. In 2007, GAO reported a decline in transports by beneficiaries in super-rural areas and recommended that the Centers for Medicare & Medicaid Services (CMS) monitor beneficiary use of ambulance transports to ensure access to services, particularly in super-rural areas. The Middle Class Tax Relief and Job Creation Act of 2012 required GAO to update the 2007 report. GAO examined, for 2010 (the most recent year complete data were available when GAO began the study), (1) ground ambulance provider costs for transports, (2) the relationship between Medicare payments and provider costs, and (3) beneficiary use of ground ambulance transports. To do this work, GAO sent a survey to a sample of eligible providers based on the 2007 report sample asking for provider costs and characteristics. The sample is representative of all ground ambulance providers that billed Medicare in 2003 and 2010, were operational in 2012, and did not share costs with nonambulance services or air ambulance services. GAO also performed a regression analysis to examine factors that affect costs, analyzed Medicare claims and enrollment data, and interviewed representatives of ambulance provider organizations. CMS reviewed a draft of this report and had no comments. Ground ambulance providers' costs per transport for 2010 varied widely. The median cost per transport for the providers in GAO's sample was $429, ranging from $224 to $2,204 per transport. Provider characteristics that affected cost per transport were volume of transports (including both Medicare and non-Medicare transports), intensity of transports (the proportion of Medicare transports that were nonemergency), and the extent to which providers received government subsidies. Higher volume of transports, higher proportions of nonemergency transports, and lower government subsidies were associated with lower costs per transport. Providers reported that personnel cost was the largest cost component in their 2010 total costs and the biggest contributor to increases in their total costs from 2009 to 2010. The median Medicare margin, including add-on payments, was about +2 percent in 2010 (meaning that providers' Medicare payments per transport exceeded their overall costs per transport) for the providers in GAO's sample, but Medicare margins varied widely for those providers. When GAO removed the add-on payments, payments decreased for the providers in the sample, resulting in a lower median Medicare margin of -1 percent. Due to the wide variability of Medicare margins for providers in the sample, GAO cannot determine whether the median provider among the providers in the population that the sample represents had a negative or positive margin. The median Medicare margin with add-on payments ranged from about -2 percent to +9 percent, while the median Medicare margin without add-on payments ranged from about -8 percent to +5 percent. Ground ambulance transports for all Medicare fee-for-service beneficiaries grew 33 percent from 2004 to 2010. Transports by beneficiaries nationwide grew the most in super-rural areas (41 percent) relative to urban and rural areas. The increase overall is attributable primarily to an increase of 59 percent over this period in basic life support (BLS) nonemergency transports, which include noninvasive interventions, such as administering oxygen. In comparing this growth by service area, BLS nonemergency transports in super-rural areas grew the most--by 82 percent. Representatives from an ambulance provider organization suggested the increase in transports may be from increased billing by local governments. Some local governments that used to provide Medicare transports free of charge may bill Medicare now because of increased budgetary pressures. The Department of Health and Human Services Office of Inspector General has cited improper payments--which can be the result of billing mistakes--as one potential cause for increases in Medicare ambulance utilization and has stated that the Medicare ambulance transport benefit is highly vulnerable to abuse, with some payments for transports not meeting program requirements.

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Supply Chain Integration, an office under the Office of the Assistant Secretary of Defense for Logistics & Materiel Readiness, Under Secretary of Defense for Acquisition, Technology and Logistics, is the department- wide office responsible for leading the development of DOD supply chain policies as well as improving accountability, visibility, and control of all critical assets, including SRC I ammunition. In addition, the Army has a prominent role in managing SRC I ammunition, as the Army procures a majority of the department’s ammunition and provides wholesale storage for the other military services at Army depots. The Army depots ship SRC I ammunition owned by the other military services to their respective locations at their request. Also, Army depots conduct semiannual physical inventories of all SRC I ammunition as required of all installations storing SRC I ammunition. SRC I ammunition may also be located—generally in small quantities—at retail locations, such as military service installations, bases, and ammunition supply points. Each military service has entities responsible for the accountability, physical inventory, and transportation of SRC I ammunition. According to military service ammunition data, the Army, Navy, Marine Corps, and Air Force collectively had approximately 226,000 SRC I missiles and rockets in the continental United States, as of April 30, 2015, as shown in table 1. In addition, USTRANSCOM is designated by DOD Directive as the DOD’s single manager for transportation, other than Service-unique or theater- assigned assets and as the DOD Distribution Process Owner. This designation includes transportation of SRC I ammunition. The Military Surface Deployment and Distribution Command, which falls under USTRANSCOM, tracks the movement of SRC I ammunition. Additionally, according to DOD officials, the Military Surface Deployment and Distribution Command coordinates responses to transportation issues of SRC I ammunition while in transit. Table 2 shows key stakeholders and roles in the transportation of SRC I ammunition. DODM 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) sets forth DOD policy on the physical security of sensitive conventional AA&E. According to DODM 5100.76, continuous program and policy oversight is required to ensure protection of AA&E within DOD, and DOD components are required to track and conduct physical inventories of SRC I ammunition by serial number. Further, DOD policy requires SRC I ammunition to have a higher level of protection and security than that provided for SRC II through SRC IV conventional ammunition. DOD and the military services have policy and guidance on how to account for, safeguard, conduct physical inventories, adjust if necessary, track, and ship SRC I ammunition within and between services and to contractors for repair. Appendix III provides additional detail on DOD policy and military service guidance relevant to the management of SRC I ammunition. The military services have several automated information systems for managing accountability and visibility of SRC I ammunition. These automated information systems also maintain various item-specific data such as serial number, production lot number, DOD identification codes, serviceability, reporting location, ownership, quantity, and shipment information. Figure 1 shows the automated information systems. The department is in the final stages of evaluating various automated information systems, including NLAC, to be designated as the DOD-wide authoritative source of data for conventional ammunition, including SRC I ammunition. DOD’s evaluation to select one authoritative information system for conventional ammunition comes in response to our March 2014 recommendation that the department designate an authoritative source of data on conventional ammunition, which includes SRC I ammunition. Also, the evaluation is in response to a congressional mandate to issue department-wide guidance by September 2015 to designate an authoritative source of data for conventional ammunition. According to OSD officials, the to-be-designated visibility system will serve as a repository of ammunition data collected through regular data feeds from the military services’ automated information systems. Since 1994, we have issued several reports about the management of SRC I ammunition, focusing on serial-number registration, physical inventories, and transportation issues. In 1994, we found that while the Navy and the Marine Corps began controlling missiles by serial number in 1990 and 1992, respectively, the Army was working on obtaining control of SRC I missiles by serial number. Further, we found that the military services were not regularly conducting physical inventories of SRC I missiles and we made recommendations to strengthen inventory accountability, which the department concurred with and implemented. In our September 1997 report, we found the military services had different procedures and requirements for maintaining oversight of SRC I rockets. Specifically, we found that the Marine Corps maintained oversight and visibility of its weapons by serial number, whereas the Army and the Navy managed their SRC I rockets by production lot and quantity. DOD concurred with our recommendation to manage SRC I rockets by serial number and reissued DOD policy in 2000. In our 2000 report, we found internal controls weaknesses at an Army ammunition depot that resulted in a loss of accountability and control over SRC I rockets. For example, serial number control of SRC I rockets was lost at the time of shipment from the contractor because serial numbers listed on receiving reports that accompanied shipments did not correspond to the actual items and quantities of the respective shipments. In March 2014, we reported on DOD’s management of conventional ammunition, and found, among other things, some limitations of the military services’ use of automated information systems that affected their ability to facilitate efficient management of conventional ammunition. We found that NLAC, the department-wide repository of ammunition data, had limitations in providing visibility of ammunition and recommended that the department select an authoritative source of department-wide ammunition data to improve DOD’s ability to provide total asset visibility over conventional ammunition. DOD concurred and stated that it would assess the alternatives and designate the appropriate solution by the fourth quarter of fiscal year 2015. Also, we recommended that DOD identify and implement internal controls, consistent with federal internal control standards, that would provide reasonable assurance that NLAC collects comprehensive, accurate data from other service ammunition systems. DOD concurred and stated in its agency response to our report that the Army updated the performance work statement for NLAC to include analyzing new data sources to identify improved system interfacing that will improve data accuracy, completeness, quality assurance, and auditability. For more details of our findings, recommendations, and the status of actions taken by DOD relating to DOD’s management of SRC I ammunition, see appendix IV. The military services have maintained accountability of SRC I ammunition at 11 sampled locations in the continental United States; however, we identified gaps in some service-level guidance and procedures for how SRC I ammunition is accounted for across locations. We found that the Air Force does not track SRC I ammunition by serial number but has plans to revise its guidance. Also, we found Air Force procedures have not maintained accountability for items owned by other services and stored at Air Force locations. Further, the military services generally recorded shipment and receipt in their accountability systems, but the receipt was not always recorded in a timely manner. Finally, we found that Army processes and information systems do not provide full accountability for in-transit items. We found that the military services have maintained accountability in their automated information systems of SRC I ammunition at the 11 sampled locations we reviewed. DOD policy calls for continuous program and policy oversight to ensure protection of AA&E, to include SRC I ammunition, within DOD. Likewise, military service guidance details accountability of AA&E, including maintenance of records. We found that, for our sample of 616 SRC I ammunition items, 612 of the 616 records matched the military services’ automated information systems and the remaining 4, although not recorded as required, were accounted for by service officials. Additionally, as part of our sample, we observed SRC I ammunition that was being readied for rapid deployment, as shown in figure 2, and documented the serial number and other identifying information, and verified the information in the Army’s systems. Additionally, we found that, in accordance with DOD policy and military service guidance and at required frequencies, the military services conducted physical inventories of SRC I ammunition to ensure accountability at 22 selected military service locations in the continental United States. We analyzed inventory memorandums from all Army depots storing SRC I ammunition, as well as selected military service locations, and found that the physical inventories were recorded as being conducted. Inventory personnel stated there were no delays or challenges in completing the physical inventories of SRC I ammunition because of sequestration or other budgetary concerns. Further, during our review, we identified instances in which the Navy and Army had taken actions to enhance the accountability of their physical inventories. First, we found that the Army, Marine Corps, and Air Force certify completion of the physical inventory of SRC I ammunition through a signed memorandum. According to Navy officials, Navy policy does not require certification through a signed memorandum. Rather, the Navy OIS system captures a Date of Last Inventory; however, Navy officials acknowledged they did not have a business process to use this data point. After we identified this, Navy officials took action to begin developing a business process to identify late inventories. Second, according to Navy officials, in an effort to better align with DOD policy, the Navy revised guidance in April 2015 to align with requirements in DODM 5100.76 so it would reflect specific intervals for completing physical inventories: monthly for unit levels and semiannually for non-unit level. Third, we examined the physical inventory process at a contractor location. We found the contractor had completed physical inventories of SRC I missiles in its custody, although the contract did not specify the frequency or approach for conducting physical inventories. When we asked Army officials to provide documentation from the contractor verifying that physical inventories were completed, the officials acknowledged they do not receive verification from the contractor upon completion of physical inventories, but stated they have taken action and are evaluating methodology to ensure they receive documentation to verify that the contractor has completed physical inventories in the future. We found that the military services, except the Air Force, track SRC I ammunition by serial number in their respective accountability systems, and the Air Force has plans to revise its guidance regarding tracking. The Air Force tracks SRC I ammunition in its accountability system, CAS, by quantities within production lot numbers. CAS does not have the capability to track SRC I ammunition by serial number because CAS does not have a field to enter serial numbers. With this limitation, the Air Force also cannot conduct physical inventories of SRC I ammunition by serial number. We found in September 1997 that the military services did not uniformly track SRC I rockets by serial number and recommended that the services manage SRC I rockets by serial number to have total visibility over the numbers and locations of rockets. The department concurred and reissued policy in 2000 to require DOD components to track and conduct physical inventories of SRC I ammunition by serial number. However, Air Force guidance reissued in June 2015 recognizes that CAS cannot track SRC I ammunition by serial number and will instead track by quantities within production lot numbers. Air Force officials have recognized that they are not meeting DOD requirements for tracking SRC I ammunition by serial number, but are in the process of modernizing CAS to track by serial number. According to Air Force officials, the Air Force previously focused on the development of another enterprise information system to track, among other things, ammunition; however, the Air Force cancelled the system and is now in the process of upgrading CAS. The Air Force provided supporting documentation to confirm plans for CAS modernization by 2017. According to Air Force officials, this upgrade will modernize the system through technological upgrades that also includes provisions to improve auditability of CAS. Upon upgrading CAS to track SRC I ammunition by serial number, Air Force officials plan to reissue Air Force guidance to ensure that the Air Force tracks and conducts physical inventories of SRC I ammunition by serial number. If the Air Force does not modify CAS to include serial numbers, the Air Force will continue to lack serial number traceability of SRC I ammunition and will not meet DOD requirements. By tracking SRC I ammunition by quantities within production lot numbers, the Air Force will not have detailed information to support life-cycle traceability requirements, such as a transactional history including inventory, maintenance, repair, service records and/or supply, for each serial number, which may affect their ability to investigate instances of lost or stolen SRC I ammunition. Air Force policy does not require accountability in its system of record for items owned by other services and stored at Air Force locations. We identified 55 SRC I ammunition items owned by the Army or Marine Corps that were in the physical custody of the Air Force, but the Air Force did not maintain accountability of these items in its system of record— CAS. DOD policy requires that the DOD component that has physical custody of materiel in storage maintain accountability for that materiel in the component’s system of record, regardless of which DOD component owns the materiel. However, we found that Air Force guidance does not require personnel to maintain accountability in its system of record for SRC I ammunition items owned by other services but in the physical custody of the Air Force, and instead allows ammunition owned by other services to be tracked in a “non-accountable” program within CAS. This non-accountable program tracks information such as net explosive weight and asset visibility; however, according to Air Force officials, the non- accountable program does not maintain an audit trail or history that would document receipt and provide a record of how the SRC I ammunition was managed while at the Air Force location. We found that, consistent with DOD policy, Army, Navy, and Marine Corps guidance generally requires that accountability for ammunition in the physical custody of the service be maintained in the service’s system of record, regardless of which service owns the ammunition. Accountability for the 55 SRC I ammunition items we identified that were owned by the Army or Marine Corps that were shipped to and in the physical custody of the Air Force was not maintained in any service’s system of record while at the Air Force location. These items included: 40 Marine Corps-owned SRC I ammunition items that were stored at an Air Force location for approximately 11 months. Marine Corps officials were able to provide evidence that these items were shipped back to a Marine Corps location after the 11 months of storage at the Air Force location. 5 Army-owned AT4 anti-armor weapons that were shipped to an Air Force installation for Army training purposes. According to Air Force officials, these SRC I ammunition items have been expended, but Army and Air Force officials did not provide us related documentation. 10 additional Army-owned AT4 anti-armor weapons that were shipped to an Air Force installation for Army training purposes. For these 10 items, Army information systems show that the items were expended and turned in 2 and a half months after shipment, but Army and Air Force officials did not provide us documentation of accountability for the assets during the time they were in Air Force custody. Air Force officials stated that these ammunition items were managed on the non-accountable program because the ammunition was Marine Corps or Army property of which the Air Force did not intend to take ownership. According to Air Force officials, the assets had been deleted once the items were removed from the munitions storage area. Air Force officials could not provide us key information about these shipments, such as the date the shipments were accepted into the munitions storage area, to whom the ammunition items were issued, or when the ammunition items were issued because they said that information was no longer available in the non-accountable program. Marine Corps and Army officials told us that the ammunition items would likely have been managed by the unit— for example, by using a separate system or a manual process such as a spreadsheet. However, they did not provide a copy of the document that was used. Air Force officials updated guidance in June 2015 to place more restrictions on the use of the non-accountable program, including for SRC I ammunition items, but the guidance continues to allow the use of the non-accountable record when the Air Force does not intend to take ownership of the ammunition. According to Air Force officials, the decision of whether to maintain accountability for ammunition owned by other services in CAS depends on the operational situation and tactical environment. For example, for 20 additional SRC I ammunition items we reviewed that were owned by the Army but in the physical custody of the Air Force for testing purposes, Air Force officials maintained accountability in CAS and were able to provide transaction history. Officials told us that the Air Force is in the process of updating CAS to facilitate tracking of SRC I ammunition by owner and will move toward having most assets in CAS. However, if the Air Force does not revise guidance to clarify that accountability for all SRC I ammunition items in the Air Force’s custody—regardless of ownership—should be maintained in the Air Force’s system of record, both the Air Force and the owning service will lack a record of receipt and management of the SRC I ammunition while at the Air Force location; also the owning service will not have full assurance that accountability was maintained. We found that the military services generally recorded shipment and receipt of SRC I ammunition in their accountability systems; however, we found that existing Army depot and Marine Corps guidance do not specify a time frame for receipting shipments of SRC I ammunition. Marine Corps officials told us they generally adhere to the Navy’s guidance, which requires receipting of shipments within 1 business day, but Marine Corps installations are not required to follow that guidance. DOD policy emphasizes the need for continuous oversight to ensure protection of sensitive conventional arms, ammunition and explosives given that if these items are left vulnerable they have the potential to jeopardize the safety and security of personnel, activities, missions, and installations worldwide. DOD policy delegates to DOD component heads the responsibility to implement the procedures of DODM 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) (Feb. 28, 2014) and develop supplemental guidance for the protection of arms, ammunition, and explosives in accordance with DODI 5100.76 Safeguarding Conventional Arms, Ammunition, and Explosives (AA&E) (May 20, 2010). However, the military services varied in the extent to which they have developed guidance that addresses the time frame within which SRC I ammunition should be receipted on the accountable record. Air Force guidance specifies SRC I ammunition be receipted on the accountable record immediately; Army guidance for retail locations specifies within 24 hours; and Navy guidance specifies within 1 business day. In contrast, Army, at the depot-level, and the Marine Corps have not finalized guidance that addresses the required time frame for receipting SRC I ammunition. In our review, we found that, generally, for those services with guidance, SRC I ammunition was receipted on the accountable record within specified time frames, while the services without guidance were more likely to receipt SRC I ammunition days after arrival, and in some instances, more than 5 days after arrival. In a non-generalizable sample of 104 shipments that we reviewed, we found the record of shipment in the shipper’s accountability system. For 100 of the 104 shipments, we found a corresponding receipt in the receiver’s accountability system. Of the four shipments for which we did not find a corresponding receipt, two were shipments of Army-owned items to the Air Force locations that the Air Force did not maintain in its accountable system because it did not own the items, and other two were shipments of Navy-owned SRC I items to a contractor for inspection. However, we found that approximately 20 percent of shipments of SRC I ammunition in our non-generalizable sample were not receipted within the time frames stated in military service policy or described as standard practice by military service officials. Of the 104 shipments we reviewed, we were able to compare receipt information to arrival time for 99 shipments, and we found that 21 of these 99 shipments were not receipted on the services’ accountability system within 2 business days after the arrival of the shipment. All of the military services either have documented policy that requires receipting SRC I ammunition on the accountable record within 1 business day or less or told us that they generally adhere to that time frame, but in our analysis, we allowed for 2 business days because military services’ information systems may take an additional business day to record transactions. Table 3 provides additional details of receipting time frames for each service. Air Force locations and Army retail locations are required by service guidance to adhere to established time frames for receipting SRC I ammunition, and all shipments we reviewed at Air Force locations for which we located receipts and all but 2 shipments we reviewed at the Army retail locations were receipted on the accountable record within 2 business days, as shown in table 3 above. In contrast, we found that the Army, at the depot-level, and the Marine Corps have not finalized guidance that addresses the required time frame for receipting SRC I ammunition. As identified in table 3, 12 of 21 shipments to Army depots and 5 of 30 shipments to Marine Corps locations were receipted more than 2 business days after arrival. An Army official told us that depots are required to receipt inbound shipments within 24 hours based on a policy letter issued prior to 2010, and that this requirement has also been in draft guidance since 2013, but that the guidance has not yet been finalized. Similarly, the Marine Corps does not have a receipting timeframe for SRC I ammunition in its guidance. Marine Corps officials told us they generally adhere to the Navy’s guidance, which requires receipting of shipments within 1 business day, but Marine Corps installations are not required to follow that guidance. Marine Corps officials told us that as of October 2015 they were in the process of incorporating a required time frame for receipting SRC I ammunition in Marine Corps guidance but did not provide a specific time frame for revising the guidance. Until the Army, at the depot-level, and the Marine Corps finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition, Army and Marine Corps officials will not have the data they need to help assure accountability for all shipped SRC I ammunition. The Air Force and Navy have policies regarding maintaining in-transit accountability for shipped SRC I ammunition that generally adhere to DOD requirements, and the Marine Corps has planned system updates to adhere to requirements; however, the Army’s policy and processes do not fully adhere. DOD policy requires that the DOD component directing materiel into an in-transit status will retain accountability within the logistics records for that materiel until there is a formal acknowledgment of receipt. The Air Force and Navy maintain in-transit tables in their accountability systems that can be used to track ammunition that has been shipped but not yet receipted. Additionally, the Navy requires all in- transit materiel remain accountable to the issuing activity until properly receipted or resolved, and Air Force policy requires that each receiver acknowledge—orally or in writing or through other automated means— that the shipped SRC I items were received, and the date the assets were received. The Marine Corps has planned system updates to adhere to DOD requirements to maintain accountability for in-transit SRC I ammunition items. According to Marine Corps officials, the Marine Corps tracks Marine Corps-owned assets in transit until formal acknowledgement of receipt in its OIS-MC system, but Marine Corps ammunition supply points do not maintain accountability for SRC I ammunition in transit to another service. Marine Corps officials told us that the system of record used by Marine Corps ammunition supply points is being upgraded in fiscal year 2016 to facilitate compliance with in-transit requirements. The Army does not maintain accountability for all in-transit items within the logistics records for that materiel until there is a formal acknowledgement of receipt. Army regulations require the Joint Munitions Command to track shipments of SRC I ammunition from depot to depot, depot to unit, or unit to depot using DTTS and to monitor shipping documents and receipts to ensure they are closed or posted in a timely manner. However, officials from the Joint Munitions Command told us they do not receive confirmation of receipt from some entities, including other military services and some contractors. The Army’s systems do not maintain in-transit tables that show items that have been shipped out of one location and are due in to another. When the Army ships SRC I ammunition from depots or retail locations, it drops those items from its accountable systems without a requirement to confirm or document that the shipment was received. For SRC I ammunition shipments to other Army locations, the Army retains visibility of shipments by maintaining a record of SRC I ammunition items that have been shipped in its Worldwide Ammunition Reporting System-New Technology (WARS-NT) database, and matches up shipped items and receipted items by serial number to confirm that the items were received. However, for shipments to other military services, Army officials told us that the Army clears shipped items from its WARS-NT records upon receiving confirmation that the items were shipped. Army officials told us that limitations in their depot-level system, called LMP, and in their retail-level system, called the Standard Army Ammunition System, prevent them from maintaining full accountability for in-transit items, and that this deficiency, which affects all classes of supply, has been identified by the Army since 2012 at both the depot and retail level but that a solution has not yet been developed because, in part, of technical complexities. However, Army officials have not evaluated or identified actions that the Army could take to enable it to retain accountability for in-transit items until acknowledgment of receipt. Unless the Army evaluates and identifies actions to retain accountability for in-transit items until acknowledgement of receipt, the Army will not have a path forward to ensure that accountability for in-transit SRC I ammunition was maintained and the ammunition was received, thereby creating a potential gap in accountability and visibility of this ammunition. The military services have not consistently ensured timely, complete, and accurate information to maintain full visibility of SRC I ammunition in the continental United States. We found the Army has not ensured timely and complete information of SRC I ammunition returned to the contractor, but has begun to take action to ensure reporting to WARS-NT to improve visibility. We also found the Army had inaccurately categorized two variants of SRC I rockets, but took immediate action to add the rocket variants to the catalog listing of SRC I ammunition. Further, we identified examples of the military services not entering timely information in the Defense Transportation Tracking System (DTTS) on shipments to aid Military Surface Deployment and Distribution Command tracking by satellite, and of the services entering inaccurate or incomplete data about shipments of SRC I ammunition, which affects visibility of SRC I ammunition in transit. We found that the Army did not have timely, complete, or accurate information of its SRC I ammunition, but has taken action in two areas in order to improve visibility. In one area, we found Army officials had not ensured timely and complete information of SRC I ammunition returned to the contractor for repair, upgrade, maintenance, or testing and had not followed guidance for maintaining visibility of SRC I missiles. While the Army’s WARS-NT system, which is the Army’s official system for tracking SRC I ammunition, provided visibility of SRC I missiles located at the contractor facility, WARS-NT did not have timely or complete records to show visibility of all SRC I missiles at the contractor’s site. In January 2015, we identified an October 2014 shipment of 58 SRC I missiles sent from an Army depot to a contractor facility for repair. Although we confirmed during our site visit that the 58 missiles were located at the contractor’s facility and that the contractor’s automated information system accounted for the missiles, we found that WARS-NT did not have timely or complete data about the shipped 58 SRC I missiles. After we identified the discrepancies in records systems, Army officials acknowledged that while it is an Army requirement for a contractor to report the receipt of these items to the WARS-NT program office, this requirement was not included in the contract. Army officials are taking action and are coordinating a modification to the contract to require the prime contractor to routinely report receipt of shipments to WARS-NT per Army regulation. In the second area, we found that WARS-NT had inaccurately categorized two variants of SRC I rockets. Specifically, we found 55 SRC I ammunition items—variants of the M72 rocket—were not included in the WARS-NT system as SRC I ammunition items. After we noted the omission of the rocket variants in WARS-NT as SRC I ammunition, Army officials took action in August 2015 to add the rocket variants to the catalog listing of SRC I ammunition and in the WARS-NT system as SRC I ammunition. We found that the military services, as required by DOD regulation, used satellite tracking for nearly all of the 104 shipments of SRC I ammunition that we reviewed; however, the services did not always enter timely, accurate, and complete information that is required to aid tracking. The Defense Transportation Regulation requires satellite tracking of shipments of SRC I ammunition via the Defense Transportation Tracking System (DTTS). We found that 103 of 104 shipments of SRC I ammunition in a non-generalizable sample we reviewed were tracked in DTTS using satellite monitoring. DTTS, which is maintained by the Military Surface Deployment and Distribution Command, which falls under the U.S Transportation Command, provides satellite tracking capability of shipments of sensitive conventional arms, ammunition and explosives, including SRC I ammunition items, from the point of departure until the point of arrival. However, we observed problems with the timeliness, accuracy, and completeness of the data provided by the military services in DTTS, which limited the information available to aid the Military Surface Deployment and Distribution Command’s tracking of these shipments and its ability to facilitate responses to any incidents, if necessary. We found that the military services did not always enter timely information in DTTS on SRC I ammunition shipments to aid the Military Surface Deployment and Distribution Command’s tracking of SRC I ammunition by satellite. We observed timeliness problems both at the point of shipment departure and the point of shipment arrival. Shipment departure: The Defense Transportation Regulation specifies that the military services’ shipping offices must enter shipping information in DTTS prior to carrier departure. Data provided by the Military Surface Deployment and Distribution Command showed that information about 93 of 1,008 shipments identified as containing SRC I items between November 1, 2013, and April 30, 2015, were not in DTTS at the time of carrier departure. According to Military Surface Deployment and Distribution Command’s data, information was entered more than 1 hour after carrier departure for 68 of the 93 shipments. On average, information about these 68 shipments was not entered until approximately 8 hours after departure. According to Military Surface Deployment and Distribution Command officials, when information is not entered in the DTTS at the time of carrier departure, the command is still notified that these shipments are on the road when drivers turn on their satellite monitoring devices. However, the command does not have information about the contents of these shipments and therefore DTTS is unable to provide essential information to initiate rapid emergency response to in-transit accidents or incidents to minimize effect. Additionally, if a driver did not turn on the satellite monitoring device, the command would not be alerted to that situation since it would be unaware that a shipment was expected. Shipment arrival: The Defense Transportation Regulation requires entry into DTTS of confirmation of receipt of SRC I shipments within 2 hours of the offloading of each shipment. Data provided by the Military Surface Deployment and Distribution Command for SRC I shipments between November 1, 2013, and April 30, 2015, showed that 572 of 992 shipments to the military services containing SRC I items were not confirmed within the calendar month that they arrived. Further, as of April 30, 2015, Military Surface Deployment and Distribution Command data shows a backlog of 364 SRC I shipments to the military services dating as far back as November 2011 that had not been confirmed. According to Military Surface Deployment and Distribution Command officials, shipments that are not confirmed in DTTS as required hinder their ability to ensure successful transportation of SRC I ammunition because it requires the command to rely solely on the carrier to confirm that SRC I ammunition has been delivered. The Military Surface Deployment and Distribution Command and the military services have taken steps to improve the timeliness of data in DTTS. The Military Surface Deployment and Distribution Command works with designated military service representatives on transportation issues, and provides reports to the military representatives on timeliness of confirmation of individual SRC I shipments and SRC I shipments from prior months that have not been confirmed. Military Surface Deployment and Distribution Command officials also told us that they have been working to try to reduce systemic causes of shipments not being in DTTS at the time of shipment departure, such as system interface delays. Similarly, military service representatives told us that they have also tried to address issues of timeliness of reporting in DTTS. For example, the Army issued guidance in May 2014 reminding transportation offices and ammunition supply points of their responsibilities with regard to entering information in DTTS. However, both Military Surface Deployment and Distribution Command officials and the military service representatives acknowledged their collaboration could be improved to determine what information is needed to improve the military services’ oversight of the timeliness of data entry in DTTS. For example: With regard to shipments not entered in the system in a timely manner, Military Surface Deployment and Distribution Command officials told us that they provided reports to the military service representatives on shipments not in the system at the time of departure; however, they stopped notifying the military service representatives through emails to request assistance because they did not observe a decrease in the number of such shipments. With regard to shipment confirmations, while the Military Surface Deployment and Distribution Command continues to provide reports on SRC I shipments that were not confirmed in a timely manner, military service representatives told us that the information they are provided does not include sufficient detail for them to work with receiving locations to improve compliance with confirmation requirements. For example, the report provided by the Military Surface Deployment and Distribution Command does not identify the office responsible for confirmation, and it provides arrival time rather than offload time, although confirmation requirements in the Defense Transportation Regulation cite time elapsed from offload time. Until the Military Surface Deployment and Distribution Command and the military services collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation, the Military Surface Deployment and Distribution Command will continue to lack full visibility of shipments of SRC I ammunition at certain points during the shipping process and the military services will not be well positioned to improve their oversight of the timeliness of data entry. We identified examples of the military services entering incomplete or inaccurate data in DTTS about shipments of SRC I ammunition. Incomplete information: The transportation control number for 8 of 104 shipments in our sample was not listed in DTTS, which limits the information available to the Military Surface Deployment and Distribution Command about individual shipments being tracked. For example, if one or more transportation control numbers associated with a shipment are not listed in DTTS, the Military Surface Deployment and Distribution Command may not have accurate information about the type, quantity, and security risk category of ammunition being tracked. 164 of 1,008 SRC I shipments from November 1, 2013, through April 30, 2015, which were reported to us by the Military Surface Deployment and Distribution Command, were missing data in the Department of Defense Identification Code field, which provides information about the specific type of ammunition being shipped. Inaccurate information—9 of 104 shipments in our sample had inaccurate controlled inventory items codes and were not identified in DTTS as SRC I shipments, which required us to go back to the Military Surface Deployment and Distribution Command to obtain additional information to confirm the shipment had been tracked by satellite. According to Standards for Internal Control in the Federal Government, agencies should have relevant, reliable, and timely information for decision-making and external reporting purposes. Completeness and accuracy are key characteristics of reliable data and refer to (1) the extent to which relevant records are present and that fields in each record are populated appropriately; (2) recorded data reflect the actual underlying information. Military Surface Deployment and Distribution Command officials told us that they attempted to address completeness and accuracy issues on a shipment-by-shipment basis. According to the officials, when an operator responsible for tracking an individual shipment notices missing or inaccurate information—such as when information in the paperwork given to the driver does not match information in the system—the operator attempts to work with the military service’s shipping office to correct that information for the shipment. However, neither the military services nor the Military Surface Deployment and Distribution Command have conducted an analysis of the problems the Military Surface Deployment and Distribution Command has observed with the completeness and accuracy of data entered by the military services to identify areas for improvement on a broader scale. Until the military services, with the aid of the Military Surface Deployment and Distribution Command, conduct analysis of the completeness and accuracy of data entered into DTTS by shippers on SRC I ammunition shipments, DOD will continue to lack full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the completeness and accuracy of the data. SRC I ammunition is treated as a higher risk than other conventional ammunition and serves as a potential threat if it were obtained and used by unauthorized individuals or groups. We found that the military services maintained accountability in their automated information systems of SRC I ammunition at 11 sampled locations. However, we found examples of SRC I ammunition items that were in the physical custody of the Air Force but owned by other services and accountability was not maintained on the Air Force’s system of record. If the Air Force does not revise guidance to clarify that accountability of all SRC I ammunition items in the Air Force’s custody—regardless of ownership—is maintained in the Air Force’s system of record, both the Air Force and the owning service will not have full assurance that accountability was maintained. Also, we found that the military services generally recorded shipment and receipt of SRC I ammunition in their accountability systems, but the Army and Marine Corps do not have guidance that required the receipting of SRC I ammunition in a timely manner, in accordance with DOD policy. Until the Army, at the depot-level, and the Marine Corps finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition, Army and Marine Corps officials will not have the data they need to help assure accountability for all shipped SRC I ammunition. Further, the Air Force, Navy, and Marine Corps have policies or plans regarding maintaining in-transit accountability for shipped SRC I ammunition to generally adhere to DOD requirements, but the Army’s policy and processes do not fully adhere. Unless the Army evaluates and identifies actions to retain accountability for in-transit items until acknowledgment of receipt, the Army will not have a path forward to ensure that accountability for in-transit SRC I ammunition was maintained and the ammunition was received, thereby creating a potential gap in accountability and visibility of this ammunition. In addition, we found that the military services have not always entered timely information in DTTS on SRC I ammunition shipments, as specified in the Defense Transportation Regulation, to aid the Military Surface Deployment and Distribution Command’s tracking and visibility of SRC I ammunition by satellite. However, the Military Surface Deployment and Distribution Command and the military services have not agreed on the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation. Moreover, we identified examples of the military services entering incomplete or inaccurate data in DTTS about shipments of SRC I ammunition. Until the Military Surface Deployment and Distribution Command and the military services collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, and the military services, with the aid of the Military Surface Deployment and Distribution Command, conduct analysis of the completeness and accuracy of data entered into DTTS military services’ shipping offices on SRC I ammunition shipments, the Military Surface Deployment and Distribution Command will continue to lack full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the timeliness, completeness, and accuracy of data entered in DTTS. We are making six recommendations to enhance the department’s policy and procedures and improve the accountability and visibility of SRC I ammunition. To ensure the accountability and protection of SRC I ammunition, in accordance with DOD policy, we recommend the Secretary of Defense direct the Secretary of the Air Force to revise guidance to clarify that accountability for all SRC I ammunition items in the Air Force’s custody— regardless of ownership—should be maintained in the Air Force’s system of record. To ensure the Army and Marine Corps record the receipt of shipped SRC I ammunition in their accountability systems, and in accordance with DOD policy, we recommend the Secretary of Defense direct: the Secretary of the Army to finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition at the depot level. the Commandant of the Marine Corps to finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition at Marine Corps locations. To ensure the Army retains accountability of SRC I ammunition in an in- transit status, consistent with DOD policy, we recommend the Secretary of Defense direct the Secretary of the Army to evaluate and identify actions to enable the Army to retain accountability for in-transit items until acknowledgment of receipt. To help improve visibility and tracking of SRC I ammunition shipments, we recommend the Secretary of Defense direct the Secretaries of the military departments and the Military Surface Deployment and Distribution Command, through the Commander of the U.S. Transportation Command, to collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation. To help improve the completeness and accuracy of data provided by the military services to the Military Surface Deployment and Distribution Command in accordance with federal internal control standards, we recommend the Secretary of Defense direct the Secretaries of the military departments, with the aid of the Military Surface Deployment and Distribution Command, to conduct analysis of the completeness and accuracy of the data entered into DTTS. We provided a draft of this report to DOD for review and comment; the department provided technical comments that we considered and incorporated as appropriate. DOD also provided written comments on our recommendations, which are reprinted in appendix V. In commenting on this draft, DOD concurred with all six of our recommendations. With respect to the first recommendation to ensure the accountability and protection of SRC I ammunition, DOD stated that the Air Force released a memorandum on December 24, 2015, directing Air Force units to account for all SRC I ammunition items in their custody, regardless of ownership, and to maintain them in the Combat Ammunition System. Additionally, DOD stated that such procedures will be included in Air Force guidance by September 30, 2016. With respect to our second and third recommendations to ensure the Army and Marine Corps record the receipt of shipped SRC I ammunition in their accountability systems within the required timeframes, DOD stated that the Army will include procedures on the required time frame for receipting SRC I ammunition at the depot-level in their guidance by September 30, 2016. Further, DOD stated that the Marine Corps has issued interim guidance via a Naval Message in January 2016 to address SRC I ammunition accountability along with required receipt times and that such procedures will be included in their guidance by June 30, 2016. Regarding our fourth recommendation to ensure the Army retains accountability of SRC I ammunition in an in-transit status, DOD stated that the Army will evaluate and identify by June 30, 2016, actions to enable the Army to retain accountability for in-transit items until acknowledgment of receipt. Further, DOD stated the proposed actions will then be prioritized for incorporation into any required follow-on work with Army Class V management systems, such as the Logistics Modernization Program and the Standard Army Ammunition System. Regarding our fifth recommendation to help improve visibility and tracking of SRC I ammunition shipments, DOD stated that the military services and the Military Surface Deployment and Distribution Command will collaboratively determine the specific information the Military Surface Deployment and Distribution Command can provide to the military services to correct data missing in DTTS at the time of shipment, and to complete shipment receipts. Furthermore, to provide greater oversight of the DTTS data, DOD stated the military services and the Military Surface Deployment and Distribution Command will develop the processes required to ensure regular feedback on accuracy and timeliness. Finally, with respect to our sixth recommendation to help improve the completeness and accuracy of data provided by the military services to the Military Surface Deployment and Distribution Command, DOD stated that the military services and the Military Surface Deployment and Distribution Command will complete the necessary analysis of the completeness and accuracy of the data entered into DTTS. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-5257 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix VI. Our review of the Department of Defense’s (DOD) management of SRC I ammunition focused on the four military services— Army, Navy, Marine Corps, and Air Force— because each military service owns, stores, and ships SRC I ammunition. To determine the extent to which the military services have maintained accountability of SRC I ammunition in the continental United States, we reviewed DOD policy and military service guidance, including Department of Defense Manual (DODM) 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E), (Apr. 17, 2012), among others, detailing: continuous accountability, frequency and process for conducting physical inventories, process for making adjustments to the electronic record if necessary, tracking of SRC I ammunition by serial number, and the shipment of SRC I ammunition in the continental United States. During our review, we visited 11 military locations—including 3 Army depots and 8 military service locations, such as military service installations, bases, and ammunition supply points, with SRC I ammunition—selected based on a number of factors including the size of SRC I inventory, the number of shipments to and from the location, and the variety of SRC I ammunition being stored. We also visited a contractor with a current production contract for SRC I missiles as SRC I ammunition items are in the contractor’s custody while at the contractor’s facility for repair, maintenance, or upgrade. Additionally, we interviewed OSD and military services officials responsible for the management of SRC I ammunition, including inventory personnel and transportation officials, to gain an understanding of the frequency and process for conducting physical inventories and how shipments of SRC I ammunition are coordinated. We compared a non-generalizable sample of over 600 SRC I ammunition items against the records in the military services’ automated information systems to verify accountability. For the Army we used the Logistics Modernization Program (LMP), Standard Army Ammunition System- Modernization (SAAS-MOD), and Worldwide Ammunition Reporting System-New Technology (WARS-NT). For the Navy and Marine Corps we used Ordnance Information System- Wholesale (OIS-W), Ordnance Information System-Retail (OIS-R), and Ordnance Information System- Marine Corps (OIS-MC). For the Air Force we used Combat Ammunition System (CAS). Specifically, during our site visits to 11 military locations and 1 contractor location, we went through storage buildings with SRC I ammunition and selected SRC I ammunition from different pallets to include a range of SRC I items as well as items from recent shipments, and documented identifying information including serial and production lot number. We verified the Army, Navy, and Marine Corps SRC I ammunition items by serial and lot number. Due to the way the Air Force maintains its records, we verified their SRC I ammunition to records based on lot number and quantity. We analyzed DOD policy and military service guidance on frequency and process for conducting physical inventories and reviewed supporting documentation to determine whether the services were maintaining accountability by conducting physical inventories according to requirements. For Army depots, we collected documentation of completed physical inventories for three fiscal years prior to our audit work— 2012, 2013, and 2014 and conducted site visits to three Army depots to observe a walk-through of their physical inventory process. We selected the three Army depots to visit based on a number of factors, including range in quantity and type of SRC I in storage and recent shipments. To supplement our site visits, we also interviewed inventory personnel at the remaining depots regarding the physical inventory process and process for adjusting the electronic record, if necessary. For five military service locations we visited, we requested documentation of the last three completed physical inventories to obtain a variety of physical inventories (e.g., monthly, quarterly, annually, or change in command) and we also observed a walk-through of their physical inventory process. Further, to supplement our site visits, we randomly selected 10 additional Air Force locations and obtained documentation for their last three completed physical inventories. We reviewed the inventories for our non- generalizable sample of 22 selected locations to determine whether physical inventories were being conducted in accordance with DOD policy and military service guidance and at required frequencies. Finally, during our site visit with the contractor, we confirmed the contractor had completed physical inventories of SRC I missiles in its custody as well as discussed with officials how they conduct physical inventories of SRC I ammunition at their location. We also examined the military services’ guidance and procedures for maintaining accountability for items owned by one service but in the physical custody of another service. We analyzed DOD policy and military service guidance on maintaining accountability for ammunition to determine the extent to which military services’ guidance aligned with DOD policy. We also analyzed data and documents obtained from the Air Force, Army, and Marine Corps on 55 SRC I items from 4 shipments of SRC I ammunition in the continental United States that contained ammunition owned by the Army or Marine Corps that was shipped to and held in the physical custody of the Air Force but for which we had found that accountability was not maintained on the Air Force’s system of record. We identified these items because we were unable to locate receipts for certain shipments in the Air Force’s system of record when we reviewed it for our analysis of the timeliness of receipt of shipments of SRC I ammunition described below. Information we report about the number of SRC I items or shipments we identified as being owned by another service but in the physical custody of the Air Force and not maintained on the Air Force’s accountable record is non-generalizable to the overall universe of SRC I items but provides insights on how the Air Force manages items in its physical custody that are owned by another service. Further, we analyzed shipping documents and military service data for a non-generalizable sample of 104 SRC I shipments, and compared receipting time frames for these shipments to military service guidance to analyze how accountability was maintained. When the military services did not have documented guidance on receipting time frames, we obtained information from military service officials about standard procedures followed by the military service. Our sample was comprised of shipments that occurred between November 1, 2013, and April 30, 2015, and that were shipped to or from locations we visited or interviewed. We selected these time frames to provide an 18-month window that provided one prior year’s data and six months that coincided with the period when we were conducting field work. Further, we selected our sample to reflect shipments to or from a variety of military services, locations, and location types. Because our sample of shipments is non-generalizable, results of our analysis cannot be used to make inferences about all SRC I shipments within the continental United States but they provide insights on the military services’ adherence to DOD policy and service-level guidance or standard practice regarding the shipment of SRC I ammunition. For the 104 shipments in our sample, we obtained and reviewed shipping documents and receipt data from the receiving military services’ accountability systems. We compared the receipt data from the receiving military service’s accountability systems to data on shipment arrival time at the receiving location that we obtained from the Defense Transportation Tracking System (DTTS), maintained by the Military Surface Deployment and Distribution Command. For our analysis, we analyzed whether shipments were receipted within 2 business days of the day of arrival of the shipment even though either service guidance or standard practice generally required receipting within 1 business day or less. We allowed for 2 business days because military services’ information systems may take an additional business day to record transactions. Also, we analyzed military service guidance related to providing accountability for in-transit items and compared that guidance to DOD policy to assess whether the military services’ policies and processes for maintaining accountability for in-transit SRC I ammunition items enabled the military services to maintain accountability of SRC I ammunition in the continental United States. When we determined that a military service’s guidance and processes did not align with DOD policy, we requested and reviewed additional documentation, such as analyses of gaps in information system capabilities and documentation of planning of system upgrades, and conducted interviews with military service officials to determine the reasons for the differences. To determine the extent to which DOD has maintained visibility of SRC I ammunition in the continental United States, we reviewed DOD policy and military service guidance, including DODM 5100.76 and the Defense Transportation Regulation, among others, detailing procedures to maintain visibility of SRC I ammunition, including in-transit visibility during shipment, satellite tracking of shipments, and timeframes for entering shipment information into DTTS. In addition, we interviewed relevant officials at the Office of the Secretary of Defense, the military services, U.S. Transportation Command, and the Military Surface Deployment and Distribution Command to gain an understanding of how visibility is maintained in their automated information systems, how shipments of SRC I ammunition are processed for shipping and entered into DTTS, and how visibility is maintained while the shipment is in transit. We obtained SRC I ammunition data from each of the military services’ automated information systems as of April 30, 2015, and analyzed this data for timely, complete and accurate information to maintain full visibility of SRC I ammunition in the continental United States. Specifically, we compared this data, based on a number of elements including type of SRC I ammunition, location in the continental United States, condition of the SRC I ammunition, and military service ownership codes, against information in the department’s National Level Ammunition Capability (NLAC) system, a DOD-wide repository that provides visibility of SRC I ammunition data, to identify inconsistencies across DOD and the military services. We also analyzed DOD requirements for satellite tracking from the Defense Transportation Regulation and obtained and analyzed information from DTTS provided by the Military Surface Deployment and Distribution Command about satellite tracking of shipments of SRC I ammunition in the continental United States from November 1, 2013, through April 30, 2015, to gain an understanding of how visibility is maintained. We analyzed data from November 1, 2013, to April 30, 2015, to correspond to the time frame we used to select our non-generalizable sample of shipments for review. To examine whether the military services used satellite tracking for shipments included in our non-generalizable sample of 104 shipments described above, we compared the transportation control number for each shipment in our sample to transportation control numbers associated with SRC I shipments in DTTS. When we could not locate a shipment in DTTS by transportation control number, we followed up with the Military Surface Deployment and Distribution Command to obtain additional information about the shipment, since in some cases the transportation control number was in DTTS but not in the data provided to us since the data was provided based on a bill-of-lading number. For the shipments that neither we nor the Military Surface Deployment and Distribution Command could locate in DTTS, we requested additional information about the shipment from military service officials to attempt to locate the shipment in DTTS through a means besides the transportation control number. For example, in some cases, the shipper had not identified the shipment in DTTS by transportation control number, and we were able to obtain and search on the bill-of-lading number to confirm that the shipment had been tracked in DTTS. We also examined the extent to which the military services provided timely data in DTTS, in accordance with the Defense Transportation Regulation, to ensure visibility. We analyzed data and reports provided by the Military Surface Deployment and Distribution Command from DTTS to identify the number of SRC I shipments between November 1, 2013, and April 30, 2015, for which information had not been entered into the system at the time of shipment departure and the number of shipments that were not confirmed within the calendar month of arrival. Further, we examined the extent to which the military services provided accurate and complete data in DTTS. We compared values for key data fields in DTTS, such as the DOD Identification Code and transportation control number, to shipping documents for selected shipments from our sample of 104 shipments. We also analyzed the number of missing values for selected data fields in DTTS for the 1,008 SRC I shipments in the continental United States between November 1, 2013, and April 30, 2015, reported to us by the Military Surface Deployment and Distribution Command. While we identified some issues related to the accuracy and completeness of DTTS data that are described in this report and may affect the reliability of the overall number of SRC I shipments during this time frame, we determined that the data were sufficiently reliable for our purposes of analyzing information about individual shipments in our sample and general trends in the timeliness, accuracy, and completeness of data entry in DTTS. To obtain additional information about the timeliness, accuracy, and completeness issues we identified and steps that were being taken to address these issues, we conducted interviews with U.S Transportation Command and Military Surface Deployment and Distribution Command officials, as well as representatives from each of the military services who are assigned to coordinate with the Military Surface Deployment and Distribution Command on transportation issues and reviewed additional documentation provided by the Military Surface Deployment and Distribution Command and the military services, such as reporting provided by the Military Surface Deployment and Distribution Command to the military services. Table 4 lists the offices that we visited or contacted during our review. We conducted this performance audit from September 2014 to February 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Department of Defense Manual (DODM) 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) sets forth DOD policy on the physical security of sensitive conventional AA&E. According to DODM 5100.76, continuous program and policy oversight is required to ensure protection of AA&E within DOD, and DOD components are required to track and conduct physical inventories of SRC I ammunition by serial number. DOD policy requires SRC I ammunition to be treated as a higher risk than other conventional ammunition which requires a higher level of protection and security. DOD and the military services have policy and guidance on how to account for, safeguard, conduct physical inventories, adjust if necessary, track, and ship SRC I ammunition within and between services and to contractors for repair, as shown in table 5 below. In May 2014, we found that the department has experienced some challenges in implementing hazardous materials (HAZMAT) regulations and other guidance, which can adversely affect the safe, timely, and cost- effective transportation of HAZMAT. For example, we found that at least 44 times during fiscal years 2012 and 2013, DOD installations did not provide commercial carriers with access to secure hold areas for arms, ammunition, and explosives shipments or assist them in finding alternatives, as required by DOD regulations. We made 3 recommendations and all 3 have been closed as implemented. Table 7 summarizes our recommendations and their implementation status. In March 2014, we found that the military services’ automated information systems used to maintain accountability for ammunition inventory have some limitations that affect their ability to facilitate efficient management of conventional ammunition. For example, the systems cannot directly exchange ammunition data because they use different exchange formats that require extra time and resources to ensure data efficiency when exchanging between systems. We also found that Army reports of ammunition inventory data, used in the process for collecting and sharing ammunition data among the military services do not include information on certain missiles. We concluded that without incorporating these items in the Army’s report, DOD may lack full transparency about all available items and may miss opportunities to avoid procurement costs for certain usable items that may already be available in the Army’s stockpile. We made 7 recommendations, of which 2 have been implemented and 5 remain open. Table 8 summarizes our recommendations and their implementation status. In April 2000, we found internal controls weaknesses at an Army ammunition depot that resulted in a loss of accountability and control over SRC I rockets. For example, serial number control of SRC I rockets was lost at the time of shipment from the contractor because serial numbers listed on receiving reports that accompanied shipments did not correspond to the actual items and quantities of the respective shipments. We also noted that these control weaknesses indicate that the depot’s inventory business processes for these sensitive items do not fully comply with federal accounting and systems requirements. We made 10 recommendations, of which 9 have been implemented and 1 has not been implemented. Table 9 summarizes our recommendations and their implementation status. In September 1997, we found oversight weaknesses with SRC I rockets and that the military services have different procedures and requirements for maintaining oversight of the rockets. Further, we found that discrepancies existed between records of the number of missiles and a physical count we conducted. In addition, we identified that some facilities were not fully complying with DOD physical security requirements. We made 5 recommendations, of which all 5 have been closed as implemented. Table 10 summarizes the recommendations and their implementation status. In September 1994, we found discrepancies in the quantities, locations, and serial numbers of SRC I missiles inventories, which we concluded indicated that the services’ oversight and recordkeeping for the missiles is poor. We also noted, among other findings, that the services did not know how many missiles they should have in their possession because they lacked systems to track the missiles by serial number. We made 6 recommendations, all of which have been implemented. Table 11 summarizes the recommendations and their implementation status. In addition to the contact named above, Marilyn Wasleski (Assistant Director), Laura Czohara, Martin de Alteriis, Amie Lesser, Felicia Lopez, Sean Manzano, Anne McDonough-Hughes, Steve Pruitt, and Richard Powelson made key contributions to this report.

DOD manages a stockpile of more than 226,000 SRC I missiles and rockets in the continental United States. SRC I conventional ammunition, which refers to nonnuclear, portable missiles and rockets in a ready-to-fire configuration, is managed as a higher risk than other conventional ammunition and serves as a potential threat if it were obtained by unauthorized individuals or groups. Senate Report 113-176 (2014) included a provision for GAO to review aspects of DOD's management of SRC I ammunition. This report addresses the extent to which the military services have maintained (1) accountability and (2) visibility (i.e., access to accurate information) of SRC I ammunition in the continental United States. GAO reviewed DOD and military service policies, regulations, and guidance on physical inventories and shipping of SRC I ammunition; conducted visits at a non-generalizable sample of 11 military service locations selected based on inventory size and number of shipments of SRC I ammunition; interviewed officials; and analyzed data on SRC I on-hand assets as of April 30, 2015, and on non-generalizable samples of SRC I shipments from November 1, 2013, to April 30, 2015. The military services maintained accountability (i.e., accurate records) of Security Risk Category (SRC) I conventional ammunition at 11 sampled locations within the continental United States; however, GAO identified gaps in some service-level guidance and procedures for how SRC I ammunition is accounted for across locations. GAO identified instances in which the Navy and Army had taken actions to enhance the accountability of the physical inventories of SRC I ammunition, such as the Army evaluating its methodology to ensure contractors with SRC I ammunition in their custody submit documentation to verify completion of inventories. However, GAO identified 55 SRC I ammunition items that were in the physical custody of the Air Force—though owned by the Army or Marine Corps—but accountability was not maintained in any service's system of record while at the Air Force location. Department of Defense (DOD) policy requires that the DOD component having physical custody of materiel maintain accountability in its records regardless of the owner, but the Air Force's guidance requires that ammunition owned by other services be tracked only in a “non-accountable” program. If the Air Force does not revise its guidance to require that accountability be maintained regardless of ownership, the Air Force and the owning service will not have complete records of management of the ammunition and the owning service will not have full assurance that accountability was maintained. GAO found that Army and Marine Corps guidance does not specify a time frame for receipting shipments of SRC I ammunition. Records showed that 12 of 21 shipments to Army depots and 5 of 30 shipments to Marine Corps locations were receipted more than 2 business days after truck arrival. Until Army and Marine Corps officials finalize and implement guidance on required time frames for receipting SRC I ammunition, officials cannot reasonably assure accountability for all shipped SRC I ammunition. The military services have not consistently ensured timely, complete, and accurate information to maintain full visibility of SRC I ammunition in the continental United States. For example, 93 of 1,008 shipments GAO examined were not entered in DOD's Defense Transportation Tracking System (DTTS) at the time of departure. Also, 9 of 104 shipments GAO examined in more detail had inaccurate controlled inventory item codes and were not identified in DTTS as SRC I shipments. The Military Surface Deployment and Distribution Command and the military services have not collaboratively determined the specific information required for the military services to ensure timely data entry into DTTS. Further, the military services, with the aid of the Military Surface Deployment and Distribution Command, have not conducted analysis of the completeness and accuracy of data entered into DTTS by shippers on SRC I ammunition shipments. Until these actions are taken, the Military Surface Deployment and Distribution Command will not have full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the timeliness, completeness, and accuracy of data entered in DTTS. GAO recommends that DOD revise and finalize guidance and improve the timeliness, completeness, and accuracy of information to maintain full accountability and visibility of SRC I ammunition. DOD concurred with all six recommendations and identified specific steps it has already taken as well as plans to address them.

govreport

With virtually billions of records, the federal government is the largest single producer, collector, and user of information in the United States. In order to carry out the various missions of the federal government, federal agencies collect and maintain personal information such as name, date of birth, address, and SSNs to distinguish among individuals and ensure that people receive the services or benefits they are entitled to under the law. SSA is responsible for issuing SSNs as part of its responsibility for administering three major income support programs for the elderly, disabled, and their dependents: the Old-Age and Survivors Insurance; Disability Insurance; and Supplemental Security Income. SSA is also the repository of information on individuals’ wages and earnings. This information is used in tax administration and is reported by individuals on their federal income tax returns. Tax return information may only be disclosed as permitted by the IRC. Information transmitted to SSA has been protected from disclosure by statute and regulation since the inception of the Social Security program. To maintain the confidentiality of the personal information the agency collects to carry out its mission, in June 1937, SSA adopted its first regulation, known as “Regulation No. 1,” to protect the privacy of individuals’ records and to include a pledge of confidentiality. The regulation was reinforced by amendments to the Social Security Act in 1939, which became the statutory basis for maintaining the confidentiality of SSA’s records. For decades, the act, along with Regulation No. 1, formed the basis for SSA’s disclosure policy. However, the enactment of subsequent legislation—the Freedom of Information Act (FOIA) in 1966 and Government in the Sunshine Act in 1976—caused SSA to reexamine its disclosure and confidentiality policy. This legislation placed the burden on SSA, as well as other federal agencies, to justify withholding information requested. Still, SSA’s policy is designed to protect the privacy rights of individuals to the fullest extent possible while permitting the exchange of records required to fulfill its administrative and program responsibilities. Over the years, SSA’s disclosure policy has been revised to comply with about 25 statutes, including the Privacy Act. The Privacy Act of 1974 is the primary law governing the protection of personal privacy by agencies of the federal government. The Privacy Act regulates the collection, maintenance, use, and disclosure of personal information that federal agencies maintain in a system of records. The act requires that, at the time the information is collected, agencies inform an individual of the following: (1) authority for the collection and whether it is mandatory or voluntary, (2) the principal purpose for the collection of information, (3) what the routine uses for the information may be, and (4) what the consequences are of not providing the information. The act applies to systems of records maintained by federal agencies, and with certain exceptions, prohibits agencies from disclosing such records without the consent of the individual whose records are being sought. The act authorizes 12 exceptions under which a federal agency may disclose information in its records without consent, as shown in table 1. The Privacy Act requires that the Office of Management and Budget (OMB) issue guidance and oversee agency implementation of the act. The act does not generally apply to state and local government records; state laws vary widely regarding disclosure of personal information in state government agencies’ control. The Privacy Act, under the law enforcement exception, outlines the minimum criteria that must be met by a law enforcement agency to obtain personal information without an individual’s consent. The act requires that the request specify the information being sought and the law enforcement activity being carried out. The request must be in writing, and signed by the agency head. In addition, OMB guidance permits agencies to disclose a personal record covered by the Privacy Act to law enforcement at the agencies’ own initiative, when a violation of law is suspected; provided that such disclosure has been established in advance as a “routine use” and misconduct is related to the purposes for which the records are maintained. The routine use exception of the Privacy Act permits disclosure of individuals’ personal information if the requested use is compatible with the purpose for which the information was initially collected. Under the act, agencies are required to keep an accurate accounting regarding each disclosure of a record to any person or to another agency and to retain the accounting for at least 5 years or the life of the record, whichever is longer. Under OMB guidance, an agency need not keep track of every disclosure at the time it is made, but the agency must be able to reconstruct an accurate and complete accounting of disclosures. While SSA’s policy permits the sharing of nontax information with law enforcement, it does so only under certain conditions and is more restrictive than both the law enforcement exception specified under the Privacy Act and the disclosure policies of most federal agencies. Before allowing the disclosure of information, SSA’s disclosure policy requires SSA officials to consider several factors such as the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. Such considerations are above and beyond what is included in the law enforcement exception to the Privacy Act. SSA maintains that it must have a restrictive disclosure policy because much of the information the agency collects is especially personal. In addition, SSA officials believe that the agency must uphold the pledge it made to the public to keep this information confidential when SSA first began collecting it. Unlike SSA, the policies of most major federal agencies allow the disclosure of information to law enforcement if the requests for information meet the requirements outlined in the Privacy Act. However, like SSA’s disclosure policy, the disclosure policies of the IRS and the Bureau of the Census, which have disclosure requirements prescribed in their statutes, are more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While SSA has a long history of protecting individuals’ privacy, the agency’s disclosure policy allows the disclosure of information to law enforcement under certain conditions. These conditions require that SSA officials consider several factors before they release individuals’ personal information. For example, they must examine the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. SSA will share information if the criminal activity involves one of the following: Fraud or other criminal activity in Social Security programs. SSA will provide information necessary to investigate or prosecute fraud or other criminal activity in Social Security programs. Nonviolent crimes and criminal activity in other government programs that are similar to Social Security programs. SSA may also disclose information to investigate and prosecute fraud and other criminal activity in similar benefit programs, including state welfare/social services programs such as Medicare or Medicaid, unemployment compensation, food stamps, and general assistance and federal entitlement programs administered by the Department of Veterans Affairs, Office of Personnel Management, and the Railroad Retirement Board. Violent and serious crimes. SSA may disclose information when a violent crime has been committed and the individual who is the subject of the information requested has been (1) indicted or convicted of the crime and (2) the penalty for conviction is incarceration for at least 1 year and a day regardless of the sentence imposed. SSA might also disclose information when a person violates parole and the violent crime provisions of the original conviction have been met. SSA defines violent and serious crimes as those characterized by the use of physical force or by the threat of physical force causing actual injury, or coercing the victim to act for fear of suffering serious bodily harm. Such crimes include but are not limited to: murder; rape; kidnapping; armed robbery; burglary of a dwelling; arson; drug trafficking or drug possession with intent to manufacture, import, export, distribute or dispense; hijacking; car-jacking; and terrorism. Provisions of other federal statutes that require that SSA disclose its records such as in connection with civil or criminal violations involving federal income tax or the location of aliens. SSA will disclose information when another federal statute requires disclosure, such as the IRS statute for tax purposes or the Immigration and Naturalization statute for locating aliens. The jeopardy or potential jeopardy of the security and safety of SSA’s clients, personnel, or facilities. SSA will disclose information about an individual if that individual is involved in an activity that places the health, safety or security of SSA clients, personnel, or facilities in jeopardy or potential jeopardy. After the disclosure, SSA must send a notice of the disclosure to the individual whose record was disclosed. SSA’s disclosure policy is contained in 20 C.F.R. Part 401 and is promulgated through regulations outlined in its “Program Operations Manual System” (POMS) and Emergency Messages. POMS is the primary tool the field offices use to assist them in making appropriate disclosure decisions when they receive requests from law enforcement agencies. POMS provides detailed guidance and incorporates references to disclosures covered by 25 different statutes, which are located in at least 15 different sections of the POMS. SSA uses Emergency Messages, usually limited to a one-time only emergency situation, to provide implementing guidance in emergency situations. For example, on September 19, 2001, SSA issued an emergency message to field offices instructing them to direct all law enforcement requests related to the terrorists’ attacks of September 11, 2001, to SSA’s OIG’s Office. SSA’s regulations are designed for implementation at all levels of the agency, including SSA’s field offices, regions, and headquarters offices. SSA can make disclosures through its headquarters, 1,336 field offices, or 10 regional offices. Disclosures can also be made through SSA’s OIG, the law enforcement component of SSA that is responsible for conducting audits and investigations of agency programs and activities. The OIG is authorized to handle disclosures through a memorandum of understanding (MOU) with SSA. The OIG investigations staff conducts and coordinates activity related to fraud, waste, abuse, and mismanagement of SSA programs and operations. The OIG investigations staff also conducts joint investigations with other federal, state, and local law enforcement agencies. The OIG investigations staff is located in 60 locations that comprise 31 field offices and 10 field divisions. SSA’s OIG is authorized to disclose individuals’ personal information to law enforcement agencies as agreed with SSA under a MOU. In July 2000, SSA’s OIG and the Commissioner of SSA signed an MOU, which outlines the conditions under which the OIG can disclose to law enforcement agencies certain limited information from SSA’s records in cases involving fraud of a Social Security program or misuse of an SSN. Under the MOU, the OIG can disclose whether a given name and SSN match the name and SSN in records at SSA, referred to as SSN verification. The MOU delegates authority to OIG employees at all levels. SSA requires that the OIG ensure that law enforcement requests meet the same requirements outlined in the Privacy Act as well as those outlined in SSA’s POMS and other guidance. In addition, law enforcement requests must include the name and SSN to be reviewed and a certification that the individual about whom information is sought is suspected of misusing an SSN or of committing another crime against a Social Security program. Under the MOU, the OIG is permitted to open an investigation and participate in joint investigations with law enforcement officials, if the OIG determines that further investigation is warranted. SSA requires that the OIG submit an annual report to the Commissioner of SSA, no later than 30 days after the end of the fiscal year. The annual report must reflect the total number of SSN verification requests received and responses made, if the number is different, broken down by OIG field division. SSA also requires that the OIG maintain records from each fiscal year for 1 year. The Commissioner of SSA can revoke the delegation of authority to the OIG described in the MOU at any time by providing a 30-day notice. While any SSA office can make disclosures, the Privacy Officer within SSA’s Office of Disclosure Policy, located in the Office of General Counsel, has overall responsibility for overseeing the agency’s implementation of the disclosure policy. Except for requests involving national security issues, which are referred to the Privacy Officer at SSA headquarters and ultimately to the Commissioner of SSA, field locations handle requests for disclosing information because the offices are at the local level where information is frequently needed. Privacy Coordinators are located in the regional offices and are available to assist the field offices on questions about disclosures. The Privacy Coordinators report to the Privacy Officer. When SSA receives a request from law enforcement agencies, SSA officials must first determine whether the request is valid, that is, in writing on the agency’s letterhead, specifies the records being requested, and is signed by an official of the requesting office. SSA field office officials are instructed to rely on their knowledge of local law enforcement agencies to determine whether a request is from the proper person. For valid requests, SSA officials must also determine whether the agency requesting the information has jurisdiction in the particular case. Other specific criteria considered in determining whether SSA will disclose individuals’ personal information to law enforcement agencies are outlined in figure 1. Tax information is disclosed consistent with IRC 6103. SSA officials told us that in all cases, the agency’s practice is to provide only the minimum amount of information necessary to assist law enforcement. For law enforcement requests that do not fit neatly in the categories described or do not meet the specific criteria outlined in SSA’s policy, SSA’s Commissioner decides whether or not the agency will share the requested information using the Commissioner’s ad hoc authority. The Commissioner’s ad hoc authority is generally reserved for exceptional cases approved on a case-by-case basis. For example, following the September 11th, 2001, terrorist attacks, the Commissioner’s ad hoc authority was invoked to disclose to the FBI and other law enforcement agencies information in SSA’s files concerning suspects or other persons who may have had information on the attacks and to help identify and locate victims and members of their families. Certain requirements must be met in order to invoke the Commissioner’s ad hoc authority. The request must be deemed appropriate and necessary, SSA’s regulations cannot specify what is to be done in the circumstance in question, and no provision of law can specifically prohibit the disclosure. SSA policy prohibits the disclosure of tax return information under the Commissioner’s ad hoc authority. SSA officials told us that the Commissioner invokes this authority infrequently and had rendered decisions to disclose information to law enforcement agencies 35 times between April 1981 and October 2002. Unlike SSA’s disclosure policy, the Privacy Act requires that fewer criteria be met before a disclosure is made. However, SSA officials state that the agency must protect tax information and maintain the pledge of confidentiality that the agency made long before the Privacy Act was enacted. Therefore, SSA’s policy imposes additional requirements as a condition for disclosure. Over the years, SSA has modified its disclosure policy to incorporate legislative requirements, but where it had discretion, SSA has continued to focus its policy on protecting individuals’ privacy and upholding the pledge of confidentiality. The law enforcement exception of the Privacy Act permits disclosure of individuals’ personal information when a law enforcement agency (1) requests the information for an authorized law enforcement activity, (2) makes the request through the agency head, (3) submits the request in writing, and (4) specifies the information requested and the law enforcement activity involved. Under the Privacy Act, a law enforcement agency investigating a person suspected of embezzlement or shoplifting could submit a request to most federal agencies, including SSA, for information seeking or verifying the person’s name, SSN, date of birth, last known address, and other data. Most federal agencies would probably provide that information from their records covered by the Privacy Act. However, under SSA’s policy, no information would be given to the law enforcement agency because SSA has determined that these are not crimes that warrant any disclosure of individuals’ personal information. Additionally, the Privacy Act includes a routine use exception, which allows personal information to be disclosed on the initiative of the custodian agency. To qualify for a routine use, the proposed use of the information must be compatible with the purpose for which the information was obtained. Agencies must publish their routine uses in the Federal Register. SSA relies on the routine use exception to disclose information to law enforcement when fraud or other violations are suspected in SSA’s programs and other similar federal income or health maintenance programs. SSA’s disclosure policy is more restrictive than the disclosure policies of most major federal agencies, with IRS and the Census Bureau, being exceptions. However, unlike SSA’s disclosure policy, the policies of the IRS and Census are specifically provided in statute. Most major federal agencies’ policies allow for disclosures to law enforcement agencies under the law enforcement or the routine use exceptions of the Privacy Act. The law enforcement exception of the Privacy Act permits all federal agencies to disclose personal information to law enforcement agencies upon written request from the law enforcement agency. Twenty of the 24 major federal agencies have issued regulations that reference that disclosure authority. In addition, OMB guidance permits agencies to disclose personal information covered by the Privacy Act to law enforcement agencies under the routine use exception of the Privacy Act. The routine use exception permits federal agencies, at their own initiative, to disclose personal information without consent if the use is compatible with the purpose for which the information was collected. OMB guidance permits such a disclosure to a law enforcement agency when a violation of law is suspected, provided that such disclosure has been established in advance as a “routine use” and the misconduct is related to the purposes for which the information is collected and maintained. Fourteen of the 24 major federal agencies have established law enforcement routine use exceptions that are generally applicable to their systems of records. Some agencies alternatively only apply the law enforcement routine use exception to specific systems of records. Accordingly, under the Privacy Act, disclosure of personal information to law enforcement agencies may be permitted, depending on the agency and the circumstances, either by the law enforcement exception or the routine use exception. SSA, however, does not permit such disclosures from SSA program records under either exception. As already discussed, SSA requires considerations above and beyond the requirements in the Privacy Act. (See app. II for a list of federal agencies’ rules referencing the Privacy Act law enforcement disclosure authority and those authorizing a general law enforcement routine use exception.) Although SSA’s disclosure policy for law enforcement is restrictive relative to most other federal agencies, IRS and Census also have restrictive disclosure requirements, which are outlined in these agencies’ statutes. IRS’s disclosures of tax returns and return information are governed by Internal Revenue Code Section 6103, which prohibits disclosures unless specifically authorized in statute. This statutory restriction serves to protect the confidentiality of personal and financial information in IRS’s possession and ensure compliance with tax laws. A court order is generally required to open tax returns or other tax information to federal law enforcement officials investigating a federal nontax crime or preparing for a grand jury or other judicial proceeding, without the knowledge or consent of the taxpayer involved. The Attorney General, the Deputy Attorney General, and other Justice Department officials specifically named in the statute, are permitted to seek a court order. To obtain a court order, the requester has to demonstrate that: reasonable cause exists to believe that a specific criminal act has been committed and tax return information is or may be relevant to a matter relating to the commission of the criminal act; the information being sought will be used exclusively in a federal criminal investigation concerning the criminal act; and cannot be reasonably obtained, under the circumstances, from another source. Information federal law enforcement obtains from IRS generally cannot be shared with state and local law enforcement. However, the Victims of Terrorism Tax Relief Act of 2001 permits federal law enforcement agencies involved in terrorist investigations/intelligence gathering to redisclose this information to officers and employees of state and local law enforcement who are directly engaged in investigating or analyzing intelligence concerning the terrorist incidents, threats, or activities. The disclosure authority for Census is spelled out in statute under Title 13 of the United States Code. The Census statute prohibits the disclosure of any individual’s Census data other than for use by the Census, making information that the Bureau of the Census collects and maintains immune from the legal process. Unlike IRS, a court order will not permit the Census Bureau to disclose information to law enforcement agencies or any other entities that may request an individual’s personal information. Regulations provide that a person’s individual census information may not be disclosed to the public for 72 years from the decennial census for which the information was collected and the fine for wrongful disclosure of confidential census information is imprisonment of up to 5 years or a fine up to $250,000, or both. The statute further restricts the use of individuals’ Census data to the Secretary of Commerce, or bureau and agency employees. Additionally, Census data for individuals may only be (1) used for statistical purposes for which it was supplied; (2) published in a manner so that an individual’s information cannot be identified; and (3) examined by persons who have been sworn as officers or employees of the Department of Commerce, or the Bureau of the Census. The statute even protects from compulsory disclosure, copies of Census information that an individual may have retained for their own personal use. Accordingly, “no department, bureau, agency, officer, or employee of the government, except the Secretary of Commerce in carrying out the statutory duties of the agency, shall require copies of information an individual may have retained.” An individual’s personal retained copies of census forms are immune from the legal process and cannot be admitted as evidence in any action, suit, or other judicial or administrative proceeding without the individual’s consent. SSA maintains that it must have a restrictive disclosure policy to protect individuals’ personal information, even from law enforcement requests, because much of the information the agency collects is especially personal and was initially obtained under the pledge of confidentiality. SSA officials told us that they try to limit disclosure because the agency has no control over the extent to which information will be safeguarded once disclosed. In addition, Social Security has universal coverage and an individual cannot refuse to be assigned an SSN. The Social Security Act requires that SSA compile wage and employment data for each individual. According to an SSA official, individuals cannot receive Social Security benefits without having an SSN. In SSA’s disclosure policy, the agency recognizes that its rules for disclosure are more restrictive than the Privacy Act and cites several reasons why. According to SSA, it seldom has records that are useful to law enforcement agencies and information from tax returns— such as addresses or employment information—cannot be disclosed. Also, SSA contends that its resources should not be diverted for nonprogram purposes. Finally, SSA says that it has a long-standing pledge to the public to maintain the confidentiality of its records. Although SSA’s policy supports sharing limited information with law enforcement under certain conditions, we found evidence that some SSA field office staff are confused about the policy that could result in staff applying it inconsistently. Information provided to law enforcement is generally limited to the verification of a name and SSN, though more information may be provided under certain circumstances. Information obtained through our selected site visits and survey results indicated that SSA field offices might have denied law enforcement requests when they could have provided information and instances in which offices might have provided more information than was permitted under SSA’s policy. Because SSA is not required to and therefore, does not maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them, we could not determine the extent to which these inconsistencies occurred. Information provided to law enforcement is routinely limited to the verification of a name and SSN, though more information may be provided under certain circumstances. When law enforcement provides SSA with the name and SSN of an indicted or convicted criminal, SSA can conduct a search on the SSN to determine if it is valid and if it matches the name provided by law enforcement. If the name and the SSN do not match, SSA will not usually identify to whom the SSN actually belongs, though they will tell law enforcement that there was no match. Except to identify and locate illegal aliens, SSA generally will not provide any information if law enforcement only provides an SSN and wants to know to whom it is assigned. Under certain circumstances, such as when SSA’s OIG conducts a joint investigation with other law enforcement agencies involving fraud against one of SSA’s programs, the OIG is allowed to provide any information available in SSA’s data system, short of IRS data. SSA tries to ensure that its disclosure policy is consistently implemented in all field offices. SSA takes various steps to ensure the consistent applications of its disclosure policy. For example, SSA has taken steps to educate its staff about its disclosure policy. SSA managers indicated that SSA staff is given disclosure policy training when they start employment and such training is refreshed as needed. Additionally, SSA posts the policy on its internal Web site and on Compact Disc-Read-Only Memory (CD-ROM) for staff reference. Furthermore, a regional “privacy coordinator” is available to answer staff questions about proper disclosure procedures. One SSA regional office provided a chart to all SSA field offices within its “program circle” that briefly summarizes SSA’s policy on access and disclosure without consent. Although this chart had not been updated since July 1996, it was viewed by the manager we talked with as a handy guide for what could be disclosed and also provided references to the location of a more thorough explanation of SSA’s policy in their POMS. In addition, to ensure that disclosure procedures are followed, field office managers told us that they usually handle information requests from law enforcement officials rather than leaving this duty to staff. However, we noted in our survey and during selected site visits, a limited number of instances where SSA’s disclosure policy appears to have been inconsistently applied. In some instances, law enforcement might have received more information than permitted under SSA’s policy. For example, one SSA OIG office we visited provided a law enforcement agency with the name, SSN, date of birth, place of birth, and parents’ name when it seemed that only the name and SSN verification results should have been provided. In another case, an SSA official reported that a state law enforcement officer stopped an individual and telephoned SSA requesting information to verify the SSN, date of birth, place of birth, and sex and was provided the results over the telephone. Although SSA’s policy permits the verification of the name and SSN, such requests are required to be in writing. In other instances, requests that should have been approved might have been turned down. For example, one SSA field office manager told us that nothing could be disclosed to law enforcement if the request for information pertained to an individual suspected of misusing an SSN because the individual had not been indicted or convicted of this crime. However, SSA’s policy would appear to permit disclosure in this situation. Another SSA field office manager told us that office would not disclose any information without consent from the individual for whom the information is being requested. Several possible reasons exist for the inconsistent application of SSA’s disclosure policy. Although our survey showed that most SSA field offices receive requests for information from law enforcement, SSA field officials we spoke with said that they do not receive requests frequently. For example, several officials told us that they received fewer than 10 requests in 2002. Because requests are infrequent, staff must often consult the policy to help them to respond properly. However, many staff members consider the policy confusing. For example, one field office manager said that, “We have doubts as to what information should be provided to U.S. Border Patrol.” Similarly, a manager in another field office said, “SSA disclosure policy should be written in “Plain English” to make it easy to understand by all readers.” A different field office manager commented, “ Disclosure policy is still frequently confusing for much of our staff.” This lack of clarity leads to confusion about what should be disclosed. For example, one manager said, “ is quite confusing. It’s hard to know what you can disclose.” Another manager commented, “I think the policy should be clearer than it is. There’s too much…’if this, then that, but not this and so on.’” In addition, SSA’s responsibilities to both assist law enforcement and protect individuals’ privacy may be exacerbating the confusion and inconsistent application of the agency’s policy. For example, officials at SSA headquarters said that they want to help law enforcement as much as possible, but they believed they must also protect the privacy of the information in their systems of records in order to perform SSA’s primary mission. Some managers in SSA field offices believed that the agency should provide information to law enforcement. However, several field office managers expressed their concerns and reluctance about sharing information with law enforcement agencies. Employees who provide information to an individual inappropriately could be subject to a penalty, including suspension or termination from SSA. Therefore, rather than risk disclosing information inappropriately, some officials might err on the side of caution and not disclose information even when it is permitted under the agency’s disclosure policy. Consistent application of SSA’s disclosure policy cannot be assessed because, according to OMB guidelines, SSA is not required to maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them. According to SSA, disclosures of individuals’ personal information are kept in individuals’ files. While SSA policy does not stipulate that field offices must keep track of requests made by a law enforcement agency, our survey revealed some information about these requests. For example, we estimate that 82 percent of SSA field offices indicated that they had received requests for personal information from law enforcement agencies. However, 71 percent of SSA’s field offices do not maintain a record of requests made by law enforcement agencies. While the majority of SSA field offices do not maintain records of law enforcement requests, results from our survey showed that 90 percent of the SSA OIG offices maintain these data for disclosures the OIG made. The SSA OIG is required to report to the SSA Commissioner aggregated data annually on disclosures made. According to the OIG, it also keeps a hard copy of requests made by law enforcement agencies for at least 1 year. On the basis of these aggregated data, between fiscal years 2000 and 2002, SSA OIG regional divisions fulfilled almost 30,000 requests from law enforcement agencies for name and SSN verification. Table 2 shows the number of verifications fulfilled by SSA OIG regional divisions and headquarters. However, no numbers are kept on denied law enforcement requests. According to SSA OIG officials, in most cases, law enforcement officers contact OIG offices by telephone before submitting a request so no written record exists if the OIG does not grant the request for information. While some law enforcement officials we spoke with were unfamiliar with SSA’s disclosure policies, most were generally satisfied with the information provided by SSA, though most would like more. Some law enforcement agencies at the state and local level were unfamiliar with the process for obtaining information and expressed frustration with their attempts to obtain information from SSA. Law enforcement officials indicated that the SSN and name verification SSA provided was often helpful to their investigations. However, most wanted SSA to provide additional information such as address, date of birth, and employer or family information. SSA officials have several concerns about expanding SSA’s disclosure policy. Findings from site visits indicated that some law enforcement officers at the state and local level, who generally request information from SSA field offices, are unfamiliar with the process for obtaining information from SSA offices. Because SSA does not have written procedures on its disclosure policy available to law enforcement, some officers find out how to obtain information virtually by trial and error. For example, one officer told us that after having his initial request for information, which was not in writing turned down because he had not followed proper procedures, he obtained a search warrant to obtain the information from SSA. The officer said that no one at SSA explained to him the procedures for obtaining information until he got the search warrant. It is unclear when or if SSA officials let law enforcement officers know what procedures need to be followed to get information. Federal law enforcement agencies, on the other hand, more often understood the Privacy Act’s procedures. Further, most federal law enforcement agencies we spoke with submitted their requests to SSA’s OIG—itself, a federal law enforcement agency. Our survey results indicated that on average in 2002, 46 percent of the requests made to OIG offices came from federal law enforcement agencies while 27 percent of the requests made to SSA field offices on average came from federal law enforcement agencies. While details on SSA’s disclosure policy are available in their POMS and other SSA documents that summarize this information, it is not readily available to law enforcement. A summary of the policy can be found on SSA’s Web site under the caption “Code of Federal Regulations for Social Security.” However, it is not easy to find and provides little detail on what SSA will provide to law enforcement. Further, the Web site does not provide law enforcement with instructions on what they need to do to get the information. Officials from federal, state, and local law enforcement agencies we spoke with were generally satisfied with the information provided by SSA although most would like more information on individuals. Law enforcement officials indicated that, although in most cases SSA only verified a name and SSN, the information received was useful to their investigations and, in some cases, was enough to help convict an individual of a crime. The information received from SSA was considered by law enforcement as the most accurate and up-to-date information available to help in their investigations. Law enforcement was also satisfied with the time in which SSA provided the information. In many cases, law enforcement officers we spoke with indicated that SSA provided the information very quickly. In addition, one SSA OIG official told us that when procedures are followed correctly, the OIG can reply back in 24 hours or less, depending on the information requested. SSA confirmed the timeliness of its responses to law enforcement requests. We estimate that over 90 percent of both SSA field office and OIG respondents reported that it took 24 hours or less to fulfill a request. Our survey results showed that 40 percent of SSA field offices and 21 percent of SSA OIG offices reported that it took less than an hour to fulfill a request from a law enforcement agency. Although most of the law enforcement officials we spoke with were satisfied with information provided by SSA, several believed the information provided was insufficient. Several of these law enforcement officials believed that the name and SSN verification was not enough to help with their investigations. These individuals generally wanted additional information such as the suspect’s wage information, address, employer, and date of birth. In documents provided to us, SSA’s OIG listed the following situations in which the OIG could not provide information to law enforcement. provides the SSN and wants to know to whom it is assigned; wants information to locate witnesses or suspects in high profile cases or wants information on individuals with Alzheimer’s disease who are lost, wants information on next of kin; wants information to locate a fugitive who may be receiving benefits under SSA’s Old-Age and Survivors Insurance program and its Disability Insurance program; wants information to make identifications in child pornography cases; wants information to determine if there has been any activity on a Social Security account in a custodial interference case; and wants information on SSNs related to non-SSA-related fraud cases or counterfeit cases. Some law enforcement officials were unhappy with SSA’s refusal to provide such information, especially because they believed that SSA could easily provide it in a short period of time. For example, one federal officer who investigates nonviolent felony crimes said that SSA seems more concerned about someone committing fraud against one of its programs than about identity theft involving the use of someone’s SSN. He also said that SSA would not provide him with any information on the person whose identity was being stolen. Another officer said that because he could not get necessary information from SSA, he had resorted to other means of gathering the information needed. The officer said that depending on resources available, it could take up to 3 weeks to get someone’s SSN through other sources. Furthermore, the officer said that while he could make the case without the SSA information, the information SSA can provide would be invaluable to helping fully prosecute a case. Many SSA officials in the field and OIG offices agreed that SSA’s disclosure policy is too restrictive. Many believed that, for legitimate investigations, the policy should allow for disclosures to law enforcement officials of whatever information they need. One SSA OIG official said that, as a law enforcement officer, he believed that he should be able to provide information to another law enforcement officer especially when he knew that doing so would help with a case and also because law enforcement officers would be more willing to share information with the OIG. While the SSA Commissioner can invoke ad hoc authority for certain specific cases to disclose information, as was done in response to the disclosure requests related to the September 11 terrorist attacks, SSA officials said that the use of this authority must be limited. SSA headquarters officials believe that expanding its disclosure policy would hamper its ability to ensure that individuals’ personal information is protected and that resources are not diverted from administering Social Security benefit programs. Protecting individuals’ privacy and providing information to law enforcement that could be helpful in solving crimes or ensuring national security are two important yet sometimes seemingly conflicting policy objectives. SSA places a high priority on privacy, and its policy for disclosure to law enforcement agencies goes beyond the requirements of the Privacy Act. SSA’s disclosure policy attempts to preserve its pledge to maintain individuals’ privacy while cooperating with law enforcement and complying with applicable statutes. The end result is a complex policy that is more restrictive than the Privacy Act requirements and those of most federal agencies and more like the policies of IRS and Census, agencies that maintain personal information whose requirements are embodied in statute. In addition, some SSA field office staff and local law enforcement officers find SSA’s policy confusing and sometimes frustrating. As a possible consequence of SSA staff and local law enforcement’s confusion about SSA’s policy, law enforcement may be denied requested information even though SSA’s policy permits its disclosure or law enforcement may receive information that SSA’s policy does not permit. Although we could not assess the overall level of consistency in the application of SSA’s policy, we believe eliminating or reducing confusion about the agency’s policy would help ensure consistent application, and that this can be achieved with relatively modest actions on SSA’s part. To help ensure consistent application of SSA’s disclosure policy for law enforcement in all of its offices and to better assist law enforcement agencies making disclosure requests, we recommend that the Commissioner of SSA do the following: Take steps to eliminate confusion about the agency’s disclosure policy. These steps could include clarifying SSA’s policy; providing additional or refresher training to staff; or delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy coordinators, or other units that SSA determines would have expertise in this area. Provide law enforcement with information on SSA’s disclosure policy and procedures. For example, this information could be provided on its Web site, in informational pamphlets, or some other written format. We obtained written comments on a draft of this report from the Commissioner of SSA. SSA’s comments are reproduced in appendix III. SSA also provided technical comments, which we incorporated in the report as appropriate. We also provided a draft of this report to the Departments of Commerce, Justice, and Treasury for review and comment. These three agencies reported that they had no comments. SSA stated that our draft report accurately reflected the importance of SSA’s disclosure policy to the agency’s mission but it presents an incomplete description of both the statutory basis for and rationale behind the policy. Further, SSA stated that the draft report does not take into account the statutory basis for the nondisclosure of tax information or the statutory support for the agency’s long-standing confidentiality pledge; therefore, SSA believes that our findings and recommendations are “overbroad.” We are aware of SSA’s obligation under the IRC and took this into consideration during our review of SSA’s disclosure policy; however, we have revised the report, where appropriate, to clarify that our observations about SSA’s disclosure policy relative to the Privacy Act do not extend to SSA’s disclosure of tax information. Disclosure of tax information is controlled by section 6103 of the IRC. We also provided additional reference to the statutory basis and rationale behind SSA’s disclosure policy. SSA also commented that 42 U.S.C. 1306 provided an independent basis for nondisclosures, apart from the Privacy Act. The report recognizes that 42 U.S.C. 1306 provides the basis for SSA’s disclosure policy and we have added a citation for this authority. Section 1306 provides SSA authority to regulate the dissemination of information in its custody as otherwise permitted by federal law. Other federal law includes the Privacy Act. Our report merely points out that SSA has used this authority to regulate in a more restrictive fashion than the Privacy Act requires. SSA stated that it believed that our characterizing the agency’s policy as more restrictive than most federal agencies does SSA a disservice because many federal agencies have little interaction with the public at large. SSA states that the only two agencies of SSA’s size and scope with respect to gathering information from the public to accomplish their missions are IRS and Census, which have more restrictive disclosure policies and statutes that prohibit disclosures. We believe that our comparison and characterization of SSA’s disclosure policy is fair. We compared SSA’s disclosure policy to those of the other 23 agencies covered by the Chief Financial Officers’ Act. We decided also to compare SSA’s policy to those of IRS and Census because they are similar in size and scope of data maintained on individuals. All of the agencies we compared are subject to the Privacy Act. As we reported, SSA’s disclosure policy, as well as those of IRS and the Census Bureau is more restrictive than most federal agencies. SSA agreed in part with our recommendation that the Commissioner take steps to eliminate confusion that may cause inconsistent application of the policy. SSA acknowledged that the policy is complex and could lead to occasional inconsistent application. However, SSA stated that it provides extensive instructions in its POMS for employees and the instructions refer staff to experts in regional and central offices for assistance when needed. SSA also stated that its regional offices have provided employees access to Intranet sites that clarify disclosure policy, but the agency will consider providing additional refresher training as appropriate. In addition, SSA stated it is currently reviewing improvements to the POMS sections that address law enforcement disclosures that the agency believes will address our concerns. SSA expressed concern about the option to consider delegating “decision-making authority for law enforcement requests to specified locations such as the OIG...” SSA stated that the Inspectors General Act of 1978 prohibits agencies from transferring programmatic functions to the Inspector General. We acknowledge in our report that SSA provides guidance on its disclosure policy in its POMS. While we found that employees were aware of this guidance, SSA staff told us that they found SSA’s policy confusing. We believe additional training as well as improvements to the POMS that clarify or simplify SSA’s policy should help ensure consistent application. With respect to SSA’s concern about our recommendation to consider delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy officers, or other units that SSA determines would have expertise in this area, we did not intend to imply that programmatic functions be transferred to the OIG. Our recommendation was aimed at directing disclosure requests to units that currently perform this function and that appear to have expertise in SSA’s disclosure policy. We simply intended to provide options for SSA to better utilize the resources they already have in place to determine whether law enforcement requests are permitted under SSA’s disclosure policy. The OIG, who currently responds to law enforcement requests as authorized under an MOU with SSA, was only one of the units we suggested as an option. We continue to believe that delegating authority to handle disclosure requests to specified units with expertise in SSA’s disclosure policy would be a plausible option for helping to ensure consistent application of SSA’s policy. This option could reduce or eliminate the need for SSA field office officials who receive sporadic requests from law enforcement to relearn SSA’s disclosure policy. SSA agreed with our recommendation that the Commissioner of SSA should provide law enforcement with information on SSA’s disclosure policy and procedures and SSA believes the agency has done so. However, SSA stated it would review its Web site and other public informational materials to see if additional material or formatting changes would be helpful. We acknowledged in our report that SSA’s policy can be found on the Internet, but noted that it is not easily found and does not clearly explain how law enforcement could obtain information. Although SSA officials told us that they provided limited discussion of the agency’s disclosure policy and procedures at law enforcement conferences, these officials did not indicate the number of conferences attended or whether these conferences involved federal, state, or local law enforcement. Some of the local law enforcement officials we spoke with were unfamiliar with how to obtain information from SSA. Therefore, we continue to believe that information that clearly defines SSA’s disclosure policy and procedures would be helpful to law enforcement. Further, we believe that our findings and recommendations are central to many concerns expressed by both SSA and law enforcement officials and we view the steps that SSA indicated that it plans to consider, or already has in process to ensure consistent application of its disclosure policy and law enforcement’s understanding of how to obtain information from SSA as appropriate steps toward correcting the concerns expressed. We are sending copies of this report to the Commissioner of Social Security; the Secretaries of Commerce, Treasury, and Homeland Security; the U.S. Attorney General; appropriate congressional committees; and other interested parties. We will also make copies of this report available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have questions about this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix IV. To attain our objectives for this assignment, we reviewed and compared the Social Security Administration’s (SSA) disclosure policy for law enforcement and the Privacy Act. We also compared SSA’s disclosure policy with that of the Internal Revenue Service (IRS) and the Bureau of the Census because SSA officials believe that these agencies are comparable with SSA. Additionally, we compared SSA’s disclosure policy with the general law enforcement disclosure policies for the other 23 Chief Financial Officers’ (CFO) Act agencies. To help determine how SSA’s disclosure policy affects information sharing with law enforcement, we conducted site visits and detailed interviews at SSA field offices and SSA’s Office of the Inspector General (OIG), as well as nearby field offices for federal, state, and local law enforcement agencies in Los Angeles, California; Chicago, Illinois; and Dallas, Texas. We also administered an electronic survey to all SSA OIG field offices and a stratified random sample of SSA field offices. We interviewed SSA officials in both headquarters and field offices and law enforcement officials at the federal, state, and local levels of government about their experiences with sharing individuals’ personal information. At the headquarters level, we interviewed SSA officials responsible for disclosure policy in the Office of General Counsel and the SSA OIG, Baltimore, Maryland. We interviewed law enforcement officials from the Departments of Justice and Treasury, including the Federal Bureau of Investigation (FBI); Bureau of Immigration and Customs Enforcement, formerly Immigration and Naturalization Service (INS) and Customs; Executive Office for United States’ Attorneys; Drug Enforcement Agency; United States Marshals Service; Secret Service; Internal Revenue Service (IRS); and Alcohol, Tobacco and Fire Arms, headquartered in Washington, D.C. During the course of our review, several of these law enforcement agencies merged into the Department of Homeland Security, or were otherwise reorganized. We also interviewed OIG officials for investigation at the Departments of Education and Housing and Urban Development in Washington, D.C. Our site visits included interviews with the Bureau of Immigration and Customs Enforcement, at Dallas, Texas, and law enforcement officials of the Arlington Police Department, Arlington, Virginia. We surveyed SSA offices in order to: (1) estimate the type and volume of law enforcement requests for personal information received by SSA; (2) determine the distribution of these requests across federal, state, and local law enforcement agencies; and (3) gain some understanding of the bases for the granting and denial of these requests. Our working definition of a personal information request is an instance for which a law enforcement agency requested the personal information of one or more individuals between fiscal years 1999 and 2002. For example, if a law enforcement agency requested addresses for two people in a single instance, this would count as one personal information request. We were specifically interested in law enforcement agencies’ requests for personal information, such as social security numbers, names, addresses, birth dates, and income. We designed an Internet-based survey and organized it into multiple sections that included the following areas: receipt of law enforcement requests, response time for fulfilling law enforcement requests, and methods for handling law enforcement requests. We selected a stratified random sample of 335 SSA field offices to participate in the survey. This number was based on an expected response rate as well as a precision level. The sample was stratified by 10 regional locations and taken from a listing of 1,286 field offices that SSA provided. The original list contained 1,336 locations. Fifty locations that are not considered field offices and, therefore, do not receive law enforcement agency requests were excluded from the sampling frame. All 31 SSA Inspector General offices were surveyed since these sites routinely accept law enforcement agencies’ requests for personal information. The survey was mailed electronically to the manager in charge at SSA and Inspector General field offices. Both office types received the same on-line survey. Survey data were collected between February 25, 2003, and March 21, 2003. The overall response rate was 90 percent; with 97 percent of the Inspector General’s field offices and 90 percent of SSA’s field offices responding. Regional response rates in the sample ranged from 86 percent to 95 percent across 10 regional locations. To provide some indication of the reliability of the survey results, standard errors were calculated. The sample was weighted in the analysis to statistically account for the sample design and nonresponse. We are 95 percent certain that the survey estimates provided in this report are within plus or minus 10 percentage points of those estimates that would have been obtained had all SSA offices been captured. To minimize some of the potential biases of other errors that could figure into the survey results, we conducted pretests that included both the SSA Inspector General and SSA field offices. Four pretest sites were SSA field offices located in Wheaton, Maryland; Washington, D.C. (Anacostia); Seattle, Washington; and Chicago, Illinois. One pretest site was an SSA Inspector General office located in Washington, D.C. The pretests were conducted either through teleconferences or face-to-face interviews, and were completed between December 2002 and January 2003. We conducted our audit work between August 2002 and July 2003 in accordance with generally accepted government auditing standards. Rule referencing Privacy Act disclosure General routine use exception of Privacy Act permits disclosure to law enforcementauthority 15 CFR 4.30(a)(5)(vii) 46 FR 63501 (12/31/81) 32 CFR 310 App. C 34 CFR 5b.9(b)(7) 34 CFR 5b. App. B 10 CFR 1008.17(b)(7) 45 CFR 5b.9(b)(7) 45 CFR 5b. App. B 24 CFR 16.11(a)(5) 43 CFR 2.56(b)(5) 67 FR 16816 (4/8/02) 49 CFR 10.35(a)(7) 31 CFR 1.24(a)(7) 38 CFR 1.576(b)(7) 67 FR 8246 (2/22/02) 14 CFR 1212.203(f)(7) 22 CFR 215.10(c)(7) 44 CFR 6.20(g) 67 FR 3193 (1/23/02) 41 CFR 105-64.201(g) 10 CFR 9.80(a)(7) 67 FR 63774 (10/15/02) 5 CFR 293.401(g) & 406 60 FR 63075 (12/8/95) Shelia Drake (202) 512-7172 ([email protected]) Jacqueline Harpp (202) 512-8380 ([email protected]) In addition to those named above, Margaret Armen, Richard Burkard, Malcolm Drewery, Kevin Jackson, Corinna Nicolaou, and David Plocher made key contributions to this report. Barbara Hills, Theresa Mechem, and Mimi Nguyen provided assistance with graphics.

Law enforcement agencies' efforts to investigate the events of September 11th increased awareness that federal agencies collect and maintain personal information on individuals such as name, social security number, and date of birth that could be useful to law enforcement. The Social Security Administration (SSA) is one of the country's primary custodians of personal information. Although the Privacy Act protects much of this information, generally, federal agencies can disclose information to law enforcement. However, determining when the need for disclosure takes priority over an individual's privacy is not clear. GAO was asked to describe (1) SSA's disclosure policy for law enforcement and how it compares with the Privacy Act and those of other federal agencies, (2) SSA's experience sharing information with law enforcement, and (3) law enforcement's experience obtaining information under SSA's policy. Although SSA's disclosure policy permits the sharing of information with law enforcement entities, it is more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While the Privacy Act permits disclosures to law enforcement for any type of crime, SSA only allows disclosures under certain conditions. For example, for serious and violent crimes, SSA will disclose information to law enforcement if the individual whose information is sought has been indicted or convicted of that crime. Even when information is disclosed, it might be limited to results obtained from verifying a social security number and name unless the investigation concerns fraud in SSA or other federal benefit programs, then the agency can work with law enforcement officials as part of a task force or joint investigation. However, the disclosure policies for law enforcement of the Internal Revenue Service (IRS) and the Census Bureau, both of which have requirements prescribed in their statutes, are also more restrictive than the Privacy Act and the policies of most federal agencies. SSA officials consider SSA's disclosure policy integral to carrying out the agency's mission. The various restrictions in SSA's disclosure policy create a complex policy that is confusing and could cause inconsistent application across the agency's more than 1,300 field offices. This could result in uneven treatment of law enforcement requests. Because aggregated data were not available, GAO was unable to assess the extent to which SSA does not consistently apply its policy. However, GAO was told of instances in which SSA officials in some field offices did not give law enforcement information that appeared to be permitted under the policy as well as instances in which they gave them more than what appeared to be allowed. Generally, law enforcement officials find the limited information SSA shares useful to their investigation, but many law enforcement officials, particularly state and local law enforcement officials, are not familiar with the policy or the process for requesting information from SSA. Most law enforcement officials expressed a desire for more information than is currently permitted under SSA's policy, but SSA maintains that providing more information would hurt its ability to carry out its primary mission.

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The Resource Conservation and Recovery Act (RCRA), passed in 1976 and substantially amended in 1984, establishes a national policy that hazardous waste be generated, treated, stored, and disposed of so as to minimize present and future threats to human health and the environment. RCRA, among other things, governs the management of hazardous waste from its generation to its final disposal so as to prevent future contamination. According to many stakeholders, the law has accomplished this purpose. RCRA also contains provisions governing the identification and listing of hazardous waste. Under these provisions, EPA has established criteria for identifying waste that should be classified as hazardous. For example, EPA has listed in its regulations specific types of waste that are to be considered hazardous. Some types are listed by their source, that is, by the specific industrial processes that produce the waste, such as electroplating, which generates sludge from wastewater treatment. Other types are defined by certain characteristics that make the waste hazardous, such as whether it ignites easily. RCRA’s regulations govern all hazardous waste, regardless of where or how it is generated. Waste from both current and past industrial operations is regulated. The requirements apply to any waste that EPA has identified as hazardous or, under its “contained-in” policy, to any environmental medium, such as soil or groundwater, that has been mingled with an identified hazardous waste until the medium no longer contains the waste. As a result, waste associated with cleanups (often referred to as remediation waste) must be managed under RCRA if it contains a hazardous component. Thus, waste generated at a wide variety of cleanups, including those under RCRA, Superfund, and state enforcement and voluntary programs, must generally be managed under RCRA’s stringent requirements. Both the Congress and EPA have considered proposals to amend the application of RCRA’s requirements to remediation waste. Since 1995, several legislative proposals have been introduced that would exempt certain types of remediation waste from these requirements and give the states the authority to establish their own requirements for managing this waste. Likewise, in 1995, the administration, as part of its effort to reinvent government, tasked EPA with identifying for statutory reform any RCRA provision whose implementation incurred costs that far outweighed the environmental benefits achieved. Through meetings with stakeholders, EPA identified RCRA remediation waste as a key area. In April 1996, EPA proposed a comprehensive rule that would have provided alternative ways of managing remediation waste. However, in September 1997, the agency announced plans to withdraw its proposed rule because, among other things, stakeholders disagreed on many remediation waste issues. Instead, the agency plans to issue regulations covering four specific elements affecting remediation waste. To respond to this report’s objectives, we reviewed pertinent laws and regulations and EPA’s policies, guidance documents, and proposed regulations that discuss the application of RCRA’s requirements to the management of remediation waste during cleanups. We interviewed EPA headquarters managers responsible for both developing and implementing RCRA policy. We also interviewed officials in nine states who are responsible for administering the federal RCRA and Superfund programs and their own state enforcement or voluntary cleanup programs. We selected five of these states because they have the largest cleanup workloads and four additional states to achieve geographic diversity. Finally, we discussed the current requirements for managing remediation waste with various industry and environmental associations. (See app. I for a more detailed statement of our scope and methodology.) While many of RCRA’s requirements can negatively affect cleanups, according to EPA, cleanup managers most often cited three requirements as creating disincentives for industry to clean up previously contaminated sites. They believe that these requirements increase the cost and time of some cleanups and lead parties to select cleanup remedies that can be either too stringent or not stringent enough, given the health and environmental risks posed by the waste. Ultimately, these requirements can discourage the cleanup of some sites, particularly of sites being managed under state voluntary programs. Most of the cleanup managers we contacted identified land disposal restrictions, minimum technological requirements, and requirements for permits as the three most significant requirements under RCRA that unnecessarily add cost and time to some cleanups. The land disposal restrictions and minimum technological requirements primarily add costs because they set stringent standards for treating and disposing of hazardous waste, forcing parties to try to reduce contamination to concentrations that they believe are lower than necessary to be protective or to use cleanup technologies that were not designed to manage remediation waste. The requirements for permits can add time—months or even years—and costs to some cleanups. For example, one EPA estimate suggests that exempting contaminated soil at a Superfund site from these requirements could reduce the treatment costs by nearly 80 percent, from an average of about $341 per ton to an average of about $73 per ton. This exemption could reduce the overall treatment and disposal costs for such a site from about $12.2 million to about $4.1 million. Ultimately, applying the three requirements to remediation waste has led parties to base their choice of some cleanup remedies not on the risks posed by the waste, but on considerations of how to meet, minimize, or avoid the requirements, according to EPA and state cleanup officials. As a result, they pointed out, parties often choose less aggressive remedies, such as leaving remediation waste in place rather than managing or treating it. The 1984 RCRA amendments created land disposal restrictions that largely prohibit parties from disposing of hazardous waste on land (e.g., in a landfill unless they have treated the waste to minimize threats to human health and the environment. The law also requires EPA to establish treatment standards for hazardous waste that has been restricted from land disposal. Once EPA has set a treatment standard, parties must meet it for hazardous waste that they subsequently dispose of on land. Parties do not have to meet the treatment standard for hazardous waste placed on land before EPA established the standard unless they remove the waste and dispose of it again—for example, during a cleanup action. Complying with the land disposal restrictions and their associated treatment standards can be costly and complex for several reasons. First, the restrictions are costly to implement because they require that waste be treated to specific, stringent standards. Such treatment is especially costly for cleanups involving large volumes of waste. Treatment to meet these stringent standards may be appropriate when relatively high-risk materials, such as concentrated hazardous waste from old lagoons and landfills, are found during cleanups. However, much remediation waste is lightly contaminated. When relatively low-risk media are found, treatment to meet the standards may be more stringent than necessary to protect human health and the environment, according to EPA. EPA estimated that exempting relatively low-risk contaminated media from the treatment standards under the land disposal restrictions could reduce by about 80 percent the volume of contaminated media subject to these requirements, from about 8.1 to about 1.8 million tons per year. The agency also estimated that exempting relatively low-risk contaminated media could decrease cleanup costs nationwide by 50 percent, or about $1.2 billion per year, without sacrificing human health or environmental protection. Second, land disposal restrictions may drive some parties to use cleanup technologies that are more stringent and therefore more costly than necessary to be protective. Under RCRA, EPA is required to set treatment standards for hazardous waste that minimize any threats to human health and the environment. EPA has generally set its treatment standards at the concentration levels that could be attained if the best demonstrated available technology were used to treat the contamination. As a result, for some hazardous waste, the only way to achieve the standard is by incineration, even though other technologies, such as soil washing or bioremediation, can result in protective cleanups at a much lower cost.For example, incineration, which can typically address all the hazardous waste at a site, can cost as much as $1,200 per ton, according to EPA’s estimates. If the waste at a site can be treated to meet RCRA’s standards through a combination of other technologies, such as bioremediation, soil washing, and immobilization, each of which is effective for certain contaminants, the final cost is likely to be no more than about $300 per ton, according to EPA—much less than the cost of incineration. Finally, the land disposal restrictions and their associated treatment standards are costly because contamination may have come from a variety of sources or industrial processes that occurred at the site over time, and parties may have to use several treatment technologies to comply with all of the applicable standards. According to EPA, this issue is particularly relevant at sites with a long history of contamination. The issue was also raised by a cleanup manager from New Jersey, one of the five states with the largest volume of remediation waste. He said that remediation waste frequently contains mixtures of many types of waste and parties find it difficult to design treatment methods that will satisfy all of the applicable standards under the land disposal restrictions. EPA has acknowledged that its treatment standards under RCRA are not generally appropriate for much of the contaminated soil typically found at cleanups. However, even though EPA believes that in most cases, such soil would be more appropriately treated using other technologies, such as bioremediation, it does not have the research to demonstrate that these technologies can attain the stringent treatment levels required by RCRA. Some of the state cleanup managers we interviewed also discussed the problems they had encountered in treating soil to achieve the standards. New York officials, for example, told us that the owners of a site with soil contaminated with metals wanted to use a cleanup technology at the site that would have achieved 98 percent of the concentration level specified by the pertinent RCRA treatment standards. However, because the technology did not fully comply with the treatment standards, the owners instead had to excavate the waste and send it to a hazardous waste facility for treatment and disposal. Alternatively, efforts to avoid triggering the treatment standards under the land disposal restrictions can drive parties to use less aggressive and perhaps less effective cleanup methods, such as leaving contaminated soil in place and placing a waterproof cover over it rather than treating it. While most cleanup programs allow such remedies on a case-by-case basis, EPA believes they are not as protective over the long term as more aggressive remedies, such as excavating the waste to treat it. RCRA also establishes design and operating specifications, known as minimum technological requirements, for facilities, such as incinerators and landfills, that either treat or dispose of hazardous waste. For example, a hazardous waste landfill or surface impoundment must have (1) two or more liners, (2) a leachate collection system, and (3) a monitoring system to ensure that contamination is not moving into the groundwater. Complying with these requirements can be expensive. For example, one facility we visited spent $750,000 in 1987 to meet the minimum technological requirements for a 2.5-acre surface impoundment. Because these technological requirements were designed for facilities that manage waste from ongoing industrial operations (called process waste), they may be more stringent than necessary for some remediation waste, according to EPA and the majority of the state cleanup managers we interviewed. For example, a temporary waste pile must meet the same requirements as a pile where hazardous waste will be treated or stored for many years. As a result, these requirements can be counterproductive for some cleanups and unnecessarily increase their costs, according to EPA, most state officials, and the industry representatives we interviewed. Disposing of remediation waste, particularly lower-risk waste, in accordance with the minimum technological requirements may add unnecessary costs. For example, parties that want to dispose of waste that has already been treated to meet land disposal requirements must still use a landfill that meets the minimum technological requirements. EPA and several state cleanup officials we interviewed were doubtful that compliance with these requirements would be worth the cost, given the low level of risk that treated remediation waste poses. According to EPA, disposing of waste in a hazardous waste landfill can cost $200 per ton, compared with $50 per ton to dispose of it in a municipal or industrial landfill. Thus, for the average Superfund site with 34,000 tons of contaminated soil, it would cost about $6.8 million to dispose of the treated soil in a landfill that meets these technological requirements, compared with about $1.7 million to dispose of it in a municipal or industrial landfill. RCRA generally prohibits the treatment, storage, or disposal of hazardous waste without a permit. Because the process of obtaining a permit involves a step-by-step approach with substantial requirements for documentation and review, obtaining a permit can increase cleanup costs and cause delays. In addition, under RCRA, facilities that require a permit in order to clean up a portion of a site must also address cleanup requirements for the entire site. Consequently, parties may try to avoid triggering the permit requirement. The administrative cost of obtaining a RCRA permit can range from $80,000 for an on-site treatment unit, such as a tank, to $400,000 for an on-site incinerator, and up to $1 million for a landfill, according to EPA’s estimates. In addition to these costs, a party may incur other costs for tasks needed to obtain a permit, such as assessing a site’s conditions in order to design a groundwater monitoring system or conducting emissions testing and trial burns for an incinerator. The time required to obtain a permit can also be extensive, according to almost all of the state cleanup managers we interviewed. For example, Texas managers said that getting a permit can take 7 to 9 months for a simple treatment unit, such as a tank, and an additional 5 to 6 years for a more complicated unit, such as a landfill. Industry representatives we spoke with also estimated that getting a RCRA permit typically takes 5 to 6 years. In a 1990 analysis of RCRA, EPA reported that the permit process is cumbersome and causes significant delays. EPA and several state cleanup managers indicated that these costs, delays, and administrative issues are particularly significant for facilities that are not in the business of transporting, storing, or disposing of hazardous waste. Such facilities would not need a RCRA permit were it not for their cleanup activities. Even facilities that already have a RCRA permit to operate encounter costs and delays when trying to get EPA or the state to modify their permit to conduct cleanup activities. EPA’s most recent estimate (1992) of the cost to modify an existing permit is about $80,000. Washington State cleanup managers said that they have been working on a permit modification for one site for 2 years. They find that under RCRA, facilities have to request a permit modification for every technical change, whereas under other programs, such as their state enforcement program, the regulators and cleanup parties can meet and negotiate changes to cleanup plans. To avoid these problems, parties sometimes opt to send their remediation waste off-site to a commercial facility that already has a RCRA permit to treat, store, or dispose of hazardous waste; however, this option can be prohibitively expensive, according to EPA and some state cleanup managers. For example, Maine does not have any such commercial facilities; therefore, parties that want to send their waste off-site have to pay high transportation costs to ship it to another state that does. To avoid triggering RCRA’s requirements, property owners whose sites are not under a federal or state cleanup order may choose to let the waste remain in place without treatment and purchase land elsewhere for their plant expansion or other needs, according to EPA, as well as many state cleanup officials and industry representatives. EPA managers told us that leaving waste in place—especially “old waste,” such as sludge, that may still have relatively high concentrations of hazardous substances—may pose health or environmental risks. Furthermore, some state cleanup managers noted, the contaminated land is not placed back into productive use. Although cleaning up a site may offer economic benefits, such as relief from liability for contamination and increased property values, industry sometimes concludes that the costs of complying with RCRA can outweigh these benefits, according to EPA’s analysis. Cleanup program managers from several states echoed these concerns. For example, cleanup managers from Missouri believe that less restrictive requirements for remediation waste would lead to more voluntary cleanups. Officials from Pennsylvania concurred, saying that they believe RCRA’s requirements discourage parties from voluntarily stepping forward to clean sites, such as former steel mill sites near Pittsburgh. Likewise, cleanup managers from New York believe that economic factors are key to determining whether a voluntary cleanup will occur. If a property’s sale price or redevelopment value does not allow a party to recoup the expenses of complying with RCRA, such a cleanup will not take place, they contend. Illinois cleanup managers expressed similar concerns, saying that potential buyers are likely to lose interest in purchasing a property once they find out that it may be subject to RCRA’s requirements, especially the treatment standards under the land disposal restrictions. Since the late 1980s, EPA has incrementally modified RCRA’s application to remediation waste through an assortment of policy statements and regulatory alternatives, which have lessened but not solved the adverse effects identified. The state managers we interviewed have had varied experience in using these alternatives; some have found them burdensome and overly complicated. Furthermore, industry representatives were concerned that using the alternatives may result in cleanups that do not meet RCRA’s requirements and will thus require further action. To allay these concerns, in 1996, EPA proposed new rules to more comprehensively reform RCRA’s requirements as they apply to remediation waste. However, because technical and legal issues associated with the proposed rule remain unresolved, the reform of RCRA’s requirements that impede cleanups can best be addressed through legislation, according to EPA. The states have most frequently used six policy and regulatory alternatives that EPA has issued. Each alternative varies, however, in the degree to which it helps to solve the problems posed by RCRA’s requirements. EPA originally designed the “contained-in” policy in 1986 to clarify that the scope of the waste managed under RCRA includes any medium—for example, groundwater or soils—that contained a listed waste. In the 1990s, recognizing that at some concentration levels, contaminated media no longer pose a hazard to health or the environment, EPA has allowed its regions and states to exclude, or “contain out,” such media from RCRA’s regulation, on a case-by-case basis. EPA has not established definitive guidance on the specific concentration levels that justify a “contained-out” decision, but it has stated that the decision should be based on the risk posed to human health. Hence, according to EPA, this policy allows regulatory agencies to make their own decisions about when contaminated media no longer contain hazardous waste and therefore no longer need to be managed under RCRA. However, EPA has also reported that while the contained-out policy has increased flexibility and reduced cleanup delays, it has not been consistently applied throughout the nation. In addition, the policy applies only to contaminated media—soil and groundwater—and not to all remediation waste, such as sludge. Furthermore, in some cases, not all waste that has been contained out is exempt from all of RCRA’s requirements. For example, contaminated soil may still be subject to land disposal requirements if it was excavated and tested in order to obtain the contained-out decision. Finally, managers from one state told us they are reluctant to use this policy because EPA has not set national standards for making a contained-out decision. A 1986 amendment to the Superfund law exempts on-site cleanups from the requirement to obtain a RCRA permit because these cleanups receive close federal and state oversight. Some states have likewise adopted this waiver for the on-site cleanups they oversee under their own enforcement programs. Nevertheless, these cleanups must continue to meet RCRA’s other requirements, including the land disposal restrictions and minimum technological requirements. Permit waivers do not apply to RCRA or state voluntary cleanups. In 1988, EPA issued a regulation to help address problems in meeting the land disposal treatment standards for specific types of waste, such as contaminated soils. The regulation allows EPA to issue a site-specific variance from a given land disposal treatment standard under certain circumstances, such as when a given waste cannot be treated to the applicable concentration level. However, according to the Superfund program managers, the lengthy approval process, which includes obtaining public comments, discourages requests for these variances. Nonetheless, EPA has recently encouraged the regions to make greater use of the variances. In 1990, EPA established this policy for Superfund cleanups, and the states have extended it to cleanups in other programs. When beginning a cleanup, a party must make a good-faith effort to determine the source of the waste identified at the site. The source often determines whether the waste is a listed hazardous waste and, therefore, subject to RCRA’s requirements. The Superfund guidance provides that when no records exist to document the exact source of the waste—a common occurrence for older, abandoned Superfund sites—the lead regulatory agency can presume that the waste is not a listed hazardous waste and is therefore not subject to RCRA’s requirements. However, the parties conducting the cleanups are at risk if they have not taken adequate steps to identify the source of the waste. If additional information becomes available to prove that, because of its source, a waste is a listed hazardous waste, the responsible party could be forced by EPA to perform additional cleanup activities at the site in accordance with RCRA’s requirements. In this case, the responsible party could face liability for improperly managing and disposing of hazardous waste. Also originating within Superfund in 1990, this interpretation of the scope of land disposal restrictions allows cleanup managers to consolidate some remediation waste and treat it or leave it in place and cap it without triggering the treatment standards under the land disposal restrictions. However, the waste can be consolidated only if it lies within contiguous areas of contamination. In addition, cleanup managers must comply with all of RCRA’s requirements if the waste is moved from one area of contamination to another or is removed, treated, and then placed back into the area of contamination. In 1993, EPA issued the corrective action management unit (CAMU) rule that significantly expands upon the area of contamination policy. According to EPA officials, under this rule, parties conducting cleanups can dig up or move waste or can permanently treat, store, or dispose of it within a strictly defined area on-site if certain site-specific design and operating requirements are met. However, the waste would not be subject to RCRA’s land disposal restrictions or minimum technological requirements. Moreover, parties must obtain EPA’s approval to use a CAMU—usually by obtaining a permit. The use of CAMUs has been somewhat limited because in 1993, some stakeholders, including the Environmental Defense Fund (EDF), filed a lawsuit questioning, among other things, whether EPA has the authority to exempt hazardous waste disposed of in CAMUs from the land disposal restrictions and the minimum technological requirements. This legal question has not yet been resolved. While most of the state managers we interviewed described these alternatives, such as the CAMU rule, as useful during cleanups, some managers were not aware of or did not understand all of the alternatives, questioned whether they were legally defensible, or found them burdensome and inefficient. EPA is considering how to address these problems. Cleanup managers from all but one of the states we selected told us that they had used EPA’s alternatives for minimizing the impact of RCRA’s requirements on remediation waste cleanups. Generally, the state and other managers believed that the alternatives brought needed flexibility to RCRA’s rigid requirements. For example, the Department of Defense’s Deputy Under Secretary for Environmental Security attributed savings of between $500 million and $1 billion in cleanup costs to the use of a CAMU at the Department’s Rocky Mountain Arsenal site. However, those managers who had used the alternatives more extensively also said that they spend considerable time and resources to determine which alternatives to use and how to use them to work around the problems presented by RCRA’s requirements. They found that the alternatives were difficult to use and did not solve all of the problems at a particular site. In some instances, we found that cleanup managers were unfamiliar with some of the alternatives or were concerned about using them. For example, cleanup managers from one state told us that they were not familiar with EPA’s policy that provides for waivers to the administrative requirements for obtaining a permit. Managers from another state told us that they were reluctant to make use of the contained-out policy because EPA had not issued specific guidance on such determinations. Industry managers told us they were hesitant to propose new CAMUs because of the rule’s uncertain future. Several industry and state cleanup managers acknowledged that they are somewhat uncomfortable applying these alternatives for fear that EPA or a third party may view the cleanup as not being in full compliance with RCRA’s requirements and may initiate a legal challenge. For example, managers in one state were somewhat uncomfortable that they take full advantage of the flexibility provided by the source of contamination presumption. In the managers’ view, the state may not be requiring an extensive enough search to determine the source of the waste. Several EPA headquarters managers said that they are not surprised that state cleanup managers are unaware of or are inconsistently applying the alternative policies because the policies are difficult to understand and have been implemented piecemeal over the years. The EPA managers acknowledged that they may need to take additional steps to help the regions and states better use these options. Recognizing the need for more comprehensive reform of RCRA’s requirements for managing remediation waste, EPA in 1993 established a formal advisory committee of key stakeholders that developed the framework for a new regulatory approach that EPA proposed in April 1996, the Hazardous Waste Identification Rule for Contaminated Media (HWIR-Media). This proposal laid out several options that range from exempting some remediation waste from RCRA’s current requirements to exempting all such waste and giving the states the authority to define how to manage it. EPA estimated that these options could save parties conducting cleanups up to $2.1 billion in cleanup costs a year over the next few years. However, stakeholders still have significant disagreements over legal and technical issues. Therefore, EPA anticipates that any approach to comprehensive regulatory reform would result in prolonged legal battles that would delay cleanups. As result, the agency announced plans to withdraw its proposed rule and focus on four more narrow regulatory changes. EPA concluded that comprehensive reform can best be achieved by revising RCRA itself. EPA’s proposed rule laid out alternatives for waste management, ranging from the “bright line” to the “unitary” approach. The first was limited to making only contaminated media eligible for an exemption from RCRA’s stringent requirements while maintaining the requirements for more highly contaminated hazardous waste. To determine which media could be exempt, EPA would establish a concentration level, or “bright line,” for various contaminants. If the contaminants in a medium fall below the bright line, the medium would be eligible for an exemption from RCRA’s current hazardous waste management requirements and EPA and authorized states would have the authority to set site-specific waste management requirements. EPA estimates that about 80 percent of all contaminated media would be eligible for a RCRA exemption under this approach, saving $1.2 billion a year in cleanup costs over the next few years. In contrast, the unitary approach would exempt all remediation waste, including debris and sludge, from RCRA’s hazardous waste management requirements. Remediation waste would then be managed under a site-specific remediation plan which would be subject to public review and comment and approval by EPA or an authorized state. EPA estimated that this approach could save approximately $2.1 billion a year in cleanup costs over the next few years. According to the Association of State and Territorial Waste Management Officials, most states would prefer an approach that includes all remediation waste—similar to the unitary approach—because it would allow for efficient cleanups. Representatives from the departments of Defense and Energy, industry, and several associations that we contacted also said they would generally prefer the unitary approach for the same reason. Industry groups, in their comments on EPA’s proposal, raised concerns about the bright-line approach, particularly about the extent to which they would have to test and sample waste to determine whether each contaminant at a facility exceeds the line, potentially making some cleanups cost-prohibitive. Some of EPA’s program managers also said that if all remediation waste is not exempted from RCRA’s current requirements, the incentives to avoid cleanups or select less aggressive remedies will continue. Other stakeholders, including representatives of EDF, would generally prefer an approach that is conceptually similar to the bright-line approach. For example, EDF, in its comments on EPA’s proposed rule, stated that it strongly objects to any rule that does not provide national treatment standards for highly contaminated media. EDF contends that, in most cases, this material is as toxic as the process waste that is subject to RCRA’s requirements and therefore should be managed rigorously. EDF also asserts that EPA lacks any technical basis for setting different treatment standards for sludge managed during cleanups. EDF believes that there is no evidence that the sludge managed during a cleanup is physically or chemically different from process waste. Therefore, EDF is opposed to relaxing RCRA’s requirements for managing sludge. EDF was also critical of EPA’s methodology for establishing bright lines, stating that the agency did not adequately consider potential exposure to contaminated groundwater. Stakeholders also disagree on the extent to which the states should be authorized to manage remediation waste. Some stakeholders expressed concern that the states, if authorized, could set different standards for managing such waste, potentially creating problems with interstate transfer and disposal. Cleanup managers in one state were particularly concerned about whether they would have adequate resources to determine the hazard posed by waste shipped to their state from states with less stringent standards. Disagreements also arose on the process that should be used to determine whether a state has adequate laws, standards, and programs to manage exempted waste. Some stakeholders argue that the states have already demonstrated their ability to manage remediation waste through their state cleanup programs and should be allowed to certify themselves as authorized to do so. EDF, on the other hand, points out that since a large portion of remediation waste would be exempt from RCRA’s hazardous waste management requirements, the states could use their own systems for managing nonhazardous waste, such as municipal and industrial landfills, for remediation waste. EDF argues that some evaluations have raised questions about the adequacy of these state systems. EPA enforcement managers also added that community groups have expressed similar concerns. If EPA is to implement a state authorization process, all stakeholders seem to agree that the agency should not duplicate the process EPA uses to authorize states to implement RCRA because it is cumbersome and time-consuming. However, the stakeholders disagree on how to streamline the process so that EPA retains meaningful oversight and the public has adequate opportunities to participate in cleanup decisions and activities. EPA concluded that resolving all the technical and legal issues, including how to distinguish what waste poses a significant threat to human health and the environment and whether EPA can exempt this waste from RCRA’s land disposal restrictions, would be time-consuming and resource-intensive. The agency expected the resulting drawn out litigation and uncertainty would further discourage cleanups. Subsequently, the agency announced on September 11, 1997, that it plans to withdraw the HWIR-Media rule and, instead, pursue final rulemaking on four more narrow portions of the proposal by June 1998. The agency acknowledges that while these changes would help improve remediation waste management, they would not provide the needed flexibility to exempt such waste from RCRA’s rules. Therefore, EPA further concluded that comprehensive reform of the remediation waste issue can be best addressed through the legislative process. In anticipation that legislative proposals to address the issue could be reintroduced, EPA, in conjunction with the Council on Environmental Quality, hosted three meetings during the past year to assess stakeholders’ views on outstanding remediation waste issues and determine possible ways to address them. Three of RCRA’s hazardous waste management requirements, in particular—land disposal restrictions, minimum technological requirements, and requirements for permits—may be unduly stringent for a significant portion of the remediation waste that poses a lesser risk to human health and the environment. While stakeholders generally agree that comprehensive reform of remediation waste management is necessary, not everyone agrees on how to achieve this reform. EPA’s efforts to provide alternative policies to mitigate the impact of these requirements have resulted in confusion over the applicability of the policies to cleanups and some, such as the CAMU rule, have been legally challenged. EPA has concluded that because stakeholders disagree on the extent to which waste should be exempt from RCRA’s requirements, as well as on EPA’s legal authority under current law to exempt waste from the requirements, the agency could not easily achieve comprehensive reform through the regulatory process. It believes that such reform can best be achieved by revising the underlying law governing remediation waste management. EPA’s plan to withdraw proposed comprehensive regulatory reform increases the need for a legislative solution. We recommend that until comprehensive legislative reform is achieved to address RCRA’s disincentives to cleanups, the Administrator, EPA, take steps to ensure that regulators overseeing cleanups have a more consistent understanding of how to apply EPA’s existing policy and regulatory alternatives to RCRA’s requirements for managing remediation waste. These steps could include, for example, consolidating the policy and regulatory alternatives into one guidance document, training all cleanup managers in its appropriate use, and providing follow-up legal assistance for site-specific implementation questions. We provided copies of a draft of this report to EPA for its review and comment. We met with agency officials, including the Acting Director, Permits and State Programs Division, Office of Solid Waste, the division with responsibility for developing policies and procedures for managing remediation waste under RCRA. The agency generally agreed with the report’s findings. EPA suggested some technical revisions to the report, which we incorporated. The agency also identified two issues it believed needed further clarification. First, EPA agreed that we identified the three specific requirements under RCRA that, when applied to remediation waste, pose the most significant barriers to cleanups. However, the agency noted that reforming these individual requirements would not remove all of the barriers; RCRA’s entire hazardous waste management process, as it applies to remediation waste, poses problems and needs comprehensive reform. Second, the agency wanted to make sure that the report clearly indicated that RCRA’s requirements affect all remediation waste, including sludge, debris, and contaminated soil. EPA believes that reform must apply to all remediation waste. We made several changes in the report where appropriate to address these issues. Finally, while agreeing that our recommendation will help parties manage cleanups under RCRA’s current requirements, EPA believes that the benefits may be limited because the requirements will continue to pose barriers to cleanups until comprehensive reform is achieved. We reemphasized that reform, while necessary, may take some time to implement. Meanwhile, parties will have to accomplish cleanups under RCRA’s current requirements and should be able to take advantage of the policy and regulatory alternatives EPA has provided. However, given the concerns that state and industry cleanup managers have expressed about using these alternatives, we believe it is important that EPA take steps to ensure the alternatives are implemented correctly. The scope and methodology used for our work is discussed in appendix I. We performed our work from April through September 1997 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies to the appropriate congressional committees; the Administrator, EPA; and other interested parties. We will also make copies available to others on request. We hope this information will assist you as you consider legislation to reform RCRA as it applies to remediation waste. If you have any further questions, please call me at (202) 512-6111. Major contributors to this report are listed in appendix II. To provide information on the requirements of the Resource Conservation and Recovery Act (RCRA) that pose barriers to managing remediation waste and the policies that the Environmental Protection Agency (EPA) has developed to mitigate those barriers, we reviewed applicable laws and numerous EPA documents, policies, and regulations. We also interviewed managers in charge of hazardous waste cleanup programs in EPA, nine states, and industry to obtain their views both on RCRA’s requirements and on the actions EPA has taken to mitigate barriers presented by the requirements. We attended all three meetings co-sponsored by EPA and the Council on Environmental Quality to assess stakeholders’ concerns with reforming RCRA’s requirements for remediation waste; these meetings were held on June 5, August 6, and September 5, 1997. Additionally, we spoke with cleanup program managers in several other federal agencies and representatives of the primary environmental association involved in remediation waste issues to learn about their experiences and perspectives. Finally, we visited a hazardous waste facility at Cytec Industries’ Willow Island plant near Parkersburg, West Virginia. The officials and representatives we interviewed include the following: The Acting Director and environmental specialists from the Permits and State Programs Division, Office of Solid Waste. This division is responsible for developing environmental remediation policies and procedures under RCRA. Environmental specialists from the Office of Site Remediation Enforcement who oversee EPA’s enforcement of RCRA. Representatives from the Superfund program who specialize in complying with RCRA’s applicable requirements. Region III officials who manage hazardous waste activities at Cytec Industries’ Willow Island plant near Parkersburg, West Virginia. Program managers responsible for overseeing hazardous waste cleanups at the departments of Defense, Energy, and the Interior. A policy director from the Association of State and Territorial Solid Waste Management Officials. Managers of Superfund, RCRA, state enforcement, and voluntary cleanup programs in nine states. We selected five of these states—California, Illinois, New Jersey, New York, and Pennsylvania—because, according to EPA, they collectively generate, each year, about 35 percent of the nation’s contaminated environmental media managed off-site. We selected the four remaining states—Maine, Missouri, Texas, and Washington—for geographic diversity. Attorneys and consultants representing major corporate members of the National Environmental Development Association and the RCRA Corrective Action Project. These groups were organized to promote the reform of RCRA. Attorneys from the Environmental Technology Council. This group represents private waste managers. A spokesperson for the Solid Waste Association of North America. This group represents municipal landfill operators. Facility and corporate headquarters managers from Cytec Industries in charge of hazardous waste management activities at the Willow Island plant near Parkersburg, West Virginia. Attorneys from the Environmental Defense Fund. This organization is one of the primary environmental organizations taking an active position on various proposals to reform RCRA’s requirements for managing remediation waste. We performed our work from April through September 1997 in accordance with generally accepted government auditing standards. Richard P. Johnson, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO provided information on: (1) the ways, according to the Environmental Protection Agency (EPA) and selected state program managers and industry representatives, that the Resource Conservation and Recovery Act's (RCRA) requirements, when applied to waste from cleanups (often referred to as remediation waste), affect cleanups; and (2) the actions EPA has taken to address any impediments. GAO noted that: (1) three key requirements under RCRA that govern hazardous waste management--land disposal restrictions, minimum technological requirements, and requirements for permits--can have negative effects when they are applied to waste from cleanups; (2) the requirements have been successful at preventing further contamination from ongoing industrial operations, according to EPA cleanup managers; (3) however, when the requirements are applied to remediation waste, they can pose barriers to cleanups; (4) because much remediation waste does not pose a significant threat to human health and the environment, subjecting it to these three requirements in particular can compel parties to perform cleanups that are more stringent than EPA, the states, industry, or national environmental groups believe are necessary to address the level of risk; (5) consequently, EPA and state program managers and industry representatives maintain, parties often try to avoid triggering the requirements by containing waste in place or by abandoning cleanups entirely; (6) in the late 1980s, when establishing national Superfund guidance, EPA recognized that these three requirements would make some cleanups more difficult and began developing policy and regulatory alternatives to give parties more flexibility in dealing with the requirements; (7) however, these alternatives do not address all of the impediments to cleanups, and some state cleanup managers were not always aware of or did not fully understand the alternatives, while others found them cumbersome to use and inefficient; (8) industry representatives were also concerned that because of the ways that some states are using these alternatives, EPA or a third party may challenge whether the cleanup fully meets RCRA requirements; (9) to allay these concerns, in 1996, EPA proposed a new rule to comprehensively reform remediation waste requirements; (10) the rule included a range of options to exempt some or all remediation waste from hazardous waste management requirements and to give states more waste management authority; (11) EPA had estimated that these options could save up to $2.1 billion a year in cleanup costs; (12) however, EPA recently decided that because stakeholders disagree over whether the agency can exempt remediation waste from the requirements, the agency would face a prolonged legal battle over the new rule; and (13) although areas of disagreement may still need to be addressed, EPA has concluded that the best way to achieve comprehensive reform is to change the underlying cleanup law.

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Before 1996, Medicare program integrity activities were subsumed under Medicare’s general administrative budget and performed, along with general claims processing functions, by insurance companies under contract with CMS, which led to certain problems. The level of funding available for program integrity activities was constrained, not only by the need to fund ongoing Medicare program operations—such as the costs for processing medical claims, but also by budget procedures imposed under the Budget Enforcement Act of 1990. In the early and mid-1990s, we reported that such funding constraints had reduced Medicare contractors’ ability to conduct audits and review medical claims. HHS advocated for a dedicated and stable amount of program integrity funding outside of the annual appropriations process, so that CMS and its contractors could plan and manage the function on a multiyear basis. HHS also asserted that past fluctuations in funding had made it difficult for contractors to retain experienced staff who understood the complexities of, and could protect, the financial integrity of Medicare program spending. Beginning in fiscal year 1997, HIPAA established MIP and provided CMS with dedicated funding to conduct program integrity activities. HIPAA stipulated a range of funds available for these activities from the Medicare trust funds each year. For example, for fiscal year 1997, the law stipulated that at least $430 million and not more than $440 million should be used. The maximum amount of MIP funds rose from $440 million in fiscal year 1997 to $720 million in fiscal year 2003. For fiscal year 2003, and every year thereafter, the maximum amount that HIPAA stipulated for MIP was $720 million. (See app. II, table 2, for additional information on the MIP funding ranges.) As a result of the increases stipulated in HIPAA, from fiscal years 1997 through 2005, total MIP expenditures increased about 63 percent—from about $438 million to $714 million, as figure 1 shows. HIPAA authorized MIP funds to be used to enter into contracts to “promote the integrity of the Medicare program.” The statute also listed the various program integrity activities to be conducted by contractors. CMS allocates MIP funds primarily to support its contractors’ program integrity efforts for the traditional Medicare program, known as fee-for- service Medicare. Among these contractors are fiscal intermediaries (intermediaries), carriers, PSCs, and Medicare administrative contractors (MAC). MACs are a new type of contractor that will replace all intermediaries and carriers by October 2011, as required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). MMA required CMS to conduct full and open competition to select MACs. CMS refers to this change as contracting reform. CMS has contracted with intermediaries, carriers, and MACs to perform two types of activities—claims processing and program integrity. Their claims processing activities include receiving and paying claims. These activities are classified as program management and are funded through a program management budget. In addition, intermediaries and carriers have been charged with conducting some program integrity activities under MIP, including performing medical review of claims. The four MACs selected in January 2006 will not conduct medical review activities. CMS plans to assign responsibility for medical review of claims to the MAC selected in July 2006 and to the other MAC contracts to be awarded in the future. MIP provides funds to support these program safeguard efforts. In addition, CMS uses MIP funds to support the activities of PSCs, which perform medical review of claims and identify and investigate potential fraud cases; a coordination of benefits (COB) contractor, which determines whether Medicare or other insurance has primary responsibility for paying a beneficiary’s health care costs; the National Supplier Clearinghouse (NSC), which screens and enrolls suppliers in the Medicare program; and the data analysis and coding (DAC) contractor, which maintains and analyzes Medicare claims data for durable medical equipment (DME), prosthetics, orthotics, and supplies. Contractors receive MIP funds to perform one or more of the following five program integrity activities: Audits involve the review of cost reports from institutions, such as hospitals, nursing homes, and home health agencies. Cost reports play a role in determining the amount of providers’ Medicare reimbursement. Medical review includes both automated and manual prepayment and postpayment reviews of Medicare claims and is intended to identify claims for noncovered or medically unnecessary services. The secondary payer activity seeks to identify primary sources of payment--such as employer-sponsored health insurance, automobile liability insurance, and workers’ compensation insurance--that should be paying claims mistakenly billed to Medicare. Secondary payer activities also include recouping Medicare payments made for claims not first identified as the responsibility of other insurers. Benefit integrity involves efforts to identify, investigate, and refer potential cases of fraud or abuse to law enforcement agencies that prosecute fraud cases. Provider education communicates information related to Medicare coverage policies, billing practices, and issues related to fraud and abuse both to providers identified as having submitted claims that were improper, and to the general provider population. CMS also uses MIP to fund support for the five activities, such as certain information technology systems, fees for consultants, storage of CMS records, and postage and printing. The agency allocates the cost of this support to the five activities, depending on which of the activities is receiving support. Table 1 provides information on specific MIP activities performed by the contractors. Appendix III provides examples of key tasks performed by each of these contractors. For fiscal years 1997 through 2005, CMS generally increased the amount of funding for each of its five program integrity activities, but the amount of the funding provided and the percentage increase have varied among the activities. Provider education received the largest percentage increase in funds, while audit and medical review received the largest amount of funds overall. (See fig. 2.) CMS increased its allocation for provider education by about 590 percent from fiscal year 1997 through fiscal year 2005. This increase was due, in part, to CMS’s decision in fiscal year 2002 to use MIP funds for outreach activities to groups of like providers, which had not previously been funded through MIP. CMS will be able to further increase expenditures for program integrity in fiscal year 2006. In addition to the maximum of $720 million originally appropriated under HIPAA for fiscal year 2006, DRA increased the maximum by an additional $112 million, for a total of $832 million. CMS plans to use some of the $112 million to address potential fraud, waste, and abuse in the new Medicare prescription drug benefit. In each year from fiscal year 1997 through fiscal year 2005, CMS generally increased the amount of MIP funds spent for each of its five program integrity activities, as figure 2 shows. In addition to the increase in the amount of funding for provider education, the expenditures for audit increased 45 percent during the same period. As figure 3 shows, expenditures for medical review increased from fiscal year 1997 to fiscal year 2001 to almost $215 million—about 81 percent—and, since fiscal year 2001, decreased to about $166 million, or about 23 percent. Overall, expenditures for medical review increased 40 percent from fiscal year 1997 to fiscal year 2005. During this period, expenditures for secondary payer increased 49 percent, and for benefit integrity, expenditures increased 89 percent. (See fig. 3 for the amount of expenditures by activity in fiscal years 1997, 2001, and 2005 and app. II, table 3, for more detailed information on the amount of expenditures for each activity in each year.) Increased spending for provider education stemmed, in part, from provider concerns about an increased burden on them in the medical review process. In 2001, we reported that as CMS increasingly focused on ensuring program integrity, providers were concerned about what they considered to be inappropriate targeting of their claims for review. Further, providers asserted that they may have billed incorrectly because of their confusion about Medicare’s program rules. To address these concerns, CMS developed a more data-driven approach for conducting medical review and also increased its emphasis on provider education. CMS officials explained that medical review would help identify providers that were billing inappropriately, and provider education would focus on individuals’ specific billing errors to eliminate or prevent recurrence of the problems. In addition, beginning in fiscal year 2002, spending for the provider education activity increased significantly because CMS began to use MIP funds for what the agency called provider outreach. Provider outreach focuses on communicating with groups of providers about Medicare policies, initiatives, and significant programmatic changes that could affect their billing. This information is conveyed through seminars, workshops, articles, and Web site publications. Previously, provider outreach had been funded outside of MIP, as part of CMS’s program management budget. Provider education spending increased from $17 million in fiscal year 2001—before provider outreach was added to the provider education activity—to $53.5 million in fiscal year 2002. In fiscal year 2005, funding for the provider education activity reached $70 million. In comparing the share of funds spent on each program integrity activity, from fiscal year 1997 through fiscal year 2005, we found that CMS generally spent the largest share on audit, averaging about 31 percent, and on medical review, averaging about 27 percent. CMS spent less on secondary payer, averaging 21 percent, and benefit integrity, averaging 15 percent. In contrast, during this period, CMS spent the smallest percentage on provider education, which averaged about 6 percent of MIP expenditures. See figure 4 for information on the percentage of funds allocated to each activity. (For more detail, see table 4 in app. II.) CMS officials told us that they generally had allocated MIP funds to the five activities based predominantly on historical funding, but sometimes considered high-level priorities. However, this approach does not take into account data or information on the effectiveness of one activity over the other in ensuring the integrity of Medicare or allow CMS to determine if activities are yielding benefits that are commensurate with the amounts spent. For example, while CMS has noted that benefit integrity and provider education activities have intangible value, the agency has not routinely collected information to evaluate their comparative effectiveness. Furthermore, CMS has not fully assessed whether MIP funds are appropriately allocated within the audit, medical review, benefit integrity, and provider education activities. For example, audit’s role has changed as Medicare’s payment methods have changed in the last decade, but it continues to have the largest share of MIP funding. According to agency officials, CMS allocates funds for the five activities based primarily on an analysis of previous years’ spending and may also consider other information when developing the MIP budget, such as current expenditures by individual contractors. CMS officials told us that they may also consider the agency’s high-level priorities. For example, in fiscal year 2004, CMS began to increase funds to expand the scope of its annual study to estimate Medicare improper payment rates, and in fiscal year 2002, it increased its MIP allocation for provider education. CMS does not have a means to compare quantitative data or qualitative information on the relative effectiveness of MIP activities that it could use in allocating funds. Instead, it calculates the quantitative benefits for two, and assesses the qualitative benefits—which are not objectively measured—for the other three. In fiscal year 2005, for its medical review and secondary payer activities, CMS tracked dollars saved in relation to dollars spent—a quantitative measure that the agency calls a return on investment (ROI). Having an ROI figure is useful because it measures the effectiveness of an individual activity so that its value can be compared with that of another activity. As of fiscal year 2005, secondary payer had an ROI of $37 for every dollar spent on the activity, and medical review had an ROI of $21 for every dollar spent. CMS tracked the ROI for audit, but by fiscal year 2002, audit’s reported contribution to ROI fell to almost zero. (See fig. 5 and app. II, table 5, for additional ROI details.) CMS officials told us that the decrease in the ROI for audit was due to the implementation of prospective payment systems (PPS), under which Medicare pays institutional providers fixed, predetermined amounts that vary according to patients’ need for care. Until fiscal year 2001, audits had achieved an ROI that was generally $9 or more for every dollar spent conducting them, by disallowing payment for individual costs that should not have been paid by Medicare under the previous payment method. Under PPS, CMS’s methods for paying providers changed. However, the information system that had been used to track ROI began to incorrectly calculate the savings from audit because it had not been adjusted for the new payment method. According to agency officials, CMS is implementing a different way to track audit savings, and an overall ROI. It will focus on the savings from disallowing items that directly affect an individual provider’s payment under a PPS, such as bad debts and the number of low- income patients hospitals serve. It will track the amounts related to these add-on payments actually paid by Medicare to, or recouped from, the provider after an audit. The difference between the amount paid prior to the audit and the amount paid after the audit (assuming there has been an adjustment) would be the savings. However, all audit functions do not result in measurable savings. For example, in its written comments on a draft of this report, CMS noted that many audit functions funded by MIP do not have an ROI. CMS stated that these include processing cost reports for data collection purposes, correcting omissions on providers’ cost reports, implementing court decisions, and issuing notifications concerning Medicare payments. In addition, CMS stated that some of these activities are mandated by law, while others have significant value to the Medicare Payment Advisory Commission (MedPAC), which is an independent federal commission; providers; provider associations; and actuaries. From fiscal year 1997 through fiscal year 2005, CMS developed qualitative assessments of the impact of benefit integrity and provider education. According to CMS, the agency develops such assessments when the savings generated by MIP activities are impossible or difficult to identify. Nevertheless, CMS officials told us that these activities provide value to the program in helping to ensure proper Medicare payments. For example, CMS officials said that benefit integrity contributes to the work of federal law enforcement agencies, which investigate and prosecute Medicare fraud and abuse. CMS officials also noted that they consider benefit integrity to have a sentinel effect in discouraging entities that may be considering defrauding the Medicare program, but this effect is impossible to measure. CMS indicated that trying to measure the results of the contractors’ benefit integrity activities could create incentives that undermine the value of their work. For example, counting the number of cases referred to law enforcement for further investigation could lead the contractors to refer more cases that were less fully developed. However, other agencies that investigate or prosecute fraud, such as HHS and the Department of Justice, keep track of their successful cases, recoveries, and fines to demonstrate their results. Similarly, CMS could assess the degree to which each of its contractors had contributed to HHS and the Department of Justice’s successful investigations and prosecutions. In regard to educating providers on appropriate billing practices, CMS may be missing opportunities to evaluate its contractors’ performance. Provider education can help reduce billing errors, according to CMS. However, according to an OIG report, CMS has not evaluated the strategies used to modify the behavior of providers through education to determine if these strategies are achieving desired results. CMS has noted the intangible value inherent in benefit integrity and provider education activities, but the agency has not routinely collected information to evaluate their comparative effectiveness in ensuring program integrity. Further, as discussed earlier, correct information on audit’s effectiveness, based on an ROI, has not been available for the last several years. Consequently, CMS is not able to determine if some of the funds spent for benefit integrity, provider education, and audit—about $396 million, or 56 percent of MIP funds in fiscal year 2005—could be better directed to secondary payer or medical review. Nevertheless, CMS officials told us that they plan to decrease the allocation to medical review and increase the allocation to provider education. CMS officials stated that they are developing two initiatives that will give the agency objective measures of the results of the audit and provider education activities. As discussed earlier, CMS is implementing a revised methodology for calculating the ROI for audit. In addition, it is trying to develop information on the effectiveness of provider education. A CMS official explained that the agency is adding a provider education component to its program integrity management reporting system. This component will potentially allow CMS to develop an ROI figure for provider education by correlating educational efforts to a decrease in claim denials and provide a measure of the quantitative benefits of this activity. This component is scheduled to begin operating in the summer of 2006. After CMS has allocated funds to each of the five MIP activities, it must decide how to further distribute those funds to pay contractors that carry out each one. For example, in fiscal year 2004, after CMS allocated about $135 million for medical review to be conducted by intermediaries and carriers, it then distributed those funds to pay 28 intermediaries and 24 carriers that were conducting medical review at that time. However, given vulnerabilities for improper payment, contractor workload, and the relative effectiveness of activities performed, CMS has not always taken steps to ensure that it has allocated funds in an optimal way within its activities. Nevertheless, CMS has used information on relative savings to decide on funding allocations within the secondary payer activity. Medical review, provider education, and benefit integrity are activities for which allocation of MIP funds may not be optimal, because our analysis suggests that CMS has not allocated funds within these activities based on information concerning contractor vulnerabilities. Such vulnerabilities include the potential for fraudulent billing in different locations and the amount of potential benefit payments at risk in the contractor’s jurisdiction. For example, CMS estimated that the contractor that handled claims for DME, orthotics, prosthetics, and supplies in a jurisdiction that included Texas and Florida—two states experiencing high levels of fraudulent Medicare billing—improperly paid 11.5 percent of its 2004 claims—or $474.9 million—which was a higher improper payment rate than that of other contractors paying these types of claims. As we previously reported, our analysis indicated this contractor received almost a third less funds for medical review per $100 in submitted claims in fiscal year 2003 than the amount given to contractors in other regions with less risk of fraudulent billing. Our most recent analysis indicated that the imbalance in fund allocation did not change in fiscal years 2004 and 2005. We could not determine the rationale for this allocation beyond what was historically budgeted for this contractor. The amount of medical review funds allocated to individual contractors is not directly tied to the amount of benefits that they pay, which is a key measure of potential risk. For example, in fiscal year 2004, one contractor paid out $66 million in benefits and received about 28 cents in medical review funds for each $100 in benefits paid. In contrast, another contractor paid out considerably more in benefits—about $5 billion in fiscal year 2004—and received about 7 cents in medical review funds for each $100 in benefits paid. Further, CMS has not adjusted the amount of funding for individual contractors to educate providers based on their relative risks. A CMS official told us that the amount of provider education funding is generally aligned with the amount allocated for medical review, regardless of the value of the benefits that the contractor pays. Similarly, the amount of MIP funds provided to PSCs is not directly tied to the amount of benefits paid in jurisdictions for which they have responsibility for benefit integrity. For example, CMS spent about $75 million for work performed by PSCs under 13 benefit integrity task orders. The PSCs averaged about 3 cents for each $100 in paid claims in the jurisdictions for which they conducted benefit integrity tasks. However, the amount of MIP funding paid to the PSCs to conduct benefit integrity activities varied from about 1 cent to about 7 cents for each $100 in claims paid. Further, our analysis showed no clear relationship between funds provided to PSCs and their responsibilities for conducting benefit integrity activities in jurisdictions with high incidences of fraudulent Medicare billing. For example, one PSC received about 4 cents for conducting benefit integrity work for each $100 in paid claims for benefit integrity work in a jurisdiction that included Florida, which is at high risk for fraudulent billing. In contrast, PSCs received the same level of funding to conduct benefit integrity work in states at lower risk for fraudulent billing, including Iowa, Montana, Pennsylvania, and Wyoming. During the last decade, Medicare has significantly changed how it pays institutional providers—such as hospitals and nursing homes—that it audits. To align with the payment method changes, CMS has modified its audit focus to items in the cost report that can affect payments under a PPS. However, these audits can affect a much smaller proportion of Medicare’s payments under a PPS than audits of costs under the previous payment method. Given the magnitude of the payment method change, CMS has not evaluated whether funds within the audit activity should be further reallocated to potentially generate greater savings to the Medicare program by addressing the accuracy of reported costs that may be used to determine payment increases. CMS distributes funds to its contractors to conduct certain tasks, such as inputting data from; reviewing; and, if needed, auditing cost reports submitted by its institutional providers in order to settle, or agree upon, the reported costs. CMS’s audit contractors are also required to conduct wage index reviews and assist with intermediary hearings and appeals of settled cost reports. For several years, CMS has had a backlog of cost reports to settle, and the agency has made a priority of reducing the backlog. Other priorities include more closely scrutinizing those providers that are still paid based on their costs—such as critical access hospitals— and conducting required audits. For providers paid under a PPS, CMS has shifted its audit focus to the few items that could affect a provider’s payments if disallowed. These include bad debt, payments for graduate medical training, and the number of low- income patients that hospitals serve. CMS has also shifted more audit resources to hospitals because more items on their cost reports can affect calculations of a provider’s add-on payments. CMS does not know the amount of MIP funds that are associated with audits of different types of providers or specific issues, such as bad debt. However, in fiscal year 2004, CMS began to separately track some audit costs, such as those for desk reviews, audits, and wage index reviews. This provided some information on how audit funds were being spent. According to CMS officials, tracking the costs of individual audits at a provider or issue level would be difficult and costly because multiple issues are audited at the same time and the complexity of individual audits varies for the same provider type. Nevertheless, more detailed information on audit costs—such as at the provider level—than CMS currently tracks could provide it with a better understanding of the value of its current mix of tasks, particularly if it could associate the costs with the savings from the audits. This could provide CMS with information on whether it needs to change the balance of funding for those tasks—for example, whether it should focus more attention on bad debt or other areas of the cost report for specific types of providers. Further, CMS’s audit function continues to focus on verifying specific aspects of the provider’s cost report that affect its individual payment. This type of audit generally addresses a small portion of providers’ Medicare payments, while under a PPS, a much greater portion of the payments are based on overall industry costs. Each year, MedPAC advises the Congress on whether the Medicare PPS rates for institutional providers should increase, decrease, or remain constant. However, MedPAC generally does not have a set of audited cost reports that validate the information it uses in its assessments of providers, such as hospitals’ allocations of their costs. According to MedPAC, the current audit process reveals little about the accuracy of the Medicare cost information. For example, while CMS audits individual providers through full or partial audits, it does not allocate funds to audit a panel of providers, such as hospitals, which could provide a means to highlight areas where cost reporting accuracy is problematic. Without accurate information, CMS cannot ensure that payments to hospitals properly reflect their costs and provide reliable information that can be a factor in determining whether rates should change or remain constant. CMS might find it cost-effective to gather additional information because audits have the potential to give the Congress better information on hospitals’ costs. For example, by law, CMS is required to periodically conduct audits of end-stage renal disease (ESRD) facilities, which care for patients who must rely on dialysis treatments to compensate for kidney failure. CMS broadened its audit plan for these facilities to include a review not only of bad debts, but also to validate the costs of a selected number of items that are paid through PPS. CMS officials indicated that their audits of these facilities generated only limited savings, usually related to bad debts, so they did not consider these audits very valuable. However, as a result of these audits, MedPAC officials stated in 2005 that these facilities had a greater margin—or ratio of Medicare payments to costs—than their cost reports suggested. This information was factored into MedPAC’s recommendation about the amount of payment increase needed in calendar year 2007. Setting appropriate payment increases for hospitals is potentially more important to Medicare than for ESRD facilities because payments to participating inpatient hospitals represented about $116 billion, or about 40 percent of Medicare’s benefit payments in fiscal year 2004. CMS officials agreed that gathering this information might be valuable, but indicated that they did not currently have sufficient funding to conduct this data validation in addition to their current efforts funded as part of audit. In contrast to provider education and audit, CMS collects information on the relative savings from specific secondary payer functions and has used this information to decide on funding allocations within the secondary payer activity. CMS allocates funds to, and calculates savings for, about 16 secondary payer functions. Among these functions are (1) a data match that helps identify instances when a Medicare beneficiary was covered by other insurance and (2) the initial enrollment questionnaire, which gathers insurance information on beneficiaries before they become eligible for Medicare. Within secondary payer, for fiscal year 2005, savings for the 16 functions ranged from less than 1 percent to 49 percent of savings of over $5 billion for all of the functions. CMS officials told us that they have used relative savings information for secondary payer functions as one factor in determining whether to increase, decrease, or terminate funding for the functions within this activity. For example, according to CMS officials, in fiscal year 2005, savings for one secondary payer function—voluntary reporting of primary payer information to CMS by health insurance companies—increased by about 65 percent over fiscal year 2004. Further, savings from this effort continue to increase. CMS is planning to maintain or expand funding to it. However, CMS officials said that after confirming their relatively low savings, they had terminated certain other efforts to identify secondary payer claims. The terminated efforts included (1) a second questionnaire sent as follow-up to determine whether a beneficiary who is claiming Medicare benefits for the first time has other health insurance that would be responsible for paying the claim and (2) an effort to determine whether certain trauma codes contained in a claim could indicate that another insurer, such as worker’s compensation, could be the primary payer. The Medicare program is undergoing significant changes for which there is little precedent. These include the addition of the new Part D prescription drug benefit and the reform of Medicare contracting. Both will require CMS to make new choices in how it should allocate its MIP funds to best address its program integrity challenges. CMS’s current allocation approach—which agency officials characterized as primarily relying on previous fiscal year funding allocations for each activity, and to each contractor, to determine current allocations—will not be adequate to address emerging program integrity risks and ongoing programmatic changes. In addition, as contracting reform proceeds, CMS intends to increase its use of MIP funds to reward contractors to encourage superior performance. However, the usefulness of award payments as a tool to encourage contractors to perform MIP tasks effectively depends on how well CMS can develop, and consistently apply, performance measures to gauge differences in the quality of performance. CMS’s current allocation approach will not be adequate to address Medicare’s emerging program integrity risks related to the prescription drug benefit. Over the next 10 years, total expenditures for the prescription drug benefit, which was implemented in January 2006, are projected to be about $978 billion, while total expenditures for the Medicare program are projected to be about $6.1 trillion. CMS and others have stated that the prescription drug benefit is at risk for significant fraud and abuse. In December 2005, an assistant U.S. attorney noted that the Medicare prescription drug benefit would be vulnerable to a host of fraud and abuse schemes unless better detection systems are developed. According to CMS, the prescription drug benefit may be vulnerable to fraud and abuse in particular areas, including beneficiary eligibility, fraud by pharmacies, and kickbacks designed to encourage certain drugs to be included by the plans administering the benefit. To respond to these challenges, CMS has selected eight private organizations, called Medicare prescription drug integrity contractors (MEDIC), to support CMS’s benefit integrity and audit efforts. Because the Medicare prescription drug benefit is in the early stages of implementation, CMS does not yet have data to estimate the level of improper payments or information to determine the level of program integrity funds needed to address emerging vulnerabilities. As a result, it is not clear whether, in the future, CMS will need to shift funds from program integrity activities for Parts A and B to protect the Part D drug benefit from potential fraud and abuse. For fiscal year 2006, $112 million beyond the HIPAA limit of $720 million has been appropriated for CMS to support program integrity activities. The President’s Budget for fiscal year 2007 has also proposed additional funds for fiscal year 2007 and fiscal year 2008. CMS plans to use some of the additional funding provided under DRA for fiscal year 2006 to support Part D program integrity efforts. For example, CMS plans to spend $14 million over the next fiscal year to fund efforts by MEDICs to protect the prescription drug benefit by performing selected tasks, such as analyzing data to identify instances of potential fraud and abuse. In addition, CMS plans to spend about $33 million on Part D information technology systems to track data related to beneficiary eligibility and to collect, maintain, and process information on Medicare covered and noncovered drugs for Medicare beneficiaries participating in Part D. See appendix IV for more information. Another significant programmatic change that will affect future MIP funding allocations is Medicare contracting reform. MMA required CMS to transfer all claims administration work, which includes selected program integrity activities, to MACs by October 2011. CMS plans to transfer all work to the MACs by July 2009—about 2 years ahead of MMA’s specified time frame. Contracting reform will affect MIP funding allocations because of (1) changes in contractors’ responsibilities for program integrity activities and their jurisdictions, (2) the potential for operational efficiencies, and (3) increasing use of MIP funds for contractor award payments. The transition to MACs will change some contractors’ program integrity responsibilities and require reallocation of MIP funds among them. The new MACs will be responsible for paying claims that were previously processed by intermediaries and carriers, but CMS has decided that MACs will not be performing all of the MIP activities that they previously conducted. For example, PSCs performed medical reviews of claims in some contractors’ jurisdictions, but this activity will be performed by almost all of the MACs in the future. Further, contractors’ jurisdictions will change as 23 MACs assume the work previously performed by a total of 51 Medicare intermediaries and carriers, within the confines of 15 newly designated geographic jurisdictions. The PSCs conducting benefit integrity work will be aligned with the MACs in the 15 jurisdictions. In some cases, one PSC may be aligned with more than one MAC jurisdiction. According to CMS officials, Medicare contracting reform will lead to operational efficiencies and savings that would mostly be due to more effective medical review. For example, CMS anticipates that greater incentives for MACs to operate efficiently and adopt industry innovations in the automated medical review of claims will result in total estimated trust fund savings of $650 million for Medicare from fiscal year 2006 to fiscal year 2011. Having program integrity activities operate more effectively could give CMS additional flexibility to reallocate some funding while achieving reductions in improperly paid claims. However, we have not validated CMS’s estimate, and in our August 2005 report on CMS’s plan for implementing Medicare contracting reform, we raised concerns about the uncertainty of savings estimates, which were based on future developments that are difficult to predict. As part of contracting reform, CMS plans to increase its allocation of MIP funds that are used as award payments to encourage superior performance of program integrity activities by contractors. Award payments that are tied to appropriate performance measures could encourage contractors to conduct MIP activities effectively and introduce innovations, such as developing new analytical approaches to enhance the medical review process. Intermediaries and carriers, both of which conduct some program integrity activities, are currently paid on the basis of their costs, generally without financial incentives to encourage superior performance. In contrast, CMS currently offers award payments to other types of contractors that conduct program integrity activities, including four MACs that were selected in January 2006, PSCs, the COB contractor, NSC, and the DAC contractor. As early as 2009, or when all administrative work has been transferred to MACs, CMS will be offering the opportunity to be selected for award payments to all contractors that conduct program integrity activities. The usefulness of using MIP funding for award payments to encourage contractors to conduct program integrity tasks effectively depends on how well CMS can develop, and consistently apply, performance measures to gauge differences in the quality of performance. In 2004, CMS conducted a study to evaluate whether the agency could reduce improper payments by using award payments for contractors to lower their paid claims error rates, which represent the amount of claims contractors paid in error compared with their total fee-for-service payments. According to CMS, the outcome of that pilot was positive, and CMS plans to use award payments in the future as part of its strategy for reducing improper payments. However, as we reported in March 2006, CMS will need to refine its measure of contractor-specific improper payments, which would enhance its ability to evaluate their performance of medical review and provider education activities. Further, even when CMS has developed measures to assess the performance of contractors that conduct MIP activities, it has not always effectively or consistently applied them. For example, the OIG recently reviewed the extent and type of information provided in evaluation reports on PSCs’ performance in detecting and deterring fraud and abuse. The OIG found that although the evaluation reports were used as a basis to assess contractors’ overall performance, they did not consistently include quantitative information on the activities contractors performed or their effectiveness. We designated the Medicare program as high risk for fraud, waste, abuse, and mismanagement in 1990, and the program remains so today. To address this ongoing risk and reduce the program’s billions of dollars in improper payments, CMS must use Medicare’s program integrity funding as effectively as possible. Further, Medicare’s susceptibility to fraud is growing, as it addresses the challenges of adding a prescription drug benefit to the program. Despite Medicare’s increasing vulnerability, CMS has generally not changed its allocation approach for MIP funding. In 2006, a decade after MIP was established to support Medicare program integrity activities, CMS officials state that the primary basis for their allocation of funds is how they have been allocated in the past. However, programmatic changes for Medicare’s contractors and emerging risks for the Part D prescription drug benefit suggest that CMS needs to modify its approach for deciding on funding allocations for—and within—the five program integrity activities. Also supporting the need for CMS to assess its current allocation approach is that the agency’s funding decisions do not routinely take into account quantitative data or qualitative information on the relative effectiveness of its five program integrity activities or contractors’ vulnerabilities. Without considering information or data, CMS cannot judge whether funds are being spent as effectively as possible or if they should be reallocated. CMS is developing two new measures that may help the agency evaluate the relative effectiveness of provider education and the audit activity. Better information about MIP activities’ effectiveness should assist CMS in making more prudent management and funding allocation decisions. To better ensure that MIP funds are appropriately allocated among and within the five program integrity activities, we recommend that CMS develop a method of allocating funds based on the effectiveness of its program integrity activities, the contractors’ workloads, and risk. In its written comments on a draft of this report, CMS stated that it generally agreed with our recommendation to develop a method of allocating MIP funds based on the effectiveness of the agency’s program integrity activities, Medicare contractors’ workloads, and risk. However, the agency expressed concern that the report appeared to emphasize the use of ROI, a quantitative measure that tracks dollars saved in relation to dollars spent, as a way to allocate funds. CMS stated this quantitative measure can be an indicator of effectiveness, but noted that such a measure cannot serve as the sole basis for informing funding decisions. The agency stated that some of its MIP activities had benefits that could not be easily quantified. CMS agreed on the value of allocating funds based on risk and provided information on programmatic changes that would help it do so. The agency also noted the efforts it had recently made to strengthen program integrity. CMS expressed concern about our discussion in the draft report concerning the use of ROI as a way to quantitatively measure effectiveness and to allocate MIP funds. CMS stated that the agency cannot provide funding based exclusively on an ROI because some activities, including benefit integrity, do not lend themselves to an ROI measurement and others, such as audit, are governed by statutory requirements. CMS also stated that in allocating MIP funds, it is critical that it consider factors other than ROI, including historical funding, because MIP funding has not increased since 2003. Our report indicates that an ROI is an important factor that should be considered in allocating funds, but cannot be the sole consideration. Our conclusions reflect our support of an approach that takes into account the qualitative benefits of program integrity activities. Our report discusses agency officials’ views on the difficulty of developing quantitative measures for the benefit integrity activity. We also provide information on CMS officials’ qualitative assessments of the positive impact of benefit integrity and provider education. For example, our report notes that according to CMS officials, these benefits include discouraging entities that may be considering defrauding the Medicare program and helping to ensure proper Medicare payments. Both quantitative and qualitative assessments of effectiveness—to the extent they can be developed—could help CMS determine whether MIP funds are being wisely invested or if they should be reallocated. CMS also commented on the allocation of MIP funds to Medicare contractors based on workload and risk. CMS noted that contracting reform and the introduction of MACs will result in contractors’ workloads being more evenly distributed. In addition, CMS noted that it is developing award fee measures for contractors’ medical review activities, including establishing performance goals for the Comprehensive Error Rate Testing program contractor-specific error rate. CMS agreed with us that risk is a factor that should be considered in allocating funds. CMS stated that it is committed to identifying and investigating better approaches to allocate resources to support critical agency functions, including using its new contracting authority to introduce incentives for Medicare fee-for-service claims processing contracts and consolidating Medicare secondary payer activities. CMS also noted that it is using state- of-the-art systems and expertise to aggressively fight waste and abuse in the program, continues to work closely with its contractors to help ensure that providers receive appropriate education and guidance in areas where billing problems have been identified, and has expanded oversight of the new Medicare Part D prescription drug benefit. In addition, CMS discussed recent program integrity efforts and successes, including reducing the number of improper fee-for-service Medicare payments and addressing fraud across all provider types by coordinating the activities of CMS, law enforcement, and Medicare contactors in Los Angeles, California, and Miami, Florida. We have reprinted CMS’s letter in appendix V. CMS also provided us with technical comments, which we incorporated in the report where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies to the Secretary of HHS, the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (312) 220-7600 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are Sheila K. Avruch, Assistant Director; Hazel Bailey; Krister Friday; Sandra D. Gove; and Craig Winslow. To provide information on the amount of funds allocated to the five Medicare Integrity Program (MIP) activities over time, we interviewed officials from the Centers for Medicare & Medicaid Services (CMS). We obtained information concerning MIP funding allocations for audit, medical review, secondary payer, benefit integrity, and provider education for fiscal years 1997 through 2005. We also analyzed allocations within these activities. Further, we obtained and analyzed related financial information, including CMS’s planned and actual expenditures, savings, and return on investment (ROI) calculations for fiscal year 1997 through fiscal year 2005; CMS financial reports; and presidential and Department of Health and Human Service (HHS) budget proposals for fiscal years 2006 and 2007. Because most MIP expenditures are for activities related to the Medicare fee-for-service plan, our analyses focused on those expenditures. We reviewed relevant legislation, such as the Health Insurance Portability and Accountability Act of 1996 (HIPAA); the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA); and the Deficit Reduction Act of 2005 (DRA). We reviewed pertinent reports and congressional testimony, including our own and those of CMS and the HHS Office of Inspector General (OIG), related to program integrity requirements. To examine the approach that CMS uses to allocate MIP funds, we interviewed CMS officials regarding factors they consider when allocating MIP funds. We reviewed related documentation provided to us by CMS, including budget development guidelines; manuals, such as the Financial Management Manual; operating plans; and selected workload data. We also reviewed information on individual projects, such as information technology systems. We also reviewed pertinent GAO reports and testimony and Medicare Payment Advisory Commission reports. We did not independently examine the internal and automated data processing controls for CMS systems from which we obtained data used in our analyses. CMS subjects its data to limited reviews and periodic examinations and relies on the data obtained from these systems as evidence of Medicare expenditures and to support CMS’s management and budgetary decisions. Therefore, we considered these data to be reliable for the purposes of our review. In addition, we interviewed CMS officials regarding changes in the Medicare program that may affect MIP funding allocations, including CMS’s plans to support activities to detect fraud and improper billing for the new Part D prescription drug benefit and MIP activities to be performed by contractors in the future. We also interviewed CMS officials concerning performance measures and evaluations of contractors. We reviewed related documentation, including the statement of work for the Medicare prescription drug integrity contractors; plans for Medicare contracting reform; policies and procedures associated with CMS’s measurement of contractor performance; standards and performance measures, such as the Comprehensive Error Rate Testing program; various manuals, including the Medicare Program Integrity Manual; and an OIG report on performance evaluations of program safeguard contractors (PSC). We also reviewed CMS’s evaluations of contractor performance. We performed our work from August 2005 through August 2006 in accordance with generally accepted government auditing standards. The following tables contain details on MIP funding, expenditures, allocations, and ROI. Table 2 shows MIP funding ranges under HIPAA. Table 3 shows the amounts of MIP expenditures allocated to each of the program integrity activities. Table 4 shows the percentage of MIP funds allocated to the program integrity activities. Table 5 shows the ROI for three of the program integrity activities. Hospitals, nursing homes, home health agencies, and other institutional providers that are—or have been— paid on a cost reimbursement basis submit cost reports to CMS. Cost reports provide a detailed accounting of what costs have been incurred, what costs the provider is charging to the Medicare program, and how such costs are accounted for by the provider. Contractors review all or part of the cost report to assess whether costs have been properly allocated and charged to the Medicare program. Contractors determine if the cost report is acceptable or if it needs further review. In some instances, contractors may conduct on-site cost report audits, which include the review of financial records and related documentation supporting costs and charges. Contractors identify billing errors made by providers through analysis of claims data; take action to prevent errors, address identified errors, or both; and publish local coverage policies to provide guidance to the public and medical community concerning items and services that are eligible for Medicare payment. Most medical reviews do not require a manual review of medical records. Often contactors conduct medical reviews simply by examining the claim itself, usually using automated methods. Coordination of benefits (COB) contractor, intermediaries and carriers, and Medicare administrative contractors (MAC) The COB contractor collects, manages, and maintains information regarding health insurance coverage for Medicare beneficiaries. To gather information to properly adjudicate submitted claims, the COB contractor sends questionnaires to newly enrolled Medicare beneficiaries and employers to solicit information about beneficiaries’ health insurance coverage. The COB contractor also collects secondary payer data from providers, insurers, attorneys, and some state agencies. The COB contractor uses data match programs to identify claims that should have been paid by another insurer. When information indicates that a beneficiary has other health insurance, the COB contractor initiates a secondary payer claims investigation. Intermediaries and carriers also conduct secondary payer operations, including prepayment activities in conjunction with the COB contractor, and they recover erroneous secondary payer payments. Contractors are tasked with preventing, detecting, and deterring Medicare fraud. PSCs conduct medical reviews to support fraud investigations, analyze data to support medical reviews, process fraud complaints, develop fraud cases, conduct provider education related to fraud activities, and support law enforcement entities. Once a case is developed, PSCs refer it to the OIG or to law enforcement for prosecution. NSC reviews and processes applications from organizations and individuals seeking to become suppliers of medical equipment and supplies in the Medicare program. NSC verifies suppliers’ application information; conducts on-site visits to the prospective suppliers; issues supplier authorization numbers, which allow suppliers to bill Medicare; and maintains a central data repository of information concerning suppliers. NSC also periodically reenrolls active suppliers and uses data to assist with fraud and abuse research. The DAC contractor conducts ongoing data analysis and reporting of trends related to supplier billing for medical equipment and supplies and provides ongoing feedback to the PSCs. When billing problems are identified through medical reviews, contractors take a variety of steps to educate providers about Medicare coverage policies, billing practices, and issues related to fraud and abuse. Contractors may conduct group training sessions, including seminars and workshops; send informational letters to providers; arrange for teleconferences; conduct site visits; and provide information on their Web sites. For fiscal year 2006, DRA provided $112 million in MIP funds beyond the annual HIPAA limit of $720 million. Of this amount, DRA specified that $12 million was for the Medi-Medi program and $100 million was for MIP in general. Table 6 provides information on CMS’s planned spending of $100 million in general MIP funds provided by DRA, including spending related to the Part D prescription drug benefit.

Since 1990, GAO has considered Medicare at high risk for fraud, waste, abuse, and mismanagement. The Medicare Integrity Program (MIP) provides funds to the Centers for Medicare & Medicaid Services (CMS--the agency that administers Medicare--to safeguard over $300 billion in program payments made on behalf of its beneficiaries. CMS conducts five program integrity activities: audits; medical reviews of claims; determinations of whether Medicare or other insurance sources have primary responsibility for payment, called secondary payer; benefit integrity to address potential fraud cases; and provider education. In this report, GAO determined (1) the amount of MIP funds that CMS has allocated to the five program integrity activities over time, (2) the approach that CMS uses to allocate MIP funds, and (3) how major changes in the Medicare program may affect MIP funding allocations. For fiscal years 1997 through 2005, CMS's MIP expenditures generally increased for each of the five program integrity activities, but the amount of the increase differed by activity. Since fiscal year 1997, provider education has had the largest percentage increase in funding--about 590 percent, while audit and medical review had the largest amounts of funding allocated. In fiscal year 2006, funding for MIP will increase further to $832 million, which includes $112 million in funds that CMS plans to use, in part, to address potential fraud and abuse in the new Medicare prescription drug benefit. CMS officials told us that they have allocated MIP funds to the five program integrity activities based primarily on past allocation levels. Although CMS has quantitative measures of effectiveness for two of its activities--the savings that medical review and secondary payer generate compared to their costs--it does not have a means to determine the effectiveness of each of the five activities relative to the others to aid it in allocating funds. Further, CMS has generally not assessed whether MIP funds are distributed to the contractors conducting each program integrity activity to provide the greatest benefit to Medicare. Because of significant programmatic changes, such as the implementation of the Medicare prescription drug benefit and competitive selection of contractors responsible for claims administration and program integrity activities, the agency's current approach will not be adequate for making future allocation decisions. For example, CMS will need to allocate funds for program integrity activities to address emerging vulnerabilities that could affect the Medicare prescription drug benefit. Further, through contracting reform, CMS will task new contractors with performing a different mix of program integrity activities. However, the agency's funding approach is not geared to target MIP resources to the activities with the greatest impact on the program and to ensure that the contractors have funding commensurate with their relative workloads and risk of making improper payments.

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The performance of passenger and checked baggage screeners in detecting threat objects at the nation’s airports has been a long-standing concern. In 1978, screeners failed to detect 13 percent of the potentially dangerous objects that Federal Aviation Administration (FAA) agents carried through airport screening checkpoints during tests. In 1987, screeners did not detect 20 percent of the objects in similar tests. In tests conducted during the late 1990s, as the testing objects became more realistic, screeners’ abilities to detect dangerous objects declined further. In April 2004, we, along with the DHS Office of the Inspector General (OIG), testified that the performance of screeners continued to be a concern. More recent tests conducted by TSA’s Office of Internal Affairs and Program Review (OIAPR) also identified weaknesses in the ability of screeners to detect threat objects, and separate DHS OIG tests identified comparable screener performance weaknesses. In its July 2004 report, The National Commission on Terrorist Attacks Upon the United States, known widely as the 9/11 Commission, also identified the need to improve screener performance and to better understand the reasons for performance problems. After the terrorist attacks of September 11, 2001, the President signed the Aviation and Transportation Security Act (ATSA) into law on November 19, 2001, with the primary goal of strengthening the security of the nation’s aviation system. ATSA created TSA as an agency with responsibility for securing all modes of transportation, including aviation. As part of this responsibility, TSA oversees security operations at the nation’s more than 450 commercial airports, including passenger and checked baggage screening operations. Prior to the passage of ATSA, air carriers were responsible for screening passengers and checked baggage, and most used private security firms to perform this function. FAA was responsible for ensuring compliance with screening regulations. Today, TSA security activities at airports are overseen by FSDs. Each FSD is responsible for overseeing security activities, including passenger and checked baggage screening, at one or more commercial airports. TSA classifies the over 450 commercial airports in the United States into one of five security risk categories (X, I, II, III, and IV) based on various factors, such as the total number of takeoffs and landings annually, the extent to which passengers are screened at the airport, and other special security considerations. In general, category X airports have the largest number of passenger boardings and category IV airports have the smallest. TSA periodically reviews airports in each category and, if appropriate, updates airport categorizations to reflect current operations. Figure 1 shows the number of commercial airports by airport security category as of December 2003. In addition to establishing TSA and giving it responsibility for passenger and checked baggage screening operations, ATSA set forth specific enhancements to screening operations for TSA to implement, with deadlines for completing many of them. These requirements included assuming responsibility for screeners and screening operations at more than 450 commercial airports by November 19, 2002; establishing a basic screener training program composed of a minimum of 40 hours of classroom instruction and 60 hours of on-the-job training; conducting an annual proficiency review of all screeners; conducting operational testing of screeners; requiring remedial training for any screener who fails an operational test; and screening all checked baggage for explosives using explosives detection systems by December 31, 2002. Passenger screening is a process by which authorized TSA personnel inspect individuals and property to deter and prevent the carriage of any unauthorized explosive, incendiary, weapon, or other dangerous item aboard an aircraft or into a sterile area. Passenger screeners must inspect individuals for prohibited items at designated screening locations. The four passenger screening functions are: X-ray screening of property, walk-through metal detector screening of individuals, hand-wand or pat-down screening of individuals, and physical search of property and trace detection for explosives. Checked baggage screening is a process by which authorized security screening personnel inspect checked baggage to deter, detect, and prevent the carriage of any unauthorized explosive, incendiary, or weapon onboard an aircraft. Checked baggage screening is accomplished through the use of explosive detection systems (EDS) or explosive trace detection (ETD) systems, and through the use of alternative means, such as manual searches, K-9 teams, and positive passenger bag match, when EDS and ETD systems are unavailable on a temporary basis. Figure 2 provides an illustration of passenger and checked baggage screening operations. There are several positions within TSA for employees that perform and directly supervise passenger and checked baggage screening functions. Figure 3 provides a description of these positions. To prepare screeners to perform screening functions, to keep their skills current, and to address performance deficiencies, TSA provides three categories of required screener training. Table 1 provides a description of the required training. In September 2003, we reported on our preliminary observations of TSA’s efforts to ensure that screeners were effectively trained and supervised and to measure screener performance. We found that TSA had established and deployed a basic screener training program and required remedial training but had not fully developed or deployed a recurrent training program for screeners or supervisors. We also reported that TSA had collected limited data to measure screener performance. Specifically, TSA had conducted limited covert testing, the Threat Image Projection System was not fully operational, and TSA had not implemented the annual screener proficiency testing required by ATSA. In subsequent products, we reported progress TSA had made in these areas and challenges TSA continued to face in making training available to screeners and in measuring and enhancing screener performance. A summary of our specific findings is included in appendix I. TSA has taken a number of actions to enhance the training of screeners and Screening Supervisors but has encountered difficulties in providing access to recurrent training. TSA has enhanced basic training by, among other things, adding a dual-function (passenger and checked baggage) screening course for new employees. Furthermore, in response to the need for frequent and ongoing training, TSA has implemented an Online Learning Center with self-guided training courses available to employees over TSA’s intranet and the Internet and developed and deployed a number of hands-on training tools. Moreover, TSA now requires screeners to participate in 3 hours of recurrent training per week, averaged over each quarter year. TSA has also implemented leadership and technical training programs for Screening Supervisors. However, some FSDs, in response to open-ended survey questions, identified a desire for more training in specific areas, including leadership, communication, and supervision. Further, despite the progress TSA has made in enhancing and expanding screener and supervisory training, TSA has faced challenges in providing access to recurrent training. FSDs reported that insufficient staffing and a lack of high-speed Internet/intranet connectivity at some training facilities have made it difficult to fully utilize these programs and to meet training requirements. TSA has acknowledged that challenges exist in recurrent screener training delivery and is taking steps to address these challenges, including factoring training requirements into workforce planning efforts and distributing training through written materials and CD-ROMs until full Internet/intranet connectivity is achieved. However, TSA does not have a plan for prioritizing and scheduling the deployment of high-speed connectivity to all airport training facilities once funding is available. The absence of such a plan limits TSA’s ability to make prudent decisions about how to move forward with deploying connectivity to all airports to provide screeners access to online training. TSA has enhanced its basic screener training program by updating the training to reflect changes to standard operating procedures, deploying a new dual-function (passenger and checked baggage screening) basic training curriculum, and allowing the option of training delivery by local staff. As required by ATSA, TSA established a basic training program for screeners composed of a minimum of 40 hours of classroom instruction and 60 hours of on-the-job training. TSA also updated the initial basic screener training courses at the end of 2003 to incorporate changes to standard operating procedures and directives, which contain detailed information on how to perform TSA-approved screening methods. However, a recent study by the DHS OIG found that while incorporating the standard operating procedures into the curricula was a positive step, a number of screener job tasks were incompletely addressed in or were absent from the basic training courses. In addition to updates to the training curriculum, in April 2004, TSA developed and implemented a new basic screener training program, dual- function screener training that covers the technical aspects of both passenger and checked baggage screening. Initially, new hire basic training was performed by a contractor and provided a screener with training in either passenger or checked baggage screening functions. A screener could then receive basic training in the other function later, at the discretion of the FSD, but could not be trained in both functions immediately upon hire. The new dual-training program is modular in design. Thus, FSDs can chose whether newly hired screeners will receive instruction in one or both of the screening functions during the initial training. In addition, the individual modules can also be used to provide recurrent training, such as refreshing checked baggage screening skills for a screener who has worked predominately as a passenger screener. TSA officials stated that this new approach provides the optimum training solution based on the specific needs of each airport and reflects the fact that at some airports the FSD does not require all screeners to be fully trained in both passenger and checked baggage screening functions. Some FSDs, particularly those at smaller airports, have made use of the flexibility offered by the modular design of the new course to train screeners immediately upon hire in both passenger and checked baggage screening functions. Such training up front allows FSDs to use screeners for either the passenger or the checked baggage screening function, immediately upon completion of basic training. Figure 4 shows that 58 percent (3,324) of newly hired screeners trained between April 1, 2004, and September 1, 2004, had completed the dual-function training. In April 2004, TSA also provided FSDs with the flexibility to deliver basic screener training using local instructors. TSA’s Workforce Performance and Training Office developed basic screener training internally, and initially, contractors delivered all of the basic training. Since then, TSA has provided FSDs with the discretion to provide the training using local TSA employees or to use contractors. The flexibility to use local employees allows FSDs and members of the screener workforce to leverage their first-hand screening knowledge and experience and address situations unique to individual airports. As of December 10, 2004, TSA had trained 1,021 local FSD staff (representing 218 airports) in how to instruct the dual-function screener training course. TSA officials stated that they expect the use of TSA-approved instructors to increase over time. “Numerous interviews revealed concerns with training curriculum, communication, and coordination issues that directly affect security screening. Unsatisfied with the quantity and breadth of topics, many Training Coordinators have developed supplementary lectures on both security and non-security related topics. These additional lectures…have been very highly received by screeners.” In October 2003, TSA introduced the Online Learning Center to provide screeners with remote access to self-guided training courses. As of September 14, 2004, TSA had provided access to over 550 training courses via the Online Learning Center and made the system available via the Internet and its intranet. TSA also developed and deployed a number of hands-on training modules and associated training tools for screeners at airports nationwide. These training modules cover topics including hand- wanding and pat-down techniques, physical bag searches, X-ray images, prohibited items, and customer service. Additionally, TSA instituted another module for the Online Learning Center called Threat in the Spotlight, that, based on intelligence TSA receives, provides screeners with the latest in threat information regarding terrorist attempts to get threat objects past screening checkpoints. Appendix III provides a summary of the recurrent training tools TSA has deployed to airports and the modules currently under development. In December 2003, TSA issued a directive requiring screeners to receive 3 hours of recurrent training per week averaged over a quarter year. One hour is required to be devoted to X-ray image interpretation and the other 2 hours to screening techniques, review of standard operating procedures, or other mandatory administrative training, such as ethics and privacy act training. In January 2004, TSA provided FSDs with additional tools to facilitate and enhance screener training. Specifically, TSA provided airports with at least one modular bomb set (MBS II) kit—containing components of an improvised explosive device—and one weapons training kit, in part because screeners had consistently told TSA’s OIAPR inspectors that they would like more training with objects similar to ones used in covert testing. Although TSA has made progress with the implementation of recurrent training, some FSDs identified the need for several additional courses, including courses that address more realistic threats. TSA acknowledged that additional screener training is needed, and officials stated that the agency is in the process of developing new and improved screener training, including additional recurrent training modules (see app. III). TSA has arranged for leadership training for screening supervisors through the Department of Agriculture Graduate School and has developed leadership and technical training courses for screening supervisors. However, some FSDs reported the need for more training for Screening Supervisors and Lead Screeners. The quality of Screening Supervisors has been a long-standing concern. In testifying before the 9/11 Commission in May 2003, a former FAA Assistant Administrator for Civil Aviation Security stated that following a series of covert tests at screening checkpoints to determine which were strongest, which were weakest, and why, invariably the checkpoint seemed to be as strong or as weak as the supervisor who was running it. Similarly, TSA’s OIAPR identified a lack of supervisory training as a cause for screener covert testing failures. Further, in a July 2003 internal study of screener performance, TSA identified poor supervision at the screening checkpoints as a cause for screener performance problems. In particular, TSA acknowledged that many Lead Screeners, Screening Supervisors, and Screening Managers did not demonstrate supervisory and management skills (i.e., mentoring, coaching, and positive reinforcement) and provided little or no timely feedback to guide and improve screener performance. In addition, the internal study found that because of poor supervision at the checkpoint, supervisors or peers were not correcting incorrect procedures, optimal performance received little reinforcement, and not enough breaks were provided to screeners. A September 2004 report by the DHS OIG supported these findings, noting that Screening Supervisors and Screening Managers needed to be more attentive in identifying and correcting improper or inadequate screener performance. TSA recognizes the importance of Screener Supervisors and has established training programs to enhance their performance and effectiveness. In September 2003, we reported that TSA had begun working with the Department of Agriculture Graduate School to tailor the school’s off-the-shelf supervisory course to meet the specific needs of Screening Supervisors, and had started training the existing supervisors at that time through this course until the customized course was fielded. According to TSA’s training records, as of September 2004, about 3,800 Screening Supervisors had completed the course—approximately 92 percent of current Screening Supervisors. In response to our survey, one FSD noted that the supervisory training was long overdue because most of the supervisors had no prior federal service or, in some cases, no leadership experience. This FSD also noted that “leadership and supervisory skills should be continuously honed; thus, the development of our supervisors should be an extended and sequential program with numerous opportunities to develop skills—not just a one-time class.” In addition to the Department of Agriculture Graduate School course, TSA’s Online Learning Center includes over 60 supervisory courses designed to develop leadership and coaching skills. In April 2004, TSA included in the Online Learning Center a Web-based technical training course—required for all Lead Screeners and Screening Supervisors. This course covers technical issues, such as resolving alarms at screening checkpoints. TSA introduced this course to the field in March 2004, and although the course is a requirement, TSA officials stated that they have not set goals for when all Lead Screeners and Screening Supervisors should have completed the course. In June 2004, TSA training officials stated that a second supervisor technical course was planned for development and introduction later in 2004. However, in December 2004, the training officials stated that planned funding for supervisory training may be used to support other TSA initiatives. The officials acknowledged that this would reduce TSA’s ability to provide the desired type and level of supervisory training to its Lead Screener, Screening Supervisor, and Screening Manager staff. TSA plans to revise its plans to provide Lead Screener, Screening Supervisor, and Screening Manager training based on funding availability. Although TSA has developed leadership and technical courses for Screening Supervisors, many FSDs, in response to our general survey, identified additional types of training needed to enhance screener supervision. Table 2 provides a summary of the additional training needs that FSDs reported. TSA training officials stated that the Online Learning Center provides several courses that cover these topics. Such courses include Situation Leadership II; Communicating with Difficult People: Handling Difficult Co-Workers; Team Participation: Resolving Conflict in Teams; Employee Performance: Resolving Conflict; High Impact Hiring; Team Conflict: Overcoming Conflict with Communication; Correcting Performance Problems: Disciplining Employees; Team Conflict: Working in Diversified Teams; Correcting Performance Problems: Identifying Performance Problems; Resolving Interpersonal Skills; Grammar, Skills, Punctuation, Mechanics and Word Usage; and Crisis in Organizations: Managing Crisis Situations. TSA training officials acknowledged that for various reasons FSDs might not be aware that the supervisory and leadership training is available. For example, FSDs at airports without high-speed Internet/intranet access to the Online Learning Center might not have access to all of these courses. It is also possible that certain FSDs have not fully browsed the contents of the Online Learning Center and therefore are not aware that the training is available. Furthermore, officials stated that online learning is relatively new to government and senior field managers, and some of the FSDs may expect traditional instructor-led classes rather than online software. Some FSDs responded to our general survey that they faced challenges with screeners receiving recurrent training, including insufficient staffing to allow all screeners to complete training within normal duty hours and a lack of high-speed Internet/intranet connectivity at some training facilities. According to our guide for assessing training, to foster an environment conducive to effective training and development, agencies must take actions to provide sufficient time, space, and equipment to employees to complete required training. TSA has set a requirement for 3 hours of recurrent training per week averaged over a quarter year, for both full-time and part-time screeners. However, FSDs for about 18 percent (48 of 263) of the airports in our airport-specific survey reported that screeners received less than 9 to 12 hours of recurrent training per month. Additionally, FSDs for 48 percent (125 of 263) of the airports in the survey reported that there was not sufficient time for screeners to receive recurrent training within regular work hours. At 66 percent of those airports where the FSD reported that there was not sufficient time for screeners to receive recurrent training within regular work hours, the FSDs cited screener staffing shortages as the primary reason. We reported in February 2004 that FSDs at 11 of the 15 category X airports we visited reported that they were below their authorized staffing levels because of attrition and difficulties in hiring new staff. In addition, three of these FSDs noted that they had never been successful in hiring up to the authorized staffing levels. We also reported in February 2004 that FSDs stated that because of staffing shortages, they were unable to let screeners participate in training because it affected the FSD’s ability to provide adequate coverage at the checkpoints. In response to our survey, FSDs across all categories of airports reported that screeners must work overtime in order to participate in training. A September 2004 DHS OIG report recommended that TSA examine the workforce implications of the 3-hour training requirement and take steps to correct identified imbalances in future workforce planning to ensure that all screeners are able to meet the recurrent training standard. The 3-hours-per-week training standard represents a staff time commitment of 7.5 percent of full- time and between 9 and 15 percent of part-time screeners’ nonovertime working hours. TSA headquarters officials have stated that because the 3- hours-per-week requirement is averaged over a quarter, it provides flexibility to account for the operational constraints that exist at airports. However, TSA headquarters officials acknowledged that many airports are facing challenges in meeting the 3-hour recurrent training requirement. TSA data for the fourth quarter of fiscal year 2004 reported that 75 percent of airports were averaging less than 3 hours of recurrent training per week per screener. The current screener staffing model, which is used to determine the screener staffing allocations for each airport, does not take the 3-hours-per-week recurrent training requirement into account. However, TSA headquarters officials said that they are factoring this training requirement into their workforce planning efforts, including the staffing model currently under development. Another barrier to providing recurrent training is the lack of high-speed Internet/intranet access at some of TSA’s training locations. TSA officials acknowledged that many of the features of the Online Learning Center, including some portions of the training modules and some Online Learning Center course offerings, are difficult or impossible to use in the absence of high-speed Internet/intranet connectivity. As one FSD put it, “the delayed deployment of the high-speed Internet package limits the connectivity to TSA HQ for various online programs that are mandated for passenger screening operations including screener training.” One FSD for a category IV airport noted the lack of a high-speed connection for the one computer at an airport he oversees made the Online Learning Center “nearly useless.” TSA began deploying high-speed access to its training sites and checkpoints in May 2003 and has identified high-speed connectivity as necessary in order to deliver continuous training to screeners. TSA’s July 2003 Performance Improvement Study recommended accelerating high- speed Internet/intranet access in order to provide quick and systematic distribution of information and, thus, reduce uncertainty caused by the day-to-day changes in local and national procedures and policy. In October 2003, TSA reported plans to have an estimated 350 airports online with high-speed connectivity within 6 months. However, in June 2004, TSA reported that it did not have the resources to reach this goal. TSA records show that as of October 2004, TSA had provided high-speed access for training purposes to just 109 airports, where 1,726 training computers were fully connected. These 109 airports had an authorized staffing level of over 24,900 screeners, meaning that nearly 20,100 screeners (45 percent of TSA’s authorized screening workforce) still did not have high-speed Internet/intranet access to the Online Learning Center at their training facility. In October 2004, TSA officials stated that TSA’s Office of Information Technology had selected an additional 16 airport training facilities with a total of 205 training computers to receive high- speed connectivity by the end of December 2004. As of January 19, 2005, TSA was unable to confirm that these facilities had received high-speed connectivity. Additionally, they could not provide a time frame for when they expected to provide high-speed connectivity to all airport training facilities because of funding uncertainties. Furthermore, TSA does not have a plan for prioritizing and scheduling the deployment of high-speed connectivity to all airport training facilities once funding is available. Without a plan, TSA’s strategy and timeline for implementing connectivity to airport training facilities is unclear. The absence of such a plan limits TSA’s ability to make prudent decisions about how to move forward with deploying connectivity once funding is available. Figure 5 shows the percentage of airports reported to have high-speed connectivity for their training computers by category of airport as of October 2004. To mitigate airport connectivity issues in the interim, on April 1, 2004, TSA made the Online Learning Center courses accessible through public Internet connections, which enable screeners to log on to the Online Learning Center from home, a public library, or other locations. However, TSA officials stated that the vast majority of screeners who have used the Online Learning Center have logged in from airports with connectivity at their training facilities. TSA also distributes new required training products using multiple delivery channels, including written materials and CD-ROMs for those locations where access to the Online Learning Center is limited. Specifically, TSA officials stated that they provided airports without high-speed connectivity with CD-ROMs for the 50 most commonly used optional commercial courseware titles covering topics such as information technology skills, customer service, and teamwork. Additionally, officials stated that as technical courses are added to the Online Learning Center, they are also distributed via CD-ROM and that until full connectivity is achieved, TSA will continue to distribute new training products using multiple delivery channels. Because of a lack of internal controls, TSA cannot provide reasonable assurance that screeners are completing required training. First, TSA policy does not clearly define responsibility for ensuring that screeners have completed all required training. Additionally, TSA has no formally defined policies or procedures for documenting completion of remedial training, or a system designed to facilitate review of this documentation for purposes of monitoring. Further, TSA headquarters does not have formal policies and procedures for monitoring completion of basic training and lacks procedures for monitoring recurrent training. Finally, at airports without high-speed connectivity, training records must be entered manually, making it challenging for some airports to keep accurate and up- to-date training records. TSA’s current guidance for FSDs regarding the training of the screener workforce does not clearly identify responsibility for tracking and ensuring compliance with training requirements. In a good control environment, areas of authority and responsibility are clearly defined and appropriate lines of reporting are established. In addition, internal control standards also require that responsibilities be communicated within an organization. The Online Learning Center provides TSA with a standardized, centralized tool capable of maintaining all training records in one system. It replaces an ad hoc system previously used during initial rollout of federalized screeners in which contractors maintained training records. A February 2004 management directive states that FSDs are responsible for ensuring the completeness, accuracy, and timeliness of training records maintained in the Online Learning Center for their employees. For basic and recurrent training, information is to be entered into the Online Learning Center within 30 days of completion of the training activity. However, the directive does not clearly identify who is responsible for ensuring that employees comply with training requirements. Likewise, a December 2003 directive requiring that screeners complete 3 hours of training per week averaged over a quarter states that FSDs are responsible for ensuring that training records for each screener are maintained in the Online Learning Center. Although both directives include language that requires FSDs to ensure training records are maintained in the Online Learning Center, neither specifies whether FSDs or headquarters officials are responsible for ensuring compliance with the basic, recurrent, and remedial training requirements. Even so, TSA headquarters officials told us that FSDs are ultimately responsible for ensuring screeners receive required training. However, officials provided no documentation clearly defining this responsibility. Without a clear designation of responsibility for monitoring training completion, this function may not receive adequate attention, leaving TSA unable to provide reasonable assurance that its screening workforce receives required training. In April 2005, TSA officials responsible for training stated that they were updating the February 2004 management directive on training records to include a specific requirement for FSDs to ensure that screeners complete required training. They expect to release the revised directive in May 2005. TSA has not established and documented policies and procedures for monitoring completion of basic and recurrent training. Internal control standards advise that internal controls should be designed so that monitoring is ongoing and ingrained in agency operations. However, TSA headquarters officials stated that they have no formal policy for monitoring screeners’ completion of basic training. They also stated that they have neither informal nor formal procedures for monitoring the completion of screeners’ recurrent training requirements, and acknowledged that TSA policy does not address what is to occur if a screener does not meet the recurrent training requirement. Officials further stated that individual FSDs have the discretion to determine what action, if any, to take when screeners do not meet this requirement. In July 2004, TSA training officials stated that headquarters staff recently began running a report in the Online Learning Center to review training records to ensure that newly hired screeners had completed required basic training. In addition, they stated that in June 2004, they began generating summary-level quarterly reports from the Online Learning Center to quantify and analyze hours expended for recurrent screener training. Specifically, TSA training officials stated that reports showing airport-level compliance with the 3-hour recurrent requirement were generated for the third and fourth quarters of fiscal year 2004 and delivered to the Office of Aviation Operations for further analysis and sharing with the field. However, Aviation Operations officials stated that they did not use these reports to monitor the status of screener compliance with the 3-hour recurrent training requirement and do not provide them to the field unless requested by an FSD. TSA training officials said that while headquarters intends to review recurrent training activity on an ongoing basis at a national and airport level, they view FSDs and FSD training staff as responsible for ensuring that individuals receive all required training. Further, they acknowledged that weaknesses existed in the reporting capability of the Online Learning Center and stated that they plan to upgrade the Online Learning Center with improved reporting tools by the end of April 2005. Without clearly defined policies and procedures for monitoring the completion of training, TSA lacks a structure to support continuous assurance that screeners are meeting training requirements. TSA has not established clear policies and procedures for documenting completion of required remedial training. The Standards for Internal Control state that agencies should document all transactions and other significant events and should be able to make this documentation readily available for examination. A TSA training bulletin dated October 15, 2002, specifies that when remedial training is required, FSDs must ensure the training is provided and a remedial training reporting form is completed and maintained with the screener’s local records. However, when we asked to review these records, we found confusion as to how and where they were to be maintained. TSA officials stated that they are waiting for a decision regarding how to maintain these records because of their sensitive nature. In the meantime, where and by whom the records should be maintained remains unclear. In September 2004, officials from TSA’s OIAPR—responsible for conducting covert testing—stated that they maintain oversight to ensure screeners requiring remedial training receive required training by providing a list of screeners that failed covert testing and therefore need remedial training to TSA’s Office of Aviation Operations. Aviation Operations is then to confirm via memo that each of the screeners has received the necessary remedial training and report back to OIAPR. Accordingly, we asked TSA for all Aviation Operations memos confirming completion of remedial training, but we were only able to obtain 1 of the 12 memos. In addition, during our review, we asked to review the remedial training reporting forms at five airports to determine whether screeners received required training, but we encountered confusion about requirements for maintaining training records and inconsistency in record keeping on the part of local TSA officials. Because of the unclear policies and procedures for recording completion of remedial training, TSA does not have adequate assurance that screeners are receiving legislatively mandated remedial training. Although training computers with high-speed Internet/intranet connectivity automatically record completion of training in the Online Learning Center, airports without high-speed access at their training facility must have these records entered manually. The February 2004 management directive that describes responsibility for entering training records into the Online Learning Center also established that all TSA employees are required to have an official TSA training record in the Online Learning Center that includes information on all official training that is funded wholly or in part with government funds. Without high- speed access, TSA officials stated that it can be a challenge for airports to keep the Online Learning Center up to date with the most recent training records. TSA headquarters officials further stated that when they want to track compliance with mandatory training such as ethics or civil rights training, they provide the Training Coordinators with a spreadsheet on which to enter the data rather than relying on the Online Learning Center. As one FSD told us, without high-speed connectivity at several of the airports he oversees, “this is very time consuming and labor intensive and strains my limited resources.” The difficulty that airports encounter in maintaining accurate records when high-speed access is absent could compromise TSA’s ability to provide reasonable assurance that screeners are receiving mandated basic and remedial training. TSA has improved its efforts to measure and enhance screener performance. However, these efforts have primarily focused on passenger screening rather than checked baggage screening, and TSA has not yet finalized performance targets for several key performance measures. For example, TSA has increased the amount of covert testing it performs at airports. These tests have identified that, overall, weaknesses and vulnerabilities continue to exist in the passenger and checked baggage screening systems. TSA also enabled FSDs to conduct local covert testing, fully deployed the Threat Image Projection (TIP) system to passenger screening checkpoints at commercial airports nationwide, and completed the 2003/2004 annual screener recertification program for all eligible screeners. However, not all of these performance measurement and enhancement tools are available for checked baggage screening. Specifically, TIP is not currently operational at checked baggage screening checkpoints, and the recertification program does not include an image recognition component for checked baggage screeners. However, TSA is taking steps to address the overall imbalance in passenger and checked baggage screening performance data, including working toward implementing TIP for checked baggage screening and developing an image recognition module for checked baggage screener recertification. To enhance screener and screening system performance, TSA has also conducted a passenger screener performance improvement study and subsequently developed an improvement plan consisting of multiple action items, many of which TSA has completed. However, TSA has not conducted a similar study for checked baggage screeners. In addition, TSA has established over 20 performance measures for the passenger and checked baggage screening systems as well as two performance indexes (one for passenger and one for checked baggage screening). However, TSA has not established performance targets for each of the component indicators within the indexes, such as covert testing. According to The Office of Management and Budget, performance goals are target levels of performance expressed as a measurable objective, against which actual achievement can be compared. Performance goals should incorporate measures (indicators used to gauge performance); targets (characteristics that tell how well a program must accomplish the measure), and time frames. Without these targets, TSA’s performance management system, and these performance indexes, specifically, may not provide the agency with the complete information necessary to assess achievements and make decisions about where to direct performance improvement efforts. Although TSA has not yet established performance targets for each of the component indicators, TSA plans to finalize performance targets for the indicators by the end of fiscal year 2005. TSA headquarters has increased the amount of covert testing it performs and enabled FSDs to conduct additional local covert testing at passenger screening checkpoints. TSA’s OIAPR conducts unannounced covert tests of screeners to assess their ability to detect threat objects and to adhere to TSA-approved procedures. These tests, in which undercover OIAPR inspectors attempt to pass threat objects through passenger screening checkpoints and in checked baggage, are designed to measure vulnerabilities in passenger and checked baggage screening systems and to identify systematic problems affecting performance of screeners in the areas of training, policy, and technology. TSA considers its covert testing as a “snapshot” of a screener’s ability to detect threat objects at a particular point in time and as one of several indicators of system wide screener performance. OIAPR conducts tests at passenger screening checkpoints and checked baggage screening checkpoints. According to OIAPR, these tests are designed to approximate techniques terrorists might use. These covert test results are one source of data on screener performance in detecting threat objects as well as an important mechanism for identifying areas in passenger and checked baggage screening needing improvement. In testimony before the 9/11 Commission, the Department of Transportation Inspector General stated that emphasis must be placed on implementing an aggressive covert testing program to evaluate operational effectiveness of security systems and equipment. Between September 10, 2002, and September 30, 2004, OIAPR conducted a total of 3,238 covert tests at 279 different airports. In September 2003, we reported that OIAPR had conducted limited covert testing but planned to double the amount of tests it conducted during fiscal year 2004, based on an anticipated increase in its staff from about 100 full-time equivalents to about 200 full-time equivalents. TSA officials stated that based on budget constraints, OIAPR’s fiscal year 2004 staffing authorization was limited to 183 full-time-equivalents, of which about 60 are located in the field. Despite a smaller than expected staff increase, by the end of the second quarter of fiscal year 2004, OIAPR had already surpassed the number of tests it performed during fiscal year 2003, as shown in table 3. In October 2003, OIAPR committed to testing between 90 and 150 airports by April 2004 as part of TSA’s short-term screening performance improvement plan. OAIPR officials stated that this was a onetime goal to increase testing. This initiative accounts for the spike in testing for the second quarter of fiscal year 2004. OIAPR has created a testing schedule designed to test all airports at least once during a 3-year time frame. Specifically, the schedule calls for OIAPR to test all category X airports once a year, category I and II airports once every 2 years, and category III and IV airports at least once every 3 years. In September 2003 and April 2004, we reported that TSA covert testing results had identified weaknesses in screeners’ ability to detect threat objects. More recently, in April 2005, we, along with the DHS OIG, identified that screener performance continued to be a concern. Specifically, our analysis of TSA’s covert testing results for tests conducted between September 2002 and September 2004 identified that overall, weaknesses still existed in the ability of screeners to detect threat objects on passengers, in their carry-on bags, and in checked baggage. Covert testing results in this analysis cannot be generalized either to the airports where the tests were conducted or to airports nationwide. These weaknesses and vulnerabilities were identified at airports of all sizes, at airports with federal screeners, and airports with private-sector screeners. For the two-year period reviewed, overall failure rates for covert tests (passenger and checked baggage) conducted at airports using private- sector screeners were somewhat lower than failure rates for the same tests conducted at airports using federal screeners for the airports tested during this period. Since these test results cannot be generalized as discussed above, each airport’s test results should not be considered a comprehensive measurement of the airport’s performance or any individual screener’s performance in detecting threat objects, or in determining whether airports with private sector screeners performed better than airports with federal screeners. On the basis of testing data through September 30, 2004, we determined that OIAPR had performed covert testing at 61 percent of the nation’s commercial airports. TSA has until September 30, 2005, to test the additional 39 percent of airports and meet its goal of testing all airports within 3 years. Although officials stated that they have had to divert resources from airport testing to conduct testing of other modes and that testing for other modes of transportation may affect their ability to conduct airport testing, they still expect to meet the goal. In February 2004, TSA provided protocols to help FSDs conduct their own covert testing of local airport passenger screening activities—a practice that TSA had previously prohibited. Results of local testing using these protocols are to be entered into the Online Learning Center. This information, in conjunction with OAIPR covert test results and TIP threat detection results, is intended to assist TSA in identifying specific training and performance improvement efforts. In February 2005, TSA released a general procedures document for local covert testing at checked baggage screening locations. TSA officials said that they had not yet begun to use data from local covert testing to identify training and performance needs because of difficulties in ensuring that local covert testing is implemented consistently nationwide. These officials said that after a few months of collecting and assessing the data, they will have a better idea of how the data can be used. TSA has nearly completed the reactivation of the TIP system at airports nationwide and plans to use data it is collecting to improve the effectiveness of the passenger screening system. TIP is designed to test passenger screeners’ detection capabilities by projecting threat images, including guns, knives, and explosives, onto bags as they are screened during actual operations. Screeners are responsible for identifying the threat image and calling for the bag to be searched. Once prompted, TIP identifies to the screener whether the threat is real and then records the screener’s performance in a database that could be analyzed for performance trends. TSA is evaluating the possibility of developing an adaptive functionality to TIP. Specifically, as individual screeners become proficient in identifying certain threat images, such as guns or knives, they will receive fewer of those images and more images that they are less proficient at detecting, such as improvised explosive devices. TIP was activated by FAA in 1999 with about 200 threat images, but it was shut down immediately following the September 11 terrorist attacks because of concerns that it would result in screening delays and panic, as screeners might think that they were actually viewing threat objects. In October 2003, TSA began reactivating and expanding TIP. In April 2004, we reported that TSA was reactivating TIP with an expanded library of 2,400 images at all but one of the more than 1,800 checkpoint lanes nationwide. To further enhance screener training and performance, TSA also plans to develop at least an additional 50 images each month. Despite these improvements, TIP is not yet available for checked baggage screening. In April 2004, we reported that TSA officials stated that they were working to resolve technical challenges associated with using TIP for checked baggage screening on EDS machines and have started EDS TIP image development. The DHS OIG reported in September 2004 that TSA plans to implement TIP on all EDS machines at checked baggage stations nationwide in fiscal year 2005. However, in December 2004, TSA officials stated that because of severe budget reductions, TSA will be unable to begin implementing a TIP program for checked baggage in fiscal year 2005. They did not specify when such a program might begin. TSA plans to use TIP data to improve the passenger screening system in two ways. First, TIP data can be used to measure screener threat detection effectiveness by different threats. Second, TSA plans to use TIP results to help identify specific recurrent training needs within and across airports and to tailor screeners’ recurrent training to focus on threat category areas that indicate a need for improvement. TSA considers February 2004 as the first full month of TIP reporting with the new library of 2,400 images. TSA began collecting these data in early March 2004 and is using the data to determine more precisely how they can be used to measure screener performance in detecting threat objects and to determine what the data identify about screener performance. TSA does not currently plan to use TIP data as an indicator of individual screener performance because TSA does not believe that TIP by itself adequately reflects a screener’s performance. Nevertheless, in April 2004, TSA gave FSDs the capability to query and analyze TIP data in a number of ways, including by screener, checkpoint, and airport. FSDs for over 60 percent of the airports included in our airport-specific survey stated that they use or plan to use TIP data as a source of information in their evaluations of individual screener performance. Additionally, FSDs for 50 percent of the airports covered in our survey reported using data generated by TIP to identify specific training needs for individual screeners. In September 2004, the DHS OIG reported that TSA is assessing the cost and feasibility of modifying TIP so that it recognizes and responds to specific threat objects with which individual screeners are most and least competent in detecting, over time. This feature would increase the utility of TIP as a training tool. The DHS OIG also reported that TSA is considering linking TIP over a network, which would facilitate TSA’s collection, analysis, and information-sharing efforts around TIP user results. The report recommended that TSA continue to pursue each of these initiatives, and TSA agreed. However, in December 2004, TSA officials stated that the availability of funding will determine whether or not they pursue these efforts further. TSA has completed its first round of the screener recertification program, and the second round is now under way. However, TSA does not currently include an image recognition component in the test for checked baggage screener recertification. ATSA requires that each screener receive an annual proficiency review to ensure he or she continues to meet all qualifications and standards required to perform the screening function. In September 2003, we reported that TSA had not yet implemented this requirement. To meet this requirement, TSA established a recertification program, and it began recertification testing in October 2003 and completed the testing in March 2004. The first recertification program was composed of two assessment components, one of screeners’ performance and the other of screeners’ knowledge and skills. During the performance assessment component of the recertification program, screeners are rated on both organizational and individual goals, such as maintaining the nation’s air security, vigilantly carrying out duties with utmost attention to tasks that will prevent security threats, and demonstrating the highest levels of courtesy to travelers to maximize their levels of satisfaction with screening services. The knowledge and skills assessment component consists of three modules: (1) knowledge of standard operating procedures, (2) image recognition, and (3) practical demonstration of skills. Table 4 provides a summary of these three modules. To be recertified, screeners must have a rating of “met” or “exceeded” standards on their annual performance assessments and have passed each of the applicable knowledge and skills modules. Screeners that failed any of the three modules were to receive study time or remedial training as well as a second opportunity to take and pass the modules. Screeners who failed on their second attempt were to be removed from screening duties and subject to termination. Screeners could also be terminated for receiving a rating of below “met” standards. TSA completed its analysis of the recertification testing and performance evaluations in May 2004. TSA’s analysis shows that less than 1 percent of screeners subject to recertification failed to complete this requirement. Figure 6 shows the recertification results. Across all airports screeners performed well on the recertification testing. Over 97 percent of screeners passed the standard operating procedures test on their first attempt. Screeners faced the most difficulty on the practical demonstration of skills component. However, following remediation, 98.6 percent of the screeners who initially failed this component passed on their second attempt. Table 5 shows the results of the recertification testing by module. As shown in table 6, screeners hired as checked baggage screeners were not required to complete the image recognition module in the first round of the recertification testing. In addition, during the first year of recertification testing, which took place from October 2003 through May 2004, dual-function screeners who were actively working as both passenger and checked baggage screeners were required to take only the recertification test for passenger screeners. They were therefore not required to take the recertification testing modules required for checked baggage, even though they worked in that capacity. TSA began implementing the second annual recertification testing in October 2004 and plans to complete it no later than June 2005. This recertification program includes components for dual-function screeners. However, TSA still has not included an image recognition module for checked baggage screeners—which would include dual-function screeners performing checked baggage screening. TSA officials stated that a decision was made to not include an image recognition module for checked baggage screeners during this cycle because not all checked baggage screeners would have completed training on the onscreen resolution protocol by the time recertification testing was conducted at their airports. In December 2004, TSA officials stated that they plan on developing an image recognition module for checked baggage and dual- function screeners, and that this test should be available for next year’s recertification program. The development and implementation of the image recognition test will be contingent, they stated, upon the availability of funds. TSA has implemented a number of improvements designed to enhance screener performance, based on concerns it identified in a July 2003 Passenger Screener Performance Improvement Study and recommendations from OIAPR. To date, however, these efforts have primarily focused on the performance of passenger screeners, and TSA has not yet undertaken a comparable performance study for checked baggage screeners. The Passenger Screener Performance Improvement Study relied in part on the findings of OIAPR’s covert testing. At the time the study was issued, OIAPR had conducted fewer than 50 tests of checked baggage screeners. The July 2003 study focused on and included numerous recommendations for improving the performance of passenger screeners, but recommended waiting to analyze the performance of checked baggage screeners until some time after implementation of the recommendations, some of which TSA indicated, also applied to checked baggage screeners. TSA officials told us that this analysis has been postponed until they have reviewed the impact of implementing the recommendations on passenger screening performance. In October 2003, to address passenger screener performance deficiencies identified in the Screener Performance Improvement Study, TSA developed a Short-Term Screening Performance Improvement Plan. This plan included specific action items in nine broad categories—such as enhance training, increase covert testing, finish installing TIP, and expedite high-speed connectivity to checkpoints and training computers— that TSA planned to pursue to provide tangible improvements in passenger screener performance and security (see app. IV for additional information on the action items). In June 2004, TSA reported that it had completed 57 of the 62 specific actions. As of December 2004, two of these actions still had not been implemented—full deployment of high-speed connectivity and a time and attendance package—both of which continue to be deferred pending the identification of appropriate resources. In addition to the Performance Improvement Study and corresponding action plans, TSA’s OIAPR makes recommendations in its reports on covert testing results. These recommendations address deficiencies identified during testing and are intended to improve screening effectiveness. As of December 2004, OIAPR had issued 18 reports to TSA management on the results of its checkpoint and checked baggage covert testing. These reports include 14 distinct recommendations, some of which were included in TSA’s screener improvement action plan. All but two of these reports included recommendations on corrective actions needed to enhance the effectiveness of passenger and checked baggage screening. TSA has established performance measures, indexes, and targets for the passenger and checked baggage screening systems, but has not established targets for the various components of the screening indexes. The Government Performance and Results Act of 1993 provides, among other things, that federal agencies establish program performance measures, including the assessment of relevant outputs and outcomes of each program activity. Performance measures are meant to cover key aspects of performance and help decision makers to assess program accomplishments and improve program performance. A performance target is a desired level of performance expressed as a tangible, measurable objective, against which actual achievement will be compared. By analyzing the gap between target and actual levels of performance, management can target those processes that are most in need of improvement, set improvement goals, and identify appropriate process improvements or other actions. An April 2004 consultant study commissioned by TSA found that FSDs and FSD staffs generally believed the lack of key performance indicators available to monitor passenger and checked baggage screening performance represented a significant organizational weakness. Since then, TSA has established over 20 performance measures for the passenger and checked baggage screening systems. For example, TSA measures the percentage of screeners meeting a threshold score on the annual recertification testing on their first attempt, the percentage of screeners scoring above the national standard level on TIP performance, and the number of passengers screened, by airport category. TSA also has developed two performance indexes to measure the effectiveness of the passenger and checked baggage screening systems. These indexes measure overall performance through a composite of indicators and are derived by combining specific performance measures relating to passenger and checked baggage screening, respectively. Specifically, these indexes measure the effectiveness of the screening systems through machine probability of detection and covert testing results; efficiency through a calculation of dollars spent per passenger or bag screened; and customer satisfaction through a national poll, customer surveys, and customer complaints at both airports and TSA’s national call center. According to TSA officials, the agency has finalized targets for the two overall indexes, but these targets have not yet been communicated throughout the agency. Further, TSA plans to provide the FSDs with only the performance index score, not the value of each of the components, because the probabilities of detection are classified as secret and TSA is concerned that by releasing components, those probabilities could be deduced. Table 7 summarizes the components of the performance indexes developed by TSA. TSA has not yet established performance targets for the various components of the screening indexes, including performance targets for covert testing (person probability of detection). TSA’s strategic plan states that the agency will use the performance data it collects to make tactical decisions based on performance. The screening performance indexes developed by TSA can be a useful analysis tool, but without targets for each component of the index, TSA will have difficulty performing meaningful analyses of the parts that add up to the index. For example, without performance targets for covert testing, TSA will not have identified a desired level of performance related to screener detection of threat objects. Performance targets for covert testing would enable TSA to focus its improvement efforts on areas determined to be most critical, as 100 percent detection capability may not be attainable. In January 2005, TSA officials stated that the agency plans to track the performance of individual index components and establish performance targets against which to measure these components. They further stated that they are currently collecting and analyzing baseline data to establish these targets and plan to finalize them by the end of fiscal year 2005. It has been over 2 years since TSA assumed responsibility for passenger and checked baggage screening operations at the nation’s commercial airports. TSA has made significant accomplishments over this period in meeting congressional mandates related to establishing these screening operations. With the congressional mandates now largely met, TSA has turned its attention to assessing and enhancing the effectiveness of its passenger and checked baggage screening systems. An important tool in enhancing screener performance is ongoing training. As threats and technology change, the training and development of screeners to ensure they have the competencies—knowledge, skills, abilities, and behaviors— needed to successfully perform their screening functions become vital to strengthening aviation security. Without addressing the challenges to delivering ongoing training, including installing high-speed connectivity at airport training facilities, TSA may have difficulty maintaining a screening workforce that possesses the critical skills needed to perform at a desired level. In addition, without adequate internal controls designed to help ensure screeners receive required training that are also communicated throughout the agency, TSA cannot effectively provide reasonable assurances that screeners receive all required training. Given the importance of the Online Learning Center in both delivering training and serving as the means by which the completion of screener training is documented, TSA would benefit from having a clearly defined plan for prioritizing the deployment of high-speed Internet/intranet connectivity to all airport training facilities. Such a plan would help enable TSA to move forward quickly and effectively in deploying high-speed connectivity once funding is available. Additionally, history demonstrates that U.S. commercial aircraft have long been a target for terrorist attacks through the use of explosives carried in checked baggage, and covert testing conducted by TSA and DHS OIG have identified that weaknesses and vulnerabilities continue to exist in the passenger and checked baggage screening systems, including the ability of screeners to detect threat objects. While covert test results provide an indicator of screening performance, they cannot solely be used as a comprehensive measure of any airport’s screening performance or any individual screener’s performance, or in determining the overall performance of federal versus private-sector screening. Rather, these data should be considered in the larger context of additional performance data, such as TIP and recertification test results, when assessing screener performance. While TSA has undertaken efforts to measures and strengthen performance, these efforts have primarily focused on passenger screening and not on checked baggage screening. TSA’s plans for implementing TIP for checked baggage screening, and establishing an image recognition component for the checked baggage screeners recertification testing—plans made during the course of our review— represent significant steps forward in its efforts to strengthen checked baggage screening functions. Additionally, although TSA has developed passenger and checked baggage screening effectiveness measures, the agency has not yet established performance targets for the individual components of these measures. Until such targets are established, it will be difficult for TSA to draw more meaningful conclusions about its performance and how to most effectively direct its improvement efforts. For example, performance targets for covert testing would enable TSA to focus its improvement efforts on areas determined to be most critical, as 100 percent detection capability may not be attainable. We are encouraged by TSA’s recent plan to establish targets for the individual components of the performance indexes. This effort, along with the additional performance data TSA plans to collect on checked baggage screening operations, should assist TSA in measuring and enhancing screening performance and provide TSA with more complete information with which to prioritize and focus its screening improvement efforts. To help ensure that all screeners have timely and complete access to screener training available in the Online Learning Center and to help provide TSA management with reasonable assurance that all screeners are receiving required passenger and checked baggage screener training, we recommend that the Secretary of the Department of Homeland Security direct the Assistant Secretary, Transportation Security Administration, to take the following two actions: develop a plan that prioritizes and schedules the deployment of high-speed Internet/intranet connectivity to all TSA’s airport training facilities to help facilitate the delivery of screener training and the documentation of training completion, and develop internal controls, such as specific directives, clearly defining responsibilities for monitoring and documenting the completion of required training, and clearly communicate these responsibilities throughout the agency. We provided a draft of this report to DHS for review and comment. On February 4, 2005, we received written comments on the draft report, which are reproduced in full in appendix V. DHS generally concurred with the findings and recommendations in the report, and agreed that efforts to implement our recommendations are critical to successful passenger and checked baggage screening training and performance. With regard to our recommendation that TSA develop a plan that prioritizes and schedules the deployment of high-speed Internet/intranet connectivity to all TSA’s airport training facilities, DHS stated that TSA has developed such a plan. However, although we requested a copy of the plan several times during our review and after receiving written comments from DHS, TSA did not provide us with a copy of the plan. Therefore, we cannot assess the extent to which the plan DHS referenced in its written comments fulfills our recommendation. In addition, regarding our recommendation that TSA develop internal controls clearly defining responsibilities for monitoring and documenting the completion of required training, and clearly communicate those responsibilities throughout TSA, DHS stated that it is taking steps to define responsibility for monitoring the completion of required training and to insert this accountability into the performance plans of all TSA supervisors. TSA’s successful completion of these ongoing and planned activities should address the concerns we raised in this report. DHS has also provided technical comments on our draft report, which we incorporated where appropriate. As agreed with your office, we will send copies of this report to relevant congressional committees and subcommittees and to the Secretary of the Department of Homeland Security. We will also make copies available to others upon request. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report or wish to discuss it further, please contact me at (202) 512-8777. Key contributors to this report are listed in appendix VI. The Transportation Security Administration (TSA) had deployed a basic screener training program and required remedial training but had not fully developed or deployed a recurrent training program for screeners or supervisors. TSA had collected little information to measure screener performance in detecting threat objects. TSA’s Office of Internal Affairs and Program Review’s (OIAPR) covert testing was the primary source of information collected on screeners’ ability to detect threat objects. However, TSA did not consider the covert testing a measure of screener performance. TSA was not using the Threat Image Projection system (TIP) but planned to fully activate the system with significantly more threat images than previously used in October 2003. TSA had not yet implemented an annual proficiency review to ensure that screeners met all qualifications and standards required to perform their assigned screening functions. Although little data existed on the effectiveness of passenger screening, TSA was implementing several efforts to collect performance data. Aviation Security: Efforts to Measure Effectiveness and Address Challenges planned to double the number of tests it conducted during fiscal year 2004. TSA only recently began activating TIP on a wide-scale basis and expected it to be fully operational at every checkpoint at all airports by April 2004. TSA only recently began implementing the annual recertification program and did not expect to complete testing at all airports until March 2004. TSA was developing performance indexes for individual screeners and the screening system as a whole but had not fully established these indexes. TSA expected to have them in place by the end of fiscal year 2004. Aviation Security: Efforts to Measure Effectiveness and Strengthen Security Programs working with the U.S. Department of Agriculture’s Graduate School to tailor its off-the-shelf supervisory course to meet the specific training needs of screening supervisors. While TSA had taken steps to enhance its screener training programs, staffing imbalances, and lack of high-speed connectivity at airport training facilities had made it difficult for screeners at some airports to fully utilize these programs. Although TSA was making progress in measuring the performance of passenger screeners, it had collected limited performance data related to its checked baggage screening operations. However, TSA had begun collecting additional performance data related to its checked baggage screening operations and planned to increase these efforts in the future. As part of its efforts to develop performance indexes, TSA was developing baseline data for fiscal year 2004 and planned to report the indexes to DHS in fiscal year 2005. With the exception of covert testing and recent TIP data, data were not yet available to assess how well screeners were performing and what steps if any TSA needed to take to improve performance. Also, TSA was not using TIP as a formal indicator of screening performance, but instead was using it to identify individual screener training needs. To examine efforts by the Transportation Security Administration to enhance their passenger and checked baggage screening programs, we addressed the following questions: (1) What actions has TSA taken to enhance training for screeners and supervisors? (2) How does TSA monitor compliance with screener training requirements? (3) What is the status of TSA’s efforts to assess and enhance screener performance in detecting threat objects? To determine how TSA has enhanced training for screeners and supervisors and how TSA has monitored compliance with screener training requirements, we obtained and analyzed relevant legislation, as well as TSA’s training plans, guidance, and curriculum. We reviewed data from TSA’s Online Learning Center and assessed the reliability of the Online Learning Center database. We compared TSA’s procedures for ensuring that screeners receive required training according to Standards for Internal Controls in the Federal Government. We interviewed TSA officials from the Office of Workforce Performance and Training and the Office of Aviation Operations in Arlington, Virginia. At the airports we visited, we interviewed Federal Security Directors and their staffs, such as Training Coordinators. We also met with officials from four aviation associations—the American Association of Airport Executives, Airports Council International, the Air Transport Association, and the Regional Airline Association. We did not assess the methods used to develop TSA’s screener training program, nor did we analyze the contents of TSA’s curriculum. Although we could not independently verify the reliability of all of this information, we compared the information with other supporting documents, when available, to determine data consistency and reasonableness. We found the data to be sufficiently reliable for our purposes. To determine what efforts TSA has taken to assess and to enhance screener performance in detecting threat objects, we reviewed related reports from the Department of Transportation and the Department of Homeland Security (DHS) Inspector General, Congressional Research Service, and TSA, as well as prior GAO reports. We obtained and reviewed TSA’s covert test data and results of the annual recertification testing. (Results of the covert testing are classified and will be the subject of a separate classified GAO report.) We discussed methods for inputting, compiling, and maintaining the data with TSA officials. We also assessed the methodology of TSA’s covert tests and questioned OIAPR officials about the procedures used to ensure the reliability of the covert test data. When we found discrepancies between the data OIAPR maintained in spreadsheets and the data included in the hard copy reports we obtained from TSA, we worked with OIAPR to resolve the discrepancies. Further, we visited TSA headquarters to review TSA’s annual recertification testing modules and discuss TSA’s process for validating the recertification exams. As a result, we determined that the data provided by TSA were sufficiently reliable for the purposes of our review. We also reviewed TSA’s performance measures, targets, and indexes. Finally, we interviewed TSA headquarters officials from several offices in Arlington, Virginia, including Aviation Operations, Workforce Performance and Training, Strategic Management and Analysis, and Internal Affairs and Program Review. In addition, in accomplishing our objectives, we also conducted site visits at select airports nationwide to interview Federal Security Directors and their staffs and conducted two Web-based surveys of Federal Security Directors. Specifically, we conducted site visits at 29 airports (13 category X airports, 9 category I airports, 3 category II airports, 3 category III airports, and 1 category IV airport) to observe airport security screening procedures and discuss issues related to the screening process with TSA, airport, and airline officials. We chose these airports to obtain a cross- section of all airports by size and geographic distribution. In addition, we selected each of the five contract screening pilot airports. The results from our airport visits provide examples of screening operations and issues but cannot be generalized beyond the airports visited because we did not use statistical sampling techniques in selecting the airports. The category X airports we visited were Baltimore Washington International Airport, Boston Logan International Airport, Chicago O’Hare International Airport, Dallas/Fort Worth International Airport, Denver International Airport, Washington Dulles International Airport, John F. Kennedy International Airport, Los Angeles International Airport, Newark Liberty International Airport, Orlando International Airport, Ronald Reagan Washington National Airport, San Francisco International Airport, Seattle-Tacoma International Airport. The category I airports we visited were Burbank- Glendale-Pasadena Airport, John Wayne Airport, Chicago Midway International Airport, Dallas Love Field, Kansas City International Airport, Little Rock National Airport, Metropolitan Oakland International Airport, Portland International Airport, and Tampa International Airport. The category II airports we visited were Jackson International Airport, Dane County Regional Airport, and Greater Rochester International Airport. The category III airports we visited were Idaho Falls Regional Airport, Jackson Hole Airport, and Orlando Sanford International Airport. The category IV airport we visited was Tupelo Regional Airport. Further, we administered two Web-based surveys to all 155 Federal Security Directors who oversee security at each of the airports falling under TSA’s jurisdiction. One survey, the general survey, contained questions covering local and national efforts to train screeners and supervisors and the status of TSA’s efforts to evaluate screener performance, including the annual recertification program and TIP. The second survey attempted to gather more specific airport security information on an airport(s) under the Federal Security Director’s supervision. For the airport-specific survey, each Federal Security Director received one or two surveys to complete, depending on the number of airports they were responsible for. Where a Federal Security Director was responsible for more than two airports, we selected the first airport based on the Federal Security Director’s location and the second airport to obtain a cross-section of all airports by size and geographic distribution. In all, we requested information on 265 airports. However, two airports were dropped from our initial selection because the airlines serving these airports suspended operations and TSA employees were redeployed to other airports. As a result our sample size was reduced to 263 airports, which included all 21 category X, and 60, 49, 73, and 60 category I through IV airports respectively. In that we did not use probability sampling methods to select the sample of airports that were included in our airport-specific survey, we cannot generalize our findings beyond the selected airports. A GAO survey specialist designed the surveys in combination with other GAO staff knowledgeable about airport security issues. We conducted pretest interviews with six Federal Security Directors to ensure that the questions were clear, concise, and comprehensive. In addition, TSA managers and an independent GAO survey specialist reviewed the survey. We conducted these Web-based surveys from late March to mid-May 2004. We received completed general surveys from all 155 Federal Security Directors and completed airport-specific surveys for all 263 separate airports for which we sought information, for 100 percent response rates. The surveys’ results are not subject to sampling errors because all Federal Security Directors were asked to participate in the surveys and we did not use probability-sampling techniques to select specific airports. However, the practical difficulties of conducting any survey may introduce other errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the data are entered into a database or were analyzed can introduce unwanted variability into the survey results. We took steps in the development of the surveys, the data collection, and the data editing and analysis to minimize these nonsampling errors. Also, in that these were Web-based surveys whereby respondents entered their responses directly into our database, there was little possibility of data entry or transcription error. In addition, all computer programs used to analyze the data were peer reviewed and verified to ensure that the syntax was written and executed correctly. We performed our work from May 2003 through April 2005 in accordance with generally accepted government auditing standards. Certain information we obtained and analyzed regarding screener training and performance are classified or are considered by TSA to be sensitive security information. Accordingly, the results of our review of this information are not included in this report. This tool allows screeners to touch actual improvised explosive device (IED) components and build their own devices. This experiential learning will enable screeners to more readily detect real IEDs during screening. These weapons are also used to assist in training by using them for live testing conducted by FSD staff. This tool allows screeners to touch actual firearms and begin to understand how they can be broken down into various parts. By understanding this and experiencing it, screeners are better able to see the components of a firearm during actual screening. These weapons are also used to assist in training by using them for live testing conducted by FSD staff. Deployed January 26, 2004 Maintain and enhance the screeners’ X-ray image operational skills. Deployed February 5, 2004 Provide a tool that includes about 14,000 image combinations to practice threat identification. These teams go into airports where data shows performance needs attention. The team offers a variety of services to assist in improving the performance, such as on-the-spot training and consulting services. Team visits can be initiated by FSDs, Internal Affairs reports, Quality Assurance trips, or MTAT Supervisors proactively visiting the airport and FSD. Site visits completed from October 2003 through December 3, 2004: North Central (37 visits) South Central (51 visits) Northeast (25 visits) Southeast (60 visits) Western (53 visits) Improve screener supervisors’ knowledge of federal government and TSA personnel rules and how to effectively coach and communicate with employees. Approximately 3,800 supervisors have been trained. Certification of screeners to perform supervisory maintenance tasks above and beyond operator training. Provide students with basic skills needed to verify the identity of flying armed law enforcement officers. This weekly product brings to light actual cases of weapons being found by law enforcement, with an explanation of how those weapons could be used to attack aviation. Provide interactive, performance based recurrent Web-based training modules for checked baggage explosive detection systems (EDS). Improve screener performance by providing an interactive tool complementary to Hand Held Metal Detector and Pat Down Video that allows the screener to practice proper techniques and receive immediate feedback. Reinforces TSA’s customer service principles and places the screener in various situations requiring effective customer service responses. Provide interactive, performance-based recurrent training modules for checkpoint and checked baggage operations. Physical Bag Search Video Maintain and enhance screeners’ explosive trace detection (ETD) and physical bag search skills for carry-on and checked baggage. Provide interactive recurrent Web-based training modules for ETD and physical bag search. Provide an interactive, performance-based training tool to enhance screener’s ability to identify prohibited items. Provide an informative and effective learning tool to maintain and enhance the skills of screeners in the areas of persons with prosthetics. Provide a tool to practice threat identification with about 10,000,000 image combinations. Sharing the X-Ray Tutor Version 2 library, this tool will allow screeners to practice finding threat items using the full capabilities of the TIP-ready X-ray machines. Provide an interactive, performance-based tool to convey how the supervisor is to handle screening situations, handed off by the screening, following standard operator procedures. Provide a Web-based training that will engage the student with 3- dimensional representations of the muscular frame, showing proper lifting techniques and the results of improper techniques. In addition to those named above, David Alexander, Leo Barbour, Lisa Brown, Elizabeth Curda, Kevin Dooley, Kathryn Godfrey, David Hooper, Christopher Jones, Stuart Kaufman, Kim Gianopoulos, Thomas Lombardi, Cady S. Panetta, Minette Richardson, Sidney Schwartz, Su Jin Yon, and Susan Zimmerman were key contributors to this report.

The screening of airport passengers and their checked baggage is a critical component in securing our nation's commercial aviation system. Since May 2003, GAO has issued six products related to screener training and performance. This report updates the information presented in the prior products and incorporates results from GAO's survey of 155 Federal Security Directors--the ranking Transportation Security Administration (TSA) authority responsible for the leadership and coordination of TSA security activities at the nation's commercial airports. Specifically, this report addresses (1) actions TSA has taken to enhance training for passenger and checked baggage screeners and screening supervisors, (2) how TSA ensures that screeners complete required training, and (3) actions TSA has taken to measure and enhance screener performance in detecting threat objects. TSA has initiated a number of actions designed to enhance screener training, such as updating the basic screener training course. TSA also established a recurrent training requirement and introduced the Online Learning Center, which makes self-guided training courses available over TSA's intranet and the Internet. Even with these efforts, Federal Security Directors reported that insufficient screener staffing and a lack of high-speed Internet/intranet connectivity at some training facilities have made it difficult to fully utilize training programs and to meet the recurrent training requirement of 3 hours per week, averaged over a quarter year, within regular duty hours. TSA acknowledged that challenges exist in recurrent training delivery and is taking steps to address these challenges, including factoring training into workforce planning efforts and distributing training through written materials and CD-ROMs. However, TSA has not established a plan prioritizing the deployment of high-speed Internet/intranet connectivity to all airport training facilities to facilitate screener access to training materials. TSA lacks adequate internal controls to provide reasonable assurance that screeners receive legislatively mandated basic and remedial training, and to monitor its recurrent training program. Specifically, TSA policy does not clearly specify the responsibility for ensuring that screeners have completed all required training. In addition, TSA officials have no formal policies or methods for monitoring the completion of required training and were unable to provide documentation identifying the completion of remedial training. TSA has implemented and strengthened efforts to measure and enhance screener performance. For example, TSA has increased the number of covert tests it conducts at airports, which test screeners' ability to detect threat objects on passengers, in their carry-on baggage, and in checked baggage. These tests identified that overall, weaknesses and vulnerabilities continue to exist in passenger and checked baggage screening systems at airports of all sizes, at airports with federal screeners, and at airports with private-sector screeners. While these test results are an indicator of performance, they cannot solely be used as a comprehensive measure of any airport's screening performance or any individual screener's performance. We also found that TSA's efforts to measure and enhance screener performance have primarily focused on passenger screening, not checked baggage screening. For example, TSA only uses threat image software on passenger screening X-ray machines, and the recertification testing program does not include an image recognition module for checked baggage screeners. TSA is taking steps to address the overall imbalance in passenger and checked baggage screening performance data. TSA also established performance indexes for the passenger and checked baggage screening systems, to identify an overall desired level of performance. However, TSA has not established performance targets for each of the component indicators that make up the performance indexes, including performance targets for covert testing. TSA plans to finalize these targets by the end of fiscal year 2005.

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IRS’ 10,000 customer service representatives are located at 25 call sites around the country. In 1999, IRS began operating this network as a single call center providing round-the-clock service. Managing the network in this way enabled IRS to route calls from three separate toll-free lines—one each for questions about tax law, account services, and refund status—to the sites with the shortest hold times among those customer service representatives assigned to answer questions concerning those issues. (Fig. 1 illustrates call routing within IRS’ toll-free network.) Before IRS began operating the network as a single call center, taxpayer calls were routed by area codes or by the percentage of staff the site had scheduled to work. Calls routed in this manner could not be easily rerouted when a site was experiencing frequent busy signals or lengthy hold times. Although individual call site operating hours and call handling responsibilities varied, IRS expanded its overall toll-free network coverage in January 1999—from 16 hours a day, 6 days a week, to 24 hours a day, 7 days a week. IRS’ call center network is controlled by the Operations Center. In general, the Operations Center is responsible for forecasting call demand—the numbers, types, and timing of calls IRS is expected to receive throughout the planning year on each of its three toll-free lines (tax law, accounts, and refunds); planning the routing of calls among call sites, based on each call site’s assigned toll-free line and subject coverage responsibilities; developing staffing requirements for each call site and monitoring site adherence to those requirements; and monitoring network call traffic status and, when necessary, rerouting calls among the sites to optimize service. The Operations Center develops call site staffing requirements weekly, with call site input and agreement. These requirements prescribe the numbers of trained customer service representatives that are to be available and ready each half-hour to take calls on each assigned subject category and toll-free line. The call sites, in turn, are expected to adhere to the staffing requirements prescribed by the Operations Center. They are generally responsible for recruiting, training, and assigning customer service representatives in sufficient numbers and skills to enable them to meet prescribed staffing requirements. Collectively, IRS call centers employed nearly 10,000 customer service representatives in October 2000. The top picture in figure 2 shows Operations Center officials monitoring network operations, while the picture on the right shows a representative handling a call at IRS’ call center in Atlanta. To address our objectives, we interviewed IRS officials involved in managing toll-free telephone operations, obtained supporting documentation, and reviewed related reports by the Treasury Inspector General for Tax Administration (TIGTA). Although we did not independently verify IRS officials’ responses to our questions, we reviewed them and related documentation for consistency. IRS’ use of other resources will be discussed in a forthcoming report on toll-free performance during the 2000 filing season. We used our human capital self-assessment checklist to obtain an understanding of human capital management, its importance in achieving federal agency operational goals, and the framework that we developed to assist agency leaders in evaluating their human capital management practices. Because people are a key resource for carrying out agencies’ missions, we also reviewed the Government Performance and Results Act’s requirements for agency strategic planning, goal-setting, and performance measurement. To identify human capital management practices used by other organizations in telephone customer service, we obtained information from several sources, including our August 2000 report on human capital management practices of public and private organizations;the 1995 National Performance Review report on best practices in telephone service; and literature on call center management, including Incoming Calls Management Institute information and reports. We did our work at IRS’ National Office in Washington, D.C.; the Office of the Chief Customer Service Field Operations in Atlanta; the Customer Service Operations Center in Atlanta; and six of IRS’ 25 call sites. As agreed with your office, we judgmentally selected the six sites to ensure geographic coverage and other characteristics and, therefore, cannot project our results to all 25 call sites. Because IRS began providing 24-hour coverage in 1999, we included the two call sites that operated 24 hours a day, 7 days a week and four sites operating fewer than 24 hours a day. Because some call sites were colocated with IRS service centers that had large labor pools from which the sites might recruit staff, the six sites included three that were colocated with service centers and three that were not. To understand human capital management practices within the context of IRS’ new organizational and operational structure, our sample includes three sites that were designated to serve taxpayers with incomes from wages and investments and three sites that were designated to serve small business and self-employed taxpayers. Since differences in site staffing levels could lead to differences in their human capital management practices, we selected two sites each from the low, middle, and high ranges of staffing levels among the 25 call sites—less than 200 staff, between 200 and 400, and more than 400, respectively. The characteristics of the six sites are shown in table 1. We performed our work between May 1999 and October 2000 in accordance with generally accepted government auditing standards. We obtained written comments on a draft of this report from the Commissioner of Internal Revenue. The comments are discussed near the end of this report and are reprinted in appendix II. IRS faces an annual challenge in determining the staffing level for its toll- free telephone customer service operations. IRS has not established a long-term, desired level-of-telephone-service goal based on the needs of taxpayers and the costs and benefits of meeting them, and then determined what staffing level is needed to achieve that service level. Rather, IRS annually determines the level of funding it will seek for its customer service workforce, based on its judgment of how to best balance its efforts to assist taxpayers and to ensure their compliance with tax laws, and then calculates the expected level of service that funding level will provide. IRS’ approach to setting this goal is inconsistent with federal guidance on strategic planning, which calls for agencies to develop strategic goals covering at least a 5-year period and to determine the staffing and other resources needed to achieve the goals. IRS’ approach is also inconsistent with industry practices, which base their goals and staffing on customer needs. Without a long-term level-of-service goal, as well as annual goals aimed at achieving the long-term goal over time, IRS lacks meaningful targets for strategically planning and managing call center performance and measuring improvement. In commenting on a draft of this report, the Commissioner stated that IRS planned to set strategic goals and staff to meet those goals. IInn the absence of a long-term goal, and multiyear plans for reaching it, IRS has estimated the service it could provide based on different staffing levels. For example, when formulating its fiscal year 2000 budget, IRS estimated that it would receive over 100 million calls on its three toll-free lines throughout the fiscal year and that its customer service representatives could handle an average of 5.6 calls per hour that they were available to take calls. These workload and productivity assumptions were the basis for calculating the expected levels of service IRS could provide with different staffing levels. Specifically, with customer service representative levels ranging from 8,291 to 10,800 full-time- equivalent staff, IRS estimated that it could achieve levels of service ranging from 58 to 80 percent, respectively. Because of the need to balance service and compliance activities within overall staffing budget limitations, IRS decided to request funding at the lower level, establishing a 58-percent level-of-service goal for fiscal year 2000 and a 60-percent level for fiscal year 2001. A long-term, results-oriented goal is important because its provides a meaningful sense of direction as well as a yardstick for measuring the results of operations and evaluating the extent of improvements resulting from changes in resources, new technology, or management of human capital. The Government Performance and Results Act of 1993 required executive branch agencies to develop multiyear, strategic plans covering at least a 5-year period; describe the human and other resources needed to achieve goals; update these plans at least every 3 years; prepare annual performance plans with annual performance goals; and measure and report annually on its progress toward meeting those set long-term, output- or results-oriented goals in these strategic plans; goals. Under the act, strategic plans are the starting point for agencies to set annual performance goals aimed at achieving their strategic goals over time. As part of the strategic planning process, agencies are required to consult with Congress and to solicit the views of other stakeholders who might be affected by the agencies’ activities. Unlike IRS, officials at all seven public and private call center operations we visited as part of our August 2000 report said that they determined staffing requirements based on their customers’ needs and clearly articulated service-level goals—that is, the percentage of calls to be answered within a given time frame. For example, the Social Security Administration (SSA)—an agency that is also subject to federal budget constraints, had a goal of 95 percent of its callers getting through on its toll-free line within 5 minutes of their first attempt. This goal was established with input and support from Congress and top SSA leadership as part of a government wide effort to improve customer service. According to an SSA associate deputy commissioner, the focus on improving telephone customer service followed a period of very poor service in the early and mid-1990s, when as many as 49 percent of callers got busy signals when they called the toll-free number. The associate deputy said that congressional stakeholders continue to monitor SSA’s toll-free telephone operations, resulting in continued support by SSA management to allocate the resources needed to meet established goals. Other studies have also documented the importance of setting service- level goals based on customers’ needs. One guide to call center management for practitioners that we reviewed underscored the importance of service-level goals. It described service level as “the core value” at the heart of effective call center management, without which, answers to many important questions, including “How many staff do you need?” would be left to chance. It said service-level goals should be realistic, understood by everyone in the organization, taken seriously, and funded adequately. While the guide also recommended benchmarking, formally or informally, with competitors or similar organizations, it stated each organization should determine an appropriate service level for its call centers, considering its unique circumstances. These considerations should include the labor and telephone equipment costs of answering the call, the value of the call to the organization, and how long callers are willing to hold for service. IRS recognizes the need to establish long-term goals and is considering adopting some of the measures used by other organizations and establishing goals for those measures. For fiscal year 2001, for example, IRS plans to measure the percentage of callers who reach IRS within 30 seconds. While IRS has not established a long-term goal for this measure, it has set an interim goal of 49 percent for fiscal year 2001. In commenting on a draft of this report, the Commissioner stated that IRS had instituted an agencywide strategic planning process in March 2000 that links the budget and available resources to its strategies and improvement projects. According to the Commissioner, IRS’ fiscal year 2002 Strategic Plan and Budget will include a 74 percent level-of-service goal, with a goal of reaching 85 to 90 percent by fiscal year 2003. Also, IRS had an initiative under way to improve workload planning to ensure that customer needs are considered during the planning and budgeting process. The six call sites we visited faced challenges in successfully recruiting, training, retaining, and scheduling customer service representatives. According to site officials, these challenges included difficulties recruiting representatives due to job characteristics, training representatives and keeping them proficient, retaining skilled representatives, and scheduling representatives to meet forecasted staffing requirements. Officials at five sites said they experienced some degree of difficulty in recruiting representatives because of job characteristics such as the seasonal nature of the positions, undesirable work hours, or the stressfulness of the work. Nevertheless, five of the sites were able to fill their vacant positions. One site was unable to fill its needs and had concerns about the suitability of the persons hired. According to officials at this latter site, due to the limited time between the date they were provided the number of positions to fill and the time that the new employees had to report for work, the officials did not have sufficient time to interview all applicants before hiring them. Officials at each IRS call site were responsible for hiring representatives for their location, including deciding what recruiting methods and applicant screening tools to use. All six sites used some combination of conventional recruiting methods, such as newspaper advertisements and college campus recruiting. To determine the suitability of applicants, beyond the basic qualifications for the position, officials at four sites interviewed applicants before hiring them, and most used interview techniques to determine how applicants might behave in typical work situations. Two of these four sites also administered a five-question, tax- related math test to assess a candidate’s basic math and analytical skills. In an effort to improve its recruiting for customer service representatives, IRS is in the early stages of developing a national recruiting strategy. As part of this plan, IRS is determining where it should target its recruiting efforts. IRS is identifying sites where IRS’ salary and benefits make it a competitive employer in the local job market and sites that have trouble recruiting and retaining suitable applicants. Officials believe this will help IRS determine which sites should be growth sites for hiring telephone customer service representatives. According to officials at the call sites we visited, the many obstacles that affected their ability to train customer service representatives and keep them proficient included the broad range of complex topics representatives must address, inadequate resources, the cyclical nature of taxpayer demand, reassignment of tax topics among representatives, and the lack of a formal mechanism to identify individual refresher training needs. Each year, IRS must train thousands of customer service representatives in a broad range of topics, and according to officials at the six sites we visited, they sometimes had to do so without adequate resources. Topics range from the status of refunds to more complicated issues such as capital gains or losses. In fiscal year 1999, the standard training curriculum provided by all sites generally included periods of classroom instruction, followed by periods of on-the-job training that were roughly half the length of the classroom instruction. This training was delivered incrementally over a 3-year period, between the busy filing seasons, during which IRS receives the bulk of its toll-free calls. The training program also included annual tax law/procedural update training. However, after customer service representatives received their initial training, they generally did not receive subsequent refresher training despite the cyclical nature of the work. Officials also cited a shortage of instructors, limited training time, and outdated training materials as other factors that affected their ability to effectively train customer service representatives. For example, officials at the one site that did not hire the number of representatives authorized said they did not have enough instructors to provide the necessary training. Officials at three sites said that they did not have sufficient time to fully train representatives before their peak season because they did not receive timely notice of when, and how many, they could hire. Officials at four sites also said that training materials provided by the National Office were frequently outdated. Keeping customer service representatives proficient was also a challenge for the sites due to the cyclical nature of taxpayer demand and changes to the topics representatives were expected to know. The frequency of the calls and the topics covered varied throughout the year. The bulk of the calls are generally received during the busy filing season. For example, more than 57.6 of the 79.6 million toll-free calls made to IRS in fiscal year 2000, or 72 percent were made from January through June. In addition, calls received from January through April predominantly involved tax law topics, while calls received after April mainly involved account- and refund-related topics. Consequently, customer service representatives could go long periods, such as months between filing seasons or even years since topic training was completed, without receiving calls to reinforce their experience on some of the topics for which they were trained. Moreover, this situation was compounded when IRS implemented centralized call routing in 1999. In conjunction with this change, IRS consolidated the number of subject categories, which ranged from 40 to 125 depending on the site, and reassigned representatives to a broader group of 31 categories. This was done without ensuring that they had adequate training or experience. According to a site official, inadequate training is one factor reducing the accuracy of IRS responses to tax law and account calls. From 1998 to 1999, for example, network accuracy for account calls decreased from 87.9 to 81.7 percent, according to IRS’ weekly customer service snapshot report dated September 30, 1999. Officials at the sites we visited also said that the lack of a formal mechanism to identify which representatives needed refresher training hindered their ability to keep their representatives proficient. Officials have records of specific training each representative has received, but they do not have a method for assessing individual competency gaps—i.e., between knowledge and skills needed to respond to calls and current proficiency—to quantify each representative’s refresher training needs. Although IRS had developed such a system and began using it in December 1998, a customer service training official said testing was not done consistently among the call sites, and refresher training was not provided to meet identified needs. The official also said a lack of funding and uncertainty of future organizational developments led IRS to discontinue the system in 1999. Because IRS does not have a system for assessing competency gaps to identify the specific refresher training needs of individual representatives, call sites waste scarce training resources trying to improve the performance of customer service representatives. For example, officials said they sometimes send groups of representatives to refresher training, knowing that some representatives will probably receive training they do not need. This happens because the course covers several subjects and each representative probably needs some of the training but most representatives probably do not need all of the training. Providing unnecessary training wastes resources that would otherwise be available for representatives who need additional training. “Fundamentally, we are attempting the impossible. We are expecting employees and our managers to be trained in areas that are far too broad to ever succeed, and our manuals and training courses are, therefore, unmanageable in scope and complexity…. The next step is to rethink what we should do at each site in order to achieve greater site specialization.” Because of the problems involved in attempting to provide the full range of training to all customer service representatives, in fiscal year 2000, IRS began refocusing its program to provide just-in-time training, targeted more to the specific types of questions taxpayers call about at different times throughout the year. In addition, as part of restructuring, IRS intends to further specialize training to serve specific taxpayer groups– those who receive income from wages and investments and those who receive income from small businesses or self-employment. IRS’ training related plans do not, however, address the need for identifying competency gaps to determine refresher training needs and target training accordingly. A National Office official informed us that IRS was working with the Office of Personnel Management to “develop competency models, document career paths, and develop assessment instruments for use in training, development, selection, etc., for all of the occupations within the IRS.” Due to the broad scope of this endeavor, however, the official could not say when IRS could expect to establish and implement a mechanism for assessing the refresher training needs of customer service representatives and ensuring that the training is provided. Despite its substantial investment in recruiting and training its network of 10,000 customer service representatives, and concern by National Office and some site officials that attrition was higher than it should be, IRS was not actively monitoring attrition and determining what steps, if any, were needed to address it. Officials do not track how many representatives leave, why they leave, or where they go—data that would be key to a strategy for decreasing attrition. A recent study of experiences at 186 call centers indicates that attrition is a major problem for the industry that is expected to worsen. Some of the organizations we contacted as part of our August 2000 report, however, were not as concerned about their attrition. They said most of their attrition was to other jobs within their organization and thus benefited the overall organization. None of the six sites we visited could provide attrition statistics for customer service representatives for 1998 or 1999. Officials at four sites provided estimates ranging from 13 to 19 percent per year; however, these estimates were just their opinions—they were not based on data collected by the site or the National Office. Although IRS did not monitor attrition, National Office officials and officials at three sites said that attrition was a problem. Only one of the six sites had collected data to determine the reasons why representatives left; officials at the remaining five sites and the National Office had opinions about why representatives left. In addition, IRS did not monitor whether the representatives who left obtained other jobs within or outside of IRS. Examples included the stressful nature of the work, seasonal employment, and better opportunities elsewhere. resources recruiting, hiring, and training representatives, only to lose them to other organizations. Some of the organizations included in our August 2000 report had high attrition, but officials said that attrition from their call centers was usually to other positions within their organizations. For example, at one company, officials noted that policies to promote from within and encourage employee mobility, allowed customer service representatives to move to more senior positions within the company. IRS faces challenges in effectively scheduling staff—that is, having the right number, with the right skills, at the right time, at each call site—due to inaccurate demand forecasting and a complicated staff scheduling process. During the first 6 months of fiscal year 2000, IRS data indicated that for 60 percent of the time call sites were overstaffed or understaffed compared to tolerances established by IRS. In addition, IRS’ method for measuring call sites’ adherence to their schedules was incomplete. Recognizing its problems with forecasting and scheduling, IRS was adapting an automated system similar to those used by other organizations. Inaccurate forecasting of the expected fiscal year 2000 toll-free call volume led to inefficient scheduling and use of staff at some sites. The Operations Center estimated that IRS would receive 100 million calls in fiscal year 2000, but IRS actually received about 80 million—20 percent less than forecasted. Because individual site staffing requirements were based on IRS’ forecasts of the expected numbers, types, and timing of calls, network and individual site work plans were also overstated, resulting in the underutilization of staff at some sites. For example, according to TIGTA’s March 2000 report, for the period December 5, 1998, through March 15, 1999, overstated call demand resulted in staff being scheduled and ready to take calls, but getting no calls, an average of 10 percent of their time at six sites for which data were available. Operations Center officials stated that IRS’ increased use of new routing technologies, combined with continuous organizational and procedural changes, made accurate forecasting difficult. Moreover, they believed the information that IRS had about historical demand was of limited value in predicting future demand for two reasons. First, the historical information was not based on operating 24 hours a day; and second, it was difficult to take into account the constantly changing environment (i.e., tax law changes and increased use of electronic filing and Web-based services). However, the Directors of Customer Account Services, whose staffs have responsibility for providing telephone customer service to wage and investment and small business and self-employed taxpayers, stated that demand forecasting should improve now that IRS has 2 years of information based on operating 24 hours a day. Managers at most of the sites we visited stated that the complicated scheduling process made it difficult to ensure that the appropriate staff were scheduled to work at the right times. They were also concerned about the amount of time they spent scheduling and rescheduling staff in attempting to ensure that they had scheduled the number of staff with the skills the Operations Center prescribed for each half-hour increment of service time. IRS management had not developed a standard system for the sites to use in helping them to develop their site schedules. As a result, each site we visited used its own system to track variables related to each customer service representative, such as the specific work schedule agreement, planned vacation and training, and skill level in answering certain types of calls. Site managers then used these variables to develop site schedules. Managers explained that the large number of variables to consider when doing so (e.g., more than 160 different work schedules at one site) complicated the scheduling process and made it difficult for them to optimize their day-to-day efforts to meet the staffing requirements prescribed by the Operations Center. IRS’ own statistics bear this out. At the times IRS measured, call centers were either understaffed or overstaffed, compared with the Operations Center’s prescribed staffing schedule, 60 percent of the time—24 percent and 36 percent, respectively, during the first 6 months of fiscal year 2000. In measuring site adherence to its prescribed staffing requirements, the Operations Center considers variances of more than 10 percent (of the total number required to be ready for each half-hour period) as overstaffing or understaffing. The Operations Center only partially measures each site’s ability to meet the prescribed staffing requirements. The current measurement system determines if each site had, on average, the required number of customer service representatives available to answer the telephone for each half- hour period. However, the Operations Center did not measure the extent to which sites provided representatives with the required skills. IRS is working with a contractor to refine a commercially available automated system to facilitate forecasting demand, scheduling staff, and tracking adherence to the schedule. The system is expected to use historical data to more accurately forecast call demand (volume, type, and timing of calls) and to centrally compare information on site staff resources (e.g., availability and skills) in relation to forecasted demand to help ensure that network staffing schedules make optimum use of available site staffing. This system is also expected to identify individual site staffing options for meeting network requirements, thus reducing the amount of time site managers spend on scheduling staff. According to Operations Center officials, the contractor was still refining the commercial version of the system because it was not designed to handle the size and complexity of IRS’ toll-free operations (e.g., the number of call sites and customer service representatives and the range of topics). According to the project leader responsible for this system, both system hardware and software were in place at all call centers prior to October 2000, but the software is not yet fully operational. Even though IRS now has 2 years of information based on operating 24 hours a day, it did not gather that data in a consistent format. The system’s forecasting and scheduling capability will not be usable until IRS has collected at least 1 year of call demand data in a consistent format. The project leader was not sure when IRS would have these data because data collection efforts were delayed in order to make changes that would allow IRS to capture more data than originally planned and in a reconfigured format. Also, the planned transfer of certain functions from the Philadelphia Service Center to the Operations Center was more than a year behind schedule in October 2000. Moreover, the project leader said IRS’ restructuring could cause further delays in achieving full system capability. Other organizations included in our August report used an automated system similar to the one IRS is implementing. For example, one company used an automated system to identify its short- and long-term staffing requirements. The system assisted call center managers in forecasting call demands and scheduling staff to meet the demands. Officials said the system also enabled the company to significantly reduce the time needed to perform these tasks. It forecasted call demand down to half-hour intervals, based on historical data trends. Considering various assumptions about call patterns and information such as the number of customer service representatives available to take calls, on leave, or in training, the system also generated a staffing schedule. The schedules were reviewed daily and adjusted as needed. IRS also faces challenges in evaluating its human capital management practices. According to our self-assessment checklist, all human capital policies should be designed, implemented, and assessed by the standard of how well they help the organization pursue its mission, goals, and objectives. While IRS evaluates its practices to make improvements in some areas, such as recruiting or training, the evaluations do not assess how individual or collective human capital policies and practices affect its ability to achieve level-of-service goals. Its evaluations also generally did not consider how improving practices in one area might affect other areas. Unlike IRS, some organizations consider how their human capital management practices affect their operational goals and how changing one practice may affect another. Without expanding its evaluations to include such analyses, IRS is unlikely to optimize the efficiency and effectiveness of its toll-free operations. Except for retention, IRS evaluated its human capital practices, to some extent, in most areas, including recruiting, training, and scheduling to improve those areas. These evaluations generally focused on how each practice could be improved for the next year. While these evaluations are useful for making short-term adjustments, they do not provide a basis for strategic planning because they do not assess how human capital management practices may need to be revised to support a long-term level-of-service goal. Additionally, IRS evaluations generally do not consider how making changes in one area affects other areas. For example, IRS evaluations of recruiting did not consider how improving retention practices might reduce attrition, decrease resources spent on recruiting and training new employees, or increase the resources available for improving the skills and productivity of existing employees. Unlike IRS, other organizations have evaluated the effects of changes in one human capital practice on other practices as well as on the overall results of their telephone assistance operations. For example, one company used training results to identify successful new hires. First, officials determined the characteristics that recruits who did well during training had in common. Then, the company changed its recruiting practices to identify and hire similar people. The Incoming Calls Management Institute recommended doing something similar—identify the personality traits and skills of top performing customer service representatives and use those traits to help assess persons applying for a representative position. IRS faces significant challenges in managing its human capital to provide telephone customer service to taxpayers. IRS has made or planned substantial improvements to help meet these challenges, but further improvements are needed. IRS will have difficulty improving its telephone service without setting a long-term, desired service-level goal that is based on the needs of taxpayers, as well as annual goals aimed at making progress toward reaching its long-term goal. As the Government Performance and Results Act and SSA experience suggest, IRS will also need support for its long- and short-term goals from congressional stakeholders. IRS’ telephone customer service workforce represents a substantial human capital investment in providing assistance to taxpayers. To get the most from this investment, IRS must be able to (1) target scarce training resources where they are most needed to optimize call center and network performance, (2) minimize turnover of trained and experienced customer service representatives to avoid unnecessary recruiting and training expenditures and enhance productivity, and (3) determine how its individual or collective human capital policies and practices affect its ability to achieve customer service goals and how changes in one or more human capital management practices will affect other practices. However, until IRS establishes a system for assessing competency gaps to identify the refresher training needs of individual customer service representatives, it cannot effectively target scarce training resources to meet individual training needs. Without a system for monitoring attrition, identifying its causes, and taking steps to address them, IRS cannot ensure that its recruiting and training resources are used efficiently. And, unless IRS considers its human capital management practices’ contribution to achieving overall service goals and considers the interrelationships among its toll-free service human capital practices, it lacks a good basis for assessing the soundness of those human capital practices. We are recommending that the Commissioner of Internal Revenue take several steps to improve IRS’ human capital management practices related to providing telephone customer service. Specifically, the Commissioner should establish a long-term, desired service-level goal based on taxpayers’ needs, together with annual goals designed to make progress toward reaching that long-term goal over time, and work with congressional and other stakeholders to obtain their support and the resources needed to reach those goals; establish a system for assessing customer service representatives’ competency gaps and meeting the refresher training needs identified by the assessments; develop a system for monitoring call center attrition and identifying its causes and use the information gathered from that system to develop, as appropriate, strategies for dealing with the attrition of customer service representatives; and ensure that IRS’ evaluations of human capital management practices consider the effects of those practices on its ability to achieve long- and short-term customer service goals and the interrelationships among human capital practices. The Commissioner of Internal Revenue provided written comments on a draft of this report in a January 12, 2001, letter, which is reprinted in appendix II. We also met with senior IRS officials on January 4, 2001, to discuss our draft report and to obtain updated information on IRS’ new toll-free measures and goals. The Commissioner agreed with our recommendations, which he said should improve performance in this critical area. In addition, he provided information summarizing IRS’ efforts relating to each recommendation and commented that IRS’ efforts reflected the constructive dialog between IRS and our staff. We incorporated the new information and modified the report, where appropriate, to reflect IRS efforts. The Commissioner’s letter stated that IRS had instituted an agencywide strategic planning process in March 2000 that links the budget and available resources to its strategies and improvement projects, but also recognized the need to strengthen that new process. Toward this end, the Commissioner stated that IRS’ fiscal year 2002 Strategic Plan and Budget reflects a 74-percent level-of-service goal, with a goal of reaching 85 to 90 percent by fiscal year 2003. This plan was not yet available as we were preparing this report. He also stated that an initiative was under way to improve workload planning to ensure that customer needs are considered during the planning and budgeting process. The Commissioner’s letter did not say how the cited workload planning initiative would identify and assess customer needs. Based on the Commissioner’s comments, significant efforts were under way or planned to help ensure that customer service representatives will have the competencies and training needed to respond to taxpayer calls. In addition to the targeted training and planned specialization discussed in this report, for example, IRS plans to establish competency-based recruiting and retention methods to help ensure that IRS recruits and retains individuals who are well-suited to telephone customer service work. The Commissioner’s comments also stated that IRS’ competency- based management plans include the use of “assessment instruments to identify training needs.” These initiatives seem to be promising and may form a basis for identifying individual refresher training needs and ensuring that these needs are met. The Commissioner’s comments also recognized the importance of retaining skilled representatives. His comments identified several efforts that focused on identifying employees that may be more likely to remain with IRS. He did not comment on monitoring why employees leave or on using this information to strengthen IRS’ efforts to retain skilled representatives. Regarding IRS’ evaluations of its human capital practices, the Commissioner’s comments did not respond directly to the primary point of our recommendation—that IRS evaluations should consider the effects of its practices on its ability to achieve its long- and short-term customer service goals. However, the Commissioner did say that IRS has embraced our Human Capital Self-Assessment Checklist for Agency Leaders. IRS had used it as a diagnostic tool in its recent review of its mid- and top-level management realignment process and planned to use it again in fiscal year 2001 to “conduct an overview of the status of human capital practices throughout the Service.” Our checklist provides a framework by which agency leaders can develop informed views of their agencies’ human capital policies and practices. The Commissioner also objected to our comparing IRS’ 1998 performance with performance in subsequent years, because of the many changes to IRS’ operating environment, such as enterprise call management and 24-hour operations. This report compared IRS’ reported tax law and account accuracy in 1998 and 1999. As stated in our evaluation of the Commissioner’s comments on our 2000 filing season report, we believe it is appropriate to compare IRS’ performance before and after the operational changes mentioned above. In reevaluating the examples we used, however, we decided to eliminate our reference to IRS’ reported tax law accuracy because we learned that the methods used to measure tax law accuracy changed in 1999, and thus, results may not be comparable. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Ranking Minority Member of the Subcommittee on Oversight; the Chairman and Ranking Minority Member, Committee on Ways and Means; the Secretary of the Treasury; the Commissioner of Internal Revenue; and Director, Office of Management and Budget. We will also send copies to others upon request. If you have any questions, please call me at (202) 512-9110 or Carl Harris at (404) 679-1900. Key contributors to this report are acknowledged in appendix III. Table 2 describes the organization, mission, and telephone center operations of the private and public organizations that were included in the scope of our August 2000 report. Customer Service: Human Capital Management at Selected Public and Private Call Centers (GAO/GGD-00-161, Aug. 22, 2000). Telephone customer service operation A telephone hotline that provided consumers with product information and responded to questions about repairs. The answer center, located in Louisville, KY, handled about 2 million calls each year. About 200 telephone customer service representatives responded to inquiries 24 hours a day, 7 days a week. Mission One of 11 core businesses of General Electric. Manufactures appliances, including refrigerators, ranges, dishwashers, microwave ovens, washing machines, dryers, water filtration systems, and heating systems. Also provides repair and maintenance services on appliances, operating a nationwide fleet of service vans. Designer, developer, and manufacturer of computer products, including personal computers, printers, computer workstations, and a range of hardware and software. The Hewlett-Packard Company Executive Customer Advocacy Group provided support for customers contacting Corporate Headquarters regarding issues or concerns with products and services. The hotline was located in Palo Alto, CA. It operated from 8 a.m. to 5 p.m., Monday through Friday, with a staff of about 22 full-time- equivalent employees who were Hewlett-Packard Company retirees in part-time positions. One call center in Springfield, IL, was staffed by 34 full- time telephone customer service representatives, who were assisted during busy times by cross-trained employees from other areas within the taxpayer assistance division. Toll-free telephone lines were open from 8 a.m. to 5 p.m., Monday through Friday, with extended weekday hours and one Saturday opening during filing season. Automated service was available 24 hours a day, 7 days a week. The call center provided taxpayers with help in completing their returns and answered questions about taxes, returns, bills, and notices that had been filed. In the Product Sales and Service Division, about 6,900 telephone customer service employees provided information on product sales and service. Call centers operated 24 hours a day, 7 days a week. Collects taxes for the state and its local governments, including income and business taxes on individuals and businesses, income and sales taxes, taxes on public utilities, tobacco and liquor, motor fuels and vehicles. The department also administers tax relief programs for the elderly and disabled and provides property assessments among the state’s counties. Designer, developer, and manufacturer of information technologies, including computer systems, software, networking systems, storage devices, and microelectronics. America’s largest not-for-profit health maintenance organization, serving over 8 million members in 17 states and the District of Columbia. An integrated health delivery system, Kaiser Permanente organizes and provides or coordinates members’ care, including preventive care, hospital and medical services, and pharmacy services. Kaiser Permanente had 17 call centers nationwide, with 12 centers located in California, the largest region. Regional call centers operated independently. The California region, where we visited, had 5.9 million members, while other regions had fewer than 1 million members each. The two largest call centers were located in Stockton and Corona, CA. Together, they employed about 475 telephone customer service representatives and about 80 management and support staff. Hours of operation were 7 a.m. to 7 p.m., 7 days a week. The member service call centers provided answers to questions on health plan- related topics, including benefits, copayments, claims, Medicare, eligibility, available services, and physician information. Mission Manages the nation’s social insurance program, consisting of retirement, survivors, and disability insurance and supplemental security income benefits for the aged, blind, and disabled. Also assigns Social Security Numbers to U.S. citizens and maintains earnings records for workers under these numbers. World’s largest package distribution company, it transports more than 3 billion parcels and documents annually. Telephone customer service operation Thirty-six call centers nationwide were staffed by 3,100 full-time, 700 part-time, and up to 60 percent of about 4,100 spike employees who were available to assist at busy times. Toll-free telephone lines were open from 7 a.m. to 7 p.m., Monday through Friday, to answer callers’ questions about Social Security benefits and programs. Coordinator of Utah taxes and fees, including taxes on income, sales, property, motor vehicles, fuel, beer, and cigarettes. Nine call centers nationwide were staffed by over 6,800 customer service representatives. Eight centers were open from 7 a.m. to 9 p.m., Monday through Friday. One center in San Antonio, TX, operated 24 hours a day, 7 days a week. Seven of the nine call centers were staffed by contract employees. The Newport News, VA, call center, which was a contract facility we visited, had 230 representatives who handled calls related to pick-up, tracking, and claims. Three call centers—a main call center, motor vehicle center, and collection center—operated weekdays from 8 a.m. to 5 p.m. with about 35 telephone customer service representatives. The call centers responded to about 15,000 to 20,000 inquiries a month dealing with a range of questions on programs administered by the Commission. For these organizations, we conducted a telephone interview in which we asked managers of telephone customer service operations several key semistructured interview questions. However, we did not have detailed discussions with officials and employees at various levels of the organizations. We judgmentally selected the organizations to visit and telephone by reviewing literature on innovations in human capital management and by obtaining opinions from experts on what organizations they thought provided noteworthy or innovative human capital management in their call center operations. We chose telephone customer service operations that dealt with tax questions or specific subjects, such as benefits, investments, and installation and operation of technical equipment, that were comparable in complexity to tax issues addressed by IRS customer service representatives. Specifically, the director for Workplace Quality at the U.S. Office of Personnel Management identified the SSA telephone customer service operation as a public sector organization that is known for effective human capital management. We visited the Illinois and California State tax agencies and telephoned the Utah State Tax Commission on the basis of recommendations of an official from the Federation of Tax Administrators. The Canada Customs and Revenue Agency was cited in literature as having an internationally recognized reputation for high- quality taxpayer service and had participated—along with IRS and the tax agencies of Australia and Japan, members of the Pacific Association of Tax Administrators, in a benchmarking study of customer service best practices. Two private sector companies we visited—Kaiser Permanente and Allstate Insurance—were selected in consultation with the executive director of the Private Sector Council. The Council, with membership including about 50 major U.S. corporations, seeks to improve the productivity, management, and efficiency of government through cooperation with the private sector. Members volunteer expertise to government agencies by participating with them in projects that are coordinated through the Council. The other private organization we visited, the United Parcel Service, was selected in follow-up to our participation in a congressional delegation and IRS visit to its Atlanta, GA, headquarters to discuss human capital and telephone customer service issues. The private call centers we telephoned—General Electric (GE) Answer Center, Hewlett-Packard Company Executive Customer Advocacy Group, and International Business Machines (IBM) Business Product Division, and/or their parent corporations—were cited in best practices literature for their effective human capital management. In addition to those named above, Robert Arcenia, Ronald Heisterkamp, Mary Jo Lewnard, and Shellee Soliday made key contributions to this report.

Each year, the Internal Revenue Service (IRS) determines the staffing level for its toll-free telephone customer service operations. GAO found that IRS lacks a long-term telephone customer service goal that reflects the needs of taxpayers and the costs and benefits of meeting that goal. Rather, IRS annually determines the level of funding it will seek for its customer service workforce, using its judgment of how to best balance service and compliance activities. IRS then calculates the level of service that funding levels will provide. This approach is inconsistent with the Government Performance and Results Act and the practice of selected public and private call centers that field questions. IRS recognizes the shortcomings of its personnel management and will include performance measures and goals in its 2002 strategic plan. According to IRS officials, the agency also faces challenges in recruiting, training, retaining, and scheduling customer service representatives. IRS is developing a strategy to address each of these issues.

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Mortgage lenders keep the loans they originate in the primary market or sell them in the secondary, or resale, markets. In turn, purchasers of mortgage loans in the secondary markets either hold the loans in their own portfolios or, most often, pool together a group of loans to back MBS that are sold to investors or held in the originator’s portfolio. Secondary loan markets benefit lenders, borrowers, and investors in a number of ways. First, they allow lenders to manage their liquidity needs, reduce interest rate risk, and generate funds for additional lending. Second, they increase the amount of credit available to borrowers and help lower interest rates by fostering competition among lenders. Finally, they allow investors to further diversify their risks and to sell their interests on active secondary markets to other willing investors. Ginnie Mae was created in 1968 through an amendment to the National Housing Act. Organizationally, Ginnie Mae operates as a unit of HUD, and its administrative, staffing, and budgetary decisions are coordinated with HUD’s. Ginnie Mae defines its mission as expanding affordable housing in America by linking capital markets to the nation’s housing markets, largely by serving as the dominant secondary market vehicle for government- backed loan programs. These programs, which insure or guarantee mortgage loans that are originated in the private sector, are administered by a variety of federal agencies, including FHA, VA, RHS, and PIH. The government backing provided by these programs expands opportunities for homeownership to borrowers who may have difficulty obtaining a conventional mortgage. Ginnie Mae does not buy or sell loans or issue mortgage-backed securities. Rather, it provides guarantees backed by the full faith and credit of the U.S. government that investors will receive timely payments of principal and interest on securities supported by pools of government-backed loans, regardless of whether the borrower makes the underlying mortgage payment or the issuer makes timely payments on the MBS. Figure 1 shows the process of Ginnie Mae securitization. All mortgages in the Ginnie Mae pool must be insured or guaranteed by a government agency and have eligible interest rates and maturities. Ginnie Mae has several different products. Ginnie Mae’s original MBS program, Ginnie Mae I, requires that all pools contain similar types of mortgages (e.g., single family) with similar maturities and the same interest rates. The Ginnie Mae II MBS program, which was introduced in 1983, permits pools to contain loans with more heterogeneous loans. For example, the underlying mortgages in a pool can have varying interest rates and a pool can be created using adjustable rate mortgages (ARM). Ginnie Mae’s Multiclass Securities Program, introduced in 1994, includes, among other things, Real Estate Mortgage Investment Conduits (REMIC) and Ginnie Mae Platinum Securities. REMICs are designed to tailor the prepayment and interest rate risks associated with MBS to investors with varying investment goals. These products direct principal and interest payments from underlying MBS to classes, or tranches, with different principal balances, interest rates, and other characteristics. Ginnie Mae Platinum Securities allow investors to aggregate MBS with relatively small remaining principal balances and similar characteristics into new, more liquid securities. Investors in Ginnie Mae MBS face prepayment risk—that is, the possibility that borrowers will pay off their mortgages early, reducing the amount of interest earned. However, investors do not face credit risk—the possibility of loss from unpaid mortgages—because the underlying mortgages backing the pools are federally insured or guaranteed and Ginnie Mae guarantees timely payment of principal and interest. FHA’s single-family loan program and PIH’s loan guarantee programs insure nearly 100 percent of the loan amount. VA guarantees the lender against losses, subject to a cap equal to 25 percent to 50 percent of the loan amount based on the size of the loan; RHS guarantees up to 90 percent of the loan value. Issuers are responsible for delinquent loans in pools. When a Ginnie Mae issuer defaults in making timely payments of principal and interest to investors, Ginnie Mae makes the payments and takes over the issuer’s entire portfolio of government- backed loans that stand behind the securities that Ginnie Mae has guaranteed. Ginnie Mae charges issuers a guarantee fee for providing its guarantee of timely payment. The fee varies depending on the product and is six basis points for securities backed by single-family loans, which represent the majority of Ginnie Mae MBS. Issuers also pay a commitment fee that gives them the authority to pool mortgages into Ginnie Mae MBS. Issuers of Ginnie Mae securities may also collect a fee to cover the cost of servicing the underlying mortgages (generally 44 basis points for Ginnie Mae I products and 19 to 69 basis points for the Ginnie Mae II). Ginnie Mae does not receive appropriations or borrow money to finance its credit operations. The agency’s revenues exceed its expenses, which reduces the federal budget deficit. Ginnie Mae securities finance the great majority of FHA and VA loans, suggesting that the agency is fulfilling its basic mission, and faces relatively little competition in the market for government-backed mortgage loans. However, Ginnie Mae’s share of the total MBS market has declined over the last 20 years, both in terms of new issuances and volume outstanding, largely because FHA and VA loan origination has not kept pace with growth in the overall mortgage market and because securitization of conventional mortgages has become far more prevalent. Historically, the vast majority of government-backed housing loans have been pooled to back MBS for which Ginnie Mae guarantees the timely payment—a trend that continues today. Ginnie Mae issued its first MBS in 1970, and since that time it has guaranteed a cumulative total of more than $2 trillion of MBS. According to Ginnie Mae, its securities historically have represented roughly 90 percent of the market for FHA and VA loans. For example, between fiscal years 1998 and 2004 Ginnie Mae securities financed between about 84 percent and 96 percent of FHA-insured single-family loans (see fig. 2). In fiscal year 2004, Ginnie Mae issued a total of $149.1 billion in MBS. These MBS financed 91 percent of all eligible loans insured or guaranteed by FHA and VA. Ginnie Mae securities also have financed about half of RHS-guaranteed single-family loans since 1999 and financed roughly 40 percent of PIH-backed loans in fiscal year 2004. In 2004, newly issued Ginnie Mae securities financed $83.8 billion in FHA-insured loans, $31.4 billion in VA-guaranteed loans, and $1.6 billion in loans guaranteed by RHS and PIH. As shown in figure 3, FHA and VA loans represented 72 percent and 27 percent, respectively, of Ginnie Mae’s portfolio of new issuances that year, with RHS and PIH representing about 1 percent. About 92 percent of the loans backing Ginnie Mae MBS were single-family loans; the remainder were multifamily loans. Because Ginnie Mae’s charter keeps it focused on a discrete portion of the MBS market—specifically, that of loans made under FHA, VA, RHS, and PIH programs—the volume of Ginnie Mae’s new MBS issuance is linked directly to the origination volume of these programs. Changes in Ginnie Mae’s market volume over the years are thus largely a reflection of changes in the volume of FHA and VA loans, which represent 99 percent of Ginnie Mae’s portfolio. Although Ginnie Mae securities finance the great majority of the government-backed loans it is authorized to support, it does face potential competition from other secondary market entities. Federally insured and guaranteed loans can be expected to appeal to conventional securitizers because these loans carry little to no credit risk. However, Ginnie Mae has consistently captured 90 percent or more of the market for FHA and VA loans. Market participants told us that Ginnie Mae captured most of the market because of the difficulty of competing with the government guarantee of timely payment. This guarantee helps Ginnie Mae securities command a higher price and, correspondingly, offer a lower yield than other MBS of government-backed loans. We spoke with a number of secondary market participants that have or could become active in the market for government-backed loans, including the Federal Home Loan Banks, Fannie Mae, Freddie Mac, state and local government agencies, and private label issuers. In general, they have had limited or no involvement in Ginnie Mae’s market. Moreover, for a variety of reasons, they do not appear to have plans to encroach on Ginnie Mae’s market to any substantial degree, as the following examples illustrate: The Federal Home Loan Banks (FHLBank) have mortgage programs under which they purchase pools of conventional and federally insured or guaranteed mortgage loans from member banks. First authorized in 1998, the programs go by the names of the Mortgage Partnership Finance® program and the Mortgage Purchase Program. The programs were attractive to lenders in part because lenders could use them to sell their mortgages without paying guarantee fees. In 2000, FHLBanks took over a significant amount of Ginnie Mae’s market share and purchased $12.7 billion in FHA and VA loans, representing about 11 percent of the combined market for those loans. However, the Federal Housing Finance Board, which oversees the FHLBanks, became concerned because the program was intended to focus on conventional rather than FHA loans. The board took measures to encourage the FHLBanks to limit their purchase of FHA loans to no more than one-third of their mortgage purchase program portfolio. After 2000, FHLBanks greatly reduced their purchases of FHA loans. From 2001 to 2003, they purchased loans representing about 4 percent to 5 percent of the FHA market, which then declined further to about 2 percent in 2004. In fiscal year 2004, Fannie Mae purchased 4 percent of all FHA and VA originations. Its share of FHA and VA originations has varied over time, ranging from 1 percent to 6 percent between 1990 and 2004, or just 0.3 percent to 3 percent of Fannie Mae’s total purchase activity. According to Fannie Mae officials, these purchases of government loans consist largely of repurchases of delinquent loans. A Fannie Mae official told us the company did not systematically purchase FHA loans and in its normal course of business did not consider itself a competitor with Ginnie Mae. Fannie Mae does not receive credit from HUD toward its affordable housing goals by purchasing government-backed loans. Freddie Mac has purchased less than 1 percent of the market of FHA and VA loans each year since 1990. Freddie Mac officials said that its competition with Ginnie Mae is largely indirect, by encouraging conventional lending to the most creditworthy low- and moderate- income borrowers who might otherwise receive a mortgage through FHA or VA. Freddie Mac officials also said they do not compete with Ginnie Mae in the secondary market directly because it is hard to compete with Ginnie Mae’s government guarantee. In addition, as with Fannie Mae, government-backed loans do not count toward Freddie Mac’s required affordable housing goals. Freddie Mac does purchase some mortgage revenue bonds that are collateralized by FHA and VA loans and directly purchases some FHA and VA loans that Ginnie Mae does not securitize. State and local government entities, including housing finance agencies, issue mortgage revenue bonds to raise funds in the capital markets for mortgage lending. Because these bonds are tax exempt, investors are willing to accept a lower interest rate for them. This interest savings is passed on through lenders to lower-income families in the form of loans with interest rates below the market average. These bonds often finance government-backed mortgages. As of 2003, 71 percent of the mortgages that revenue bonds financed were insured or guaranteed by a federal program—58 percent by FHA, 10 percent by RHS, and 3 percent by VA. The overall volume of mortgage revenue bonds issued was $10.7 billion in 2003. Private label issuers purchased an estimated 3 percent of FHA and VA loans in 2004. These issuers account for an increasingly large share of the overall MBS market, but most of their market consists of loans not offered by FHA and VA programs, such as jumbo nonconforming loans and home equity lines of credit. According to RHS officials, private label issuers do currently securitize the majority of Section 538 multifamily loans guaranteed by RHS, but these loans account for less than 1 percent of Ginnie Mae’s portfolio. Most of the competition for Ginnie Mae’s market share does not come directly—that is, secondary market participants are not seeking to purchase or securitize significant numbers of government-backed loans. Rather, lenders compete with Ginnie Mae indirectly by seeking greater market share at the origination level by making conventional loans to borrowers who might otherwise use FHA and VA loan programs. Fannie Mae and Freddie Mac have an incentive to serve this market because lower-income borrowers who might otherwise turn to a government- backed loan program can help them meet their housing goals established by HUD. In addition, subprime mortgage originations have grown dramatically in recent years, as many lenders market to less creditworthy borrowers who in the past may have received a government-backed loan. Although Ginnie Mae continues to finance the bulk of government-backed loans, its share of the overall MBS market has declined substantially over the past 20 years. As shown in figure 4, Ginnie Mae securities represented 42 percent of all new MBS issued in 1985, but only 7 percent in 2004. This drop in market share of new issuance is due not to a significant decline in Ginnie Mae’s MBS issuance, but rather to rapid growth in the rest of the market—Fannie Mae, Freddie Mac, and private label issuers, which we refer to as the “conventional” market for MBS. In 1985, Ginnie Mae MBS issuance was $46 billion, while the conventional market issued $64 billion. By 2004, Ginnie Mae issuance had grown to $127 billion, but issuance of conventional MBS had grown to $1.8 trillion. MBS issuance has risen among all segments of the conventional market. The rise in private label MBS issuance has been particularly steep in the last few years, rising from $136 billion in 2000 to $864 billion in 2004. Two factors have spurred the growth of the conventional MBS market: the increasing number of conventional mortgage originations and the growing proportion of these mortgages that are securitized. Mortgage lending in the conventional market has grown much more rapidly over the last 20 years than lending through FHA and VA programs. Conventional mortgage originations rose from an estimated $243 billion in 1985 to an estimated $2.8 trillion in 2004. In contrast, originations of FHA and VA loans rose from $42 billion to $129 billion during that period. In addition, the rate of securitization of conventional mortgages has risen rapidly over the last 20 years; by the end of 2004, almost half of outstanding mortgage debt was financed through securitization, according to the Bond Market Association. Ginnie Mae’s market share of outstanding MBS has also declined significantly over the last 20 years, falling from 54 percent in 1985 to 10 percent in 2004. Since 2000, Ginnie Mae’s volume of MBS outstanding has fallen from $612 billion to $453 billion in 2004, a drop of approximately 26 percent. The primary factor contributing to this decline has been the increase in borrowers who have refinanced out of FHA and VA loan programs into conventional loans. Falling interest rates and rising home prices have led to a boom in refinancing over the last 10 years, particularly from 1997 to 1999 and 2001 to 2004. At the peak of the refinancing boom in 2003, refinancings represented about 65 percent of mortgage originations. As some borrowers with mortgages insured by FHA and guaranteed by VA have built up equity in their homes, they have been able to refinance out of these programs into conventional loans that may offer more favorable and flexible terms and interest rates. This trend may have been facilitated to some extent by the increased availability of loans to borrowers who are less creditworthy. This has allowed some borrowers who would not otherwise have been able to borrow in the conventional market to do so rather than using FHA-insured and VA-guaranteed mortgage programs. The decline in the outstanding volume of FHA and VA loans has led to a corresponding decline in the outstanding volume of Ginnie Mae securities, which are mostly composed of those loans. To a lesser extent, lender repurchases of delinquent FHA-insured and VA-guaranteed loans in Ginnie Mae pools have also contributed to the decline in Ginnie Mae’s volume of outstanding MBS. Ginnie Mae’s policy prior to 2003 allowed lenders and servicers to repurchase loans that were in their Ginnie Mae pools if the borrower missed just one payment that remained unpaid for 4 consecutive months. According to Ginnie Mae, these loans often had a low risk of default; the loan may have had only one missed payment followed by resumption of loan servicing by the borrower. However, lenders were able to profit by repurchasing these loans for the remaining balance because, during an era of falling interest rates, the market value of the loans was more than the remaining balance. Data obtained from Ginnie Mae officials show that these repurchases of delinquent loans reached a peak in 2002, when they totaled $22 billion, and that they contributed to the decline in Ginnie Mae’s outstanding volume. To address this problem, Ginnie Mae announced a revision to its loan repurchase policy in November 2002. Under the new policy, for pools issued on or after January 1, 2003, servicers can repurchase delinquent loans only when no payment has been made for 3 consecutive months. Ginnie Mae officials as well as issuers we talked with said that these new policies appear to have curtailed repurchase activity. Ginnie Mae’s share of the government-backed mortgage market has been fairly constant. If other secondary market players substantially increased their market share of government-backed mortgages, borrowers would be unlikely to see higher interest rates or tighter credit immediately, because such players would need to offer products that were competitive with Ginnie Mae’s. However, a decline in the proportion of high-quality mortgages included in Ginnie Mae’s MBS could lower their overall credit quality, potentially raising the cost of servicing the underlying mortgages and thus interest rates paid by borrowers. In addition, any decline in the volume of Ginnie Mae’s MBS could potentially reduce their liquidity, although it is unclear whether reduced liquidity is likely to be a significant concern in the foreseeable future. Finally, declines in Ginnie Mae’s outstanding volume would reduce its fee revenue from its MBS programs. Because Ginnie Mae’s program income exceeds its expenses, a drop in income could affect its contribution to reducing the federal budget deficit. As noted earlier, Ginnie Mae has consistently guaranteed MBS for the great majority of FHA and VA loans, but its share of the total MBS market has declined significantly since 1985. Borrowers of government-backed loan programs have benefited from the Ginnie Mae guarantee because it helps make such loans more accessible and keep borrowers’ interest rates down. New issuance of Ginnie Mae MBS has remained fairly constant, generally ranging from $150 billion to $200 billion annually from 1998 to 2004. Ginnie Mae’s share of the MBS market for government-backed loans would likely decline only if other secondary market players such as the Federal Home Loan Banks, Fannie Mae, Freddie Mac, state and local government entities, and private label issuers chose to become more active in the securitization of these loans. In such a scenario, interest rates would probably not rise or credit tighten for borrowers because such players would need to offer products that were competitive with Ginnie Mae’s, thus benefiting borrowers to a similar degree. As noted earlier, however, such a scenario is unlikely in the near future, as other secondary market participants generally appear to have chosen not to directly compete with Ginnie Mae because of the government guarantee. As we have seen, Ginnie Mae’s outstanding volume of MBS has declined in recent years because the outstanding volume of FHA and VA loans has fallen as growing numbers of borrowers refinance in the conventional market. However, those FHA and VA borrowers who are able to take advantage of refinancing options are generally the most creditworthy of the programs’ borrowers. The result has been a decline in the overall credit quality of FHA and VA loans in recent years indicated by increased default and foreclosure rates in government mortgage insurance and guarantee programs. As a result, the loan quality underlying Ginnie Mae’s securities has declined. Thus far, investors have not been directly affected by this development because of the government guarantee. However, the cost of servicing the government-backed loans in Ginnie Mae’s pools could rise in such a scenario, since managing delinquencies and the foreclosure process is the most costly component of servicing. According to Ginnie Mae, the servicing fees issuers are allowed to charge are sufficient to cover any significant increase in servicing costs resulting from declines in credit quality. However, increased servicing costs could result in smaller profits for Ginnie Mae issuers, potentially reducing lenders’ willingness to make government-backed loans and increasing borrowers’ interest rates. In addition, any increase in prepayment rates due to borrower defaults could reduce the price investors are willing to pay for Ginnie Mae MBS, which could also act to raise interest rates for borrowers. A market is said to be liquid if the instruments it trades can be bought by investors or sold in the markets quickly and easily with little impact on market prices. Liquid assets have relatively lower yields and higher prices than illiquid assets. One key factor affecting the liquidity of MBS is the size of the market in which they are traded—all other things being equal, larger markets are generally more liquid than smaller markets. In addition, standardized pools—that is, pools of mortgages with similar interest rates and terms—are generally more liquid than pools of mixed mortgage products, which cannot be traded as readily because they are more difficult to value and thus riskier. For this reason, Ginnie Mae I securities are more liquid than Ginnie Mae II securities (whose pools consist of loans with more variability). Market participants we spoke with provided mixed opinions about the current liquidity of Ginnie Mae securities. Some dealers said that Ginnie Mae securities were quite liquid and traded easily, while others noted that they were less liquid than other MBS, such as those issued by Fannie Mae and Freddie Mac. One institutional investor told us that Ginnie Mae securities that are traded in smaller volumes—such as those backed by hybrid ARMs—could face liquidity issues. Another noted that the liquidity of Ginnie Mae securities could be a concern for very large trades, such as those of more than $1 billion. Any reduced liquidity resulting from a continued decline in Ginnie Mae’s market share could have some effect on the costs to borrowers of government-backed loans. However, it is not clear how significant the decline would have to be before liquidity became a significant concern that materially affected the pricing of Ginnie Mae securities and thus interest rates for borrowers of government-backed loans. Ginnie Mae officials told us that their securities had at least adequate liquidity. They noted, for example, that the bid-ask spread on Ginnie Mae securities was comparable with the spread for Fannie Mae securities, one indication that liquidity is not currently an issue. The officials said that if volume continued to decline, liquidity could become a significant concern in the future, although it is unknown at what levels of volume this would occur. Revenues from Ginnie Mae’s MBS guarantee programs exceed the cost of operating them. Since fiscal year 1985, the agency has not had to borrow from the U.S. government to finance its operations and its excess funds go into a receipt account held as capital reserves. As shown in table 1, in fiscal year 2004 Ginnie Mae had total revenues of $815.5 million and expenses of $77.8 million. The excess of its revenues over expenses, net of interest income, is invested in U.S. government securities and reduces the amount that the Treasury must borrow from the public to finance government programs—that is, it reduces the deficit. In fiscal year 2004, this amount was $295 million. Most of Ginnie Mae’s revenue comes from MBS program income, which totaled $372.8 million in fiscal year 2004. Ginnie Mae charges issuers a guarantee fee that is based on the aggregate principal balance of an issuer’s outstanding MBS, and collects commitment fees for the authority to pool mortgages into Ginnie Mae MBS. Ginnie Mae’s program income allows it to cover the expenses it incurs in carrying out its programs and initiatives, including the cost of hiring contractors, paying staff salaries and benefits, printing, and performing other administrative functions. Ginnie Mae also incurs credit-related expenses—for example, it must maintain reserves against losses and issuer defaults in order to ensure a ready source of funds to meet its guarantee of timely payment. At the end of fiscal year 2004, Ginnie Mae had reserves of about $10.4 billion. Ginnie Mae’s fee income is based on the principal balance of its securities portfolio, so the agency’s revenues largely depend on the volume of its outstanding securities. As we have seen, Ginnie Mae’s share of the MBS market has declined in the last 20 years. In fiscal years 2000 through 2004, Ginnie Mae’s principal balance outstanding also declined, falling from $603.4 billion to $453.4 billion and reducing program income from $408.2 million to $372.8 million (see fig. 5). As a result, during that period, the agency’s excess of revenues over expenses (net of interest), which reduces the federal budget deficit, declined from $347 million to $295 million. Ginnie Mae’s program income continues to exceed its expenses and, according to Ginnie Mae officials, is likely to do so for the foreseeable future. However, if its outstanding volume continued to decline, program income and excess revenues, which reduce the federal budget deficit, could also be expected to continue falling. Ginnie Mae faces challenges in a number of areas. First, it must respond to changes in the marketplace and meet the needs of its stakeholders. To meet this challenge, the agency has expanded its product offerings and taken other initiatives to maintain its viability. Second, Ginnie Mae must adequately disclose loan information that MBS investors need to assess prepayment risk. The agency has recently improved this disclosure, though these improvements are not yet complete. Third, Ginnie Mae must work within the limits of its commitment authority. In 1999, it instituted procedures to ration its commitment authority when the agency faced the possibility of reaching the limit of its authority by year’s end. To help prevent the problem from recurring, Congress changed Ginnie Mae’s commitment authority cycle from 1 year to 2 years and could consider further steps. Fourth, inconsistencies and inaccuracies exist in some aspects of Ginnie Mae’s data systems, although measures to improve these systems are under way. Finally, given Ginnie Mae’s small staff and reliance on contractors, the agency faces the challenge of ensuring that its capacity to plan, manage, and oversee contractors is adequate. Ginnie Mae has faced and continues to face the challenge of fulfilling its mission of supporting government-backed loan programs in a changing market environment. Among the significant market changes over the last 20 years have been the growing availability of private mortgage insurance and subprime loans, rapid development of the conventional secondary mortgage market, alterations in the volume and characteristics of government-backed loan programs, and the proliferation of new mortgage loan products, such as hybrid ARMs. Ginnie Mae recently completed or has under way several initiatives that are likely to help respond to the needs of its stakeholders in a changing marketplace, although additional efforts may be needed in some areas. Among the steps Ginnie Mae has taken are the following: As part of its Business Improvement Initiative, in October 2004 Ginnie Mae began a formal process of soliciting recommendations from business partners and other stakeholders to improve its MBS and Multiclass Securities programs. In March 2005, the agency publicly released the suggestions it had received, including, among others, changing technological processes and developing new securitization products. Ginnie Mae officials say they are currently in the process of evaluating the suggestions. Ginnie Mae played a role in developing FHA’s hybrid ARM products. Ginnie Mae and FHA officials say that they worked together to encourage Congress to permit FHA to insure hybrid ARMs, in large part because the agency wanted to remain competitive with conventional markets, in which such products had become increasingly popular. Ginnie Mae developed a securitization program, as Ginnie Mae II securities, for these products, and in 2004 FHA began offering 3-, 5-, 7-, and 10-year hybrid ARM products in addition to its standard 1-year ARM. In February 2005, Ginnie Mae began guaranteeing securities backed by RHS multifamily loans, which support affordable multifamily housing in rural areas. RHS officials told us that this created the first consistent secondary market for these loans and that Ginnie Mae’s involvement would increase access to these loans and would lower borrower costs by increasing lenders’ liquidity. The officials also noted that Ginnie Mae had actively supported RHS by ensuring that the multifamily loan program could be securitized as Ginnie Mae I securities. The Ginnie Mae II Program was created to provide issuers and investors with more flexibility in pooling different kinds of loans—such as adjustable rate mortgages—into Ginnie Mae securities. By their nature, Ginnie Mae II securities are less homogeneous than Ginnie Mae I securities. As a result, they are considered less predictable and investors demand a higher yield from these securities. In 2003, the Ginnie Mae II product was restructured to make it more competitive. Among other changes, the agency narrowed the spread on the note rates that could be included in the pools, so that the loans backing the securities would be more homogenous. In addition, the range of servicing fees that issuers could charge was widened to provide more flexibility. As a result, Ginnie Mae says there is now a smaller gap in pricing between Ginnie Mae I and Ginnie Mae II securities. But one broker-dealer we spoke with complained that to ensure sufficient loan volume for a Ginnie Mae II pool, issuers sometimes must include mortgages that would otherwise qualify for a Ginnie Mae I. In July 2004, Ginnie Mae expanded its Targeted Lending Initiative, which was created to provide financial incentives for lenders to increase loan volumes and raise homeownership levels in underserved areas. Under the program, which began in 1996, Ginnie Mae reduced its guarantee fee by up to 50 percent for approved issuers that originate or purchase eligible loans in designated communities and place them in Ginnie Mae pools. The expansion brought additional areas into the program, including “colonias” along the Southwest border region and additional Renewal Communities and Urban Enterprise Zones designated by HUD. In September 2005, Ginnie Mae announced it was temporarily expanding the Targeted Lending Initiative further to include counties in the states of Alabama, Louisiana, and Mississippi that were declared federal disaster areas as a result of Hurricane Katrina. Ginnie Mae still faces certain barriers to financing government-backed loan programs. For example, VA and Ginnie Mae officials have expressed concern that recently enacted changes in the law authorizing certain hybrid ARM products in VA’s loan guarantee program did not address a limitation that has made these products difficult to securitize. Although the Veterans Benefits Act of 2004 made certain modifications to the program’s provisions for adjusting interest rates for VA’s 5-, 7-, and 10-year hybrid ARM products, the act continued a restriction on annual rate adjustments (those made after the initial rate adjustment) to a maximum increase or decrease of 1 percentage point. While this restriction may benefit borrowers by limiting interest rate increases, Ginnie Mae and VA officials said that a 1 percentage point annual cap was inadequate to attract interest from investors who purchased such products. Further, the terms of VA’s hybrid ARM products are no longer the same as the corresponding hybrid ARMs offered by FHA, bifurcating the market and making securities containing these types of loans less liquid. According to Ginnie Mae, this lack of liquidity results in higher interest rates for veterans and nonveterans alike. VA officials said that the capital markets and Ginnie Mae may not have been sufficiently consulted on this adjustment during the legislative process to ensure that provisions in the VA hybrid ARM program were consistent with the requirements of Ginnie Mae and conventional secondary markets. A similar situation occurred with respect to an FHA single-family insured ARM product. The fiscal year 2002 VA/HUD appropriations bill limited annual interest rate adjustments on FHA’s hybrid ARMs to 1 percentage point if the initial interest rate term was fixed for 5 years or less and imposed a lifetime cap of 5 percentage points. These caps were intended to assist FHA borrowers, but lenders and capital market participants expressed concern that Ginnie Mae securities backed by these ARMs would be unattractive to investors—and thus lenders—since equivalent products in the conventional market typically included annual caps of 2 percent and lifetime caps of 6 percent. In response, an amendment to the authorizing legislation, enacted in December 2003, made the annual cap applicable only to loans having a fixed term for the first three or fewer years—a change that FHA said was needed to meet the needs of home buyers, lenders, and the secondary mortgage market. Following the 2003 amendment, FHA issued an interim final rule in March 2005 that raised the cap on adjustments to annual interest rates for 5-year ARMs from 1 to 2 percentage points and raised the lifetime cap on interest rate adjustments for those loans to 6 percentage points. Ginnie Mae officials noted that these problems could have been avoided had Congress initially consulted more closely with capital market participants. Investors in Ginnie Mae securities do not face credit risk, since the mortgages underlying these securities are federally insured or guaranteed and because Ginnie Mae guarantees timely payment of principal and interest. However, MBS investors do face prepayment risk, because they are purchasing cash flows that can stop when borrowers pay their loans in full early. Mortgage loans are prepaid for several reasons, most commonly when the house is refinanced, sold, or destroyed, or when the borrower goes into foreclosure. Prepayment rates tend to increase in periods of declining interest rates, when borrowers have the opportunity to lower their interest payments by refinancing. When mortgages are prepaid, voluntarily or involuntarily, investors receive their principal, but not further interest payments. In an environment of declining interest rates, prepayments may force investors to reinvest prematurely at a lower interest rate and to incur transaction costs. Historically, the rate of prepayment for Ginnie Mae securities has been lower than for other MBS because borrowers of government-backed mortgages are generally first-time or low- to moderate-income home buyers who are less likely to be able to incur the cost of refinancing or relocating. According to research by securities trading firms, between 1980 and 1990 Ginnie Mae securities consistently prepaid at lower rates than their conventional counterparts. However, since that time, prepayment rates for conventional MBS have changed relative to those for Ginnie Mae MBS. Since 1990, Ginnie Mae’s prepayment rates have been slower than those of their conventional equivalents in the initial 18 months to 2 years after loan origination. But after this initial period, as the loans seasoned, Ginnie Mae’s prepayment rates have generally risen compared with conventional MBS. Ginnie Mae securities backed by seasoned loans are currently prepaying at a much faster rate than did similar securities during the 1990s. Three factors in particular seem to have influenced the increase in Ginnie Mae’s rate of prepayment—refinancings, delinquencies, and repurchases. As explained earlier, expanded access to credit, rising home prices, and falling interest rates have allowed more FHA and VA borrowers to refinance into conventional loans. With the added equity built up in their homes, borrowers have been able to reduce their monthly costs by refinancing without paying the federal programs’ insurance premiums. In addition, delinquency and default rates for FHA and VA loans—which have traditionally been higher than those for conventional loans—have been steadily increasing in recent years. The delinquency rate on all FHA mortgages increased from 6.7 percent in 1990 to 12.2 percent in 2004. By contrast, the delinquency rate for conventional mortgages has remained relatively stable and stood at 1.6 percent in 2003. Finally, as noted earlier, before July 2003 Ginnie Mae’s policy allowed loan servicers to repurchase loans from Ginnie Mae’s pools if a borrower missed only one payment and left it unpaid for 4 months. These repurchases, which peaked in 2002, caused a temporary acceleration in the prepayment rates of Ginnie Mae’s MBS. Market participants we met with expressed concerns about the accelerated rate of prepayment on Ginnie Mae securities in recent years. Institutional investors often employ complex models—which rely in part on detailed information about the underlying loan pools—to forecast prepayment rates and help price MBS. Investors we spoke with noted that predicting prepayment risk on Ginnie Mae securities had become increasingly difficult because of rapid shifts in the marketplace, such as the expansion in the availability of conventional credit and increases in FHA and VA delinquencies, and uncertainty about future developments. In the past, the securities industry has also expressed concerns that developing models to predict prepayment of Ginnie Mae MBS has been particularly difficult because Ginnie Mae has not always provided the same degree of detail on its loans as conventional securitizers. In written comments to Ginnie Mae, the Bond Market Association—a trade association representing securities dealers—said that while Ginnie Mae had begun providing more information than ever before about the mortgages backing its securities, there was still “significant room for improvement.” One broker-dealer noted to us that information was particularly lacking on hybrid ARM products in Ginnie Mae pools. A second broker-dealer said that additional information on geography and occupancy rates for multifamily loans would help better estimate the risk of delinquency—and thus prepayment—of securities backing those loans. Market participants also noted that having information on borrower credit scores would be useful. To address concerns about its disclosures, in January 2004 Ginnie Mae began its MBS Disclosure Initiative, which was designed to provide investors with additional information that would allow them to better forecast prepayment rates. Prior to the initiative, Ginnie Mae’s disclosures on the loans underlying its securities included such things as the weighted average age of the loan, the number of loans in the pool, the unpaid principal balance, and the average original loan size. With the initiative, the agency began providing expanded disclosures—at issuance—of loan data that it was already collecting and began disclosing new data items about FHA and VA single-family loan pools, including original loan-to-value ratios, loan purpose, property type, average original loan size, and year of origination. In addition, in September 2004 Ginnie Mae began updating its MBS disclosures every month instead of quarterly. Ginnie Mae said that in December 2005 it would begin disclosing additional details on the reasons for prepayments of the loans backing Ginnie Mae MBS, including the number of loans that were paid off in full by borrowers, repurchased by issuers because of delinquency, and liquidated due to foreclosure. Ginnie Mae officials told us that the recent changes made disclosures on Ginnie Mae securities comparable with those for Fannie Mae’s and Freddie Mac’s. In developing its annual budget, Ginnie Mae officials told us they must estimate the amount of the agency’s commitment authority—the limit on the total dollar volume of securities that the agency can guarantee. The Office of Management and Budget reviews Ginnie Mae’s commitment authority estimates before they are finalized and included in the President’s budget request to Congress. Ginnie Mae estimates the amount of the commitment authority it will need for future years based on the actual authority used by the federal guarantee programs it served in the previous year. The agency also considers commitment authority allocations it actually made to issuers in the previous year and includes them as part of the estimate, adding an additional percentage to that estimate to cover unanticipated events in the marketplace. The Secretary of HUD is required by statute to notify Congress when Ginnie Mae has utilized 75 percent of its commitment authority and when HUD estimates that the agency will exhaust this authority before the end of a fiscal year. If Ginnie Mae exhausts the limit placed on its commitment authority, it must suspend issuance of new MBS until Congress provides additional authority. Under these circumstances, an issuer may either have its request returned or leave it with Ginnie Mae to be processed on a first-come, first-served basis after additional commitment authority is restored. In 1999, fearing it would reach the limit before the end of the year, Ginnie Mae instituted procedures to ration its commitment authority. It temporarily limited the approval of commitment requests to the amount estimated to cover issuer needs for no more than a 60-day period. According to industry participants we spoke with, this step was disruptive to lenders and issuers and caused concern that Ginnie Mae would not have the authority it needed to honor commitments it had already made. One trade association told us that that this situation had resulted in some loss of credibility for Ginnie Mae. According to Ginnie Mae, the agency had not adequately estimated the demand for its guarantee in 1999, in part because of unexpectedly high levels of new construction and mortgage refinancing activity that year. Since that time, the agency has taken steps to help ensure that it is no longer in danger of reaching the limit of its commitment authority. Since 2002, the commitment authority Ginnie Mae has received as part of HUD’s annual appropriations is available for 2 years. Congress annually provides commitment authority but the authority is available for two years. This means Ginnie Mae can use “carryover” authority from the prior year to make current year commitments. According to agency officials, this change from a 1- to a 2-year cycle has given Ginnie Mae more flexibility in planning how to use its commitment authority and should reduce the need to ration it again in the future. In addition, the actual commitment authority available to Ginnie Mae at any given time may be above the additional amount authorized annually, because since fiscal year 2002, the agency has carried over unused authority from the prior year. Thus, as shown in figure 6, although Ginnie Mae’s new commitment authority limit has been $200 billion each year since fiscal year 1999, the actual authority available for Ginnie Mae to use has been higher beginning in 2002. In fact, in fiscal year 2003, Ginnie Mae was able to meet program demands. Having the ability to rely on unused authority carried over from prior years has meant that the agency has not had to ration or suspend issuer commitments since 1999. Thus, if Ginnie Mae exceeds its annual commitment limit, for a particular year, it has the authority to do so but only to the extent of its carryover authority. However, given uncertainty of demand in the marketplace, carryover authority still may not be enough. Federal agencies often face difficulties estimating potential demand for loan guarantees, in part because the budget process requires them to forecast demand nearly 2 years in advance. Our 2005 report on the FHA and RHS loan guarantee programs discussed options that Congress could consider to prevent suspensions of those programs related to exhaustion of their commitment authority. Some of the options discussed in that report could be applicable to Ginnie Mae. For example, Congress could establish a higher limit on Ginnie Mae’s commitment authority, although such a step could increase the government’s exposure to risk. Congress could also require Ginnie Mae to provide more frequent updates on the amount of commitment authority it has used. This would involve little additional administrative burden and would provide additional and timelier information for determining whether to provide supplemental commitment authority before the end of a fiscal year. Because both of these options could have various implications, their specific impacts would depend on how the changes were structured and implemented. In November 2002, officials of First Beneficial Mortgage Corporation, one of Ginnie Mae’s approved issuers, were convicted of engaging in fraudulent pooling practices. According to information from HUD’s Office of the Inspector General (OIG) the company used forged documents to pool loans that were collateralized with nonexistent properties and that were not insured or guaranteed by a federal agency, as required of Ginnie Mae securities. Ginnie Mae declared First Beneficial in default and incurred a loss of approximately $20 million. HUD’s OIG, among others, investigated the First Beneficial case and subsequently audited Ginnie Mae’s internal controls, completing its report in March 2003. The investigation and audit identified inconsistencies and inaccuracies in Ginnie Mae’s data systems and other internal control weaknesses. Most notably, the OIG found that Ginnie Mae, its issuers, and the agencies it serves did not all use a single common and unique case number as the primary management control for identifying and tracking loans in the MBS pools. Instead, each entity assigned its own tracking number, making comparisons of loan data difficult and hindering efforts to ensure that the loans in Ginnie Mae’s pools were federally insured or guaranteed. The OIG’s report also found that Ginnie Mae did not have adequate controls in place to ensure the reliability of its data—for example, it could not ensure the accuracy of its data entry procedures, had not sufficiently verified all loans to ensure they were federally insured or guaranteed, and did not make sure that all issuers were in fact eligible to issue Ginnie Mae securities. As a result, Ginnie Mae potentially could not identify ineligible loans in its pools. Ginnie Mae has taken several measures to address many of the internal control and data weaknesses identified in the HUD OIG’s reports. For example, the agency has developed and implemented policies, controls, and training designed to make data entry more accurate and is working to better integrate its multiple data systems. Further, 99 percent of Ginnie Mae’s portfolio is made up of loans backed by FHA and VA, and the agency now matches the loans in its data systems against those in FHA’s and VA’s databases. However, Ginnie Mae, FHA, and VA still do not use the same case numbers, which would eliminate the need for time-consuming matching. Ginnie Mae officials told us that they are analyzing aligning case numbers as part of an ongoing Business Process Improvement Initiative. However, such a change would be difficult because it would require systems changes for both Ginnie Mae and its issuers. OIG officials told us that Ginnie Mae had largely addressed the deficiencies they had observed in the loan data and that that the OIG was generally satisfied with the agency’s efforts to address internal control weaknesses. However, we identified additional data integrity issues during our review. For example, Ginnie Mae was initially unable to provide us with a breakdown of loans in its portfolio—that is, percentages of FHA, VA, RHS, and PIH loans. This basic data could not be provided, the agency said, because a programming error had resulted in the underreporting of FHA loans and the overreporting of VA loans. Ginnie Mae officials acknowledged that their data systems should be improved and that they do not have easy access to as much of their information as they should. Ginnie Mae operates with a small staff—in fiscal year 2004, the agency had about 66 employees—and contracts out most of its transactional and support work. Ginnie Mae has stated that this centralized management model is designed to allow a relatively small group of agency employees to manage a large number of outsourced projects, improving the quality, timeliness, and consistency of their work. In fiscal year 2004, approximately 81 percent of Ginnie Mae’s activities were contracted out, including key operations such as accounting and technical support, Ginnie Mae servicing of defaulted loans, internal control reviews, preparation of assessment rating tools, issuer compliance reviews, and information systems management. Concerns about Ginnie Mae’s oversight of its contractors have existed for several years. Our 1993 review of Ginnie Mae’s staffing found that the agency was not adequately monitoring its contractors’ activities. At that time, the largest contractor told us the agency did not have the resources to adequately review its contractors’ work, and Ginnie Mae itself acknowledged that it did not. Similarly, in a 1997 review of HUD’s contracting activity, HUD’s OIG found that Ginnie Mae was not in compliance with contracting and procurement procedures. The review found that in some instances Ginnie Mae contractors were performing tasks that were inherently governmental functions and that aspects of the bidding process hindered competition. At that time, Ginnie Mae had its own contracting officer; however, as of January 1999, Ginnie Mae began using HUD’s contracting officer and its staff to award contracts. Internal control issues continue to be a potential concern at Ginnie Mae, as evidenced by losses due to fraud in the First Beneficial case, the HUD OIG’s 2003 report, and our own findings of problems with some aspects of the agency’s management information systems. Because Ginnie Mae has a small staff and contracts out most of its operations, appropriate contract management and oversight are inherently key components in improving the agency’s data systems and internal controls. Unlike the time of the 1997 OIG report, Ginnie Mae’s contracting staff are now supplemented by assistance from HUD’s contracting staff. In addition, the agency has initiatives under way to improve its information technology infrastructure and to streamline its business processes, some of which involve contract management. For example, Ginnie Mae officials told us that in 2002 the agency created the Procurement Management Division to more stringently oversee existing contracting and procurement procedures and to provide additional training for staff in contract planning and development. In addition, Ginnie Mae officials say they have built incentives into their performance rating system to increase staff accountability for contract planning and oversight and to provide incentives designed to foster effective contract planning and monitoring. Ginnie Mae’s staff of about 66 are responsible for performing inherently governmental functions and for overseeing the contractors that perform most of the agency’s operations. Based on a 2004 HUD resource management study that found that Ginnie Mae had sufficient staff to perform contract administration functions, Ginnie Mae officials told us they believe that their staffing levels are adequate. But given its reliance on contractors, Ginnie Mae should continue to focus on ensuring that staff have the training, qualifications, and capabilities they need to ensure that contracts are planned, monitored, and executed appropriately. Despite its declining share of the overall MBS market, Ginnie Mae continues to serve its key public policy goal of providing a strong secondary market outlet for federally insured and guaranteed housing programs, helping to improve their access and affordability for low- to moderate-income borrowers. The decline in Ginnie Mae’s share of the overall MBS market should not necessarily be a major source of concern, since it is largely a function of the rapid growth in the conventional MBS market. Unlike firms in the conventional market, however, Ginnie Mae has relatively little control over the volume of its securities, which depends on the volume of FHA and VA loan programs. Changes in the volume and market share of government-backed housing loans are largely the result of policies and decisions made by Congress and the agencies themselves. Improvements to Ginnie Mae’s product line benefit government-backed loan programs by making them more liquid, but the impact on these programs’ volume is relatively marginal. A further decline in Ginnie Mae’s volume could have certain implications related to credit quality, liquidity, and the agency’s contribution to offsetting the federal budget deficit. But just how much Ginnie Mae’s volume could decline in the near future is unclear, as is the magnitude of any potential effects on the market or federal budget. Ginnie Mae faces the challenge of adjusting its product mix and policies to address changes in the marketplace while continuing to meet the needs of both borrowers who rely on affordable housing programs and of industry stakeholders such as issuers and investors. Ginnie Mae has added a number of new products over the years, has made a serious effort to solicit feedback from its business partners, and has expanded its disclosures for investors. The agency has also expanded the types of loans that Ginnie Mae securities can finance, and RHS and PIH officials have commended Ginnie Mae’s proactive efforts to assist their loan programs. But some changes remain beyond its scope—for instance, conditions in FHA and VA hybrid ARM products that have limited investor interest. Closer consultation by lawmakers with Ginnie Mae and capital market participants could help ensure that congressionally mandated provisions of loan programs are consistent with Ginnie Mae and conventional secondary market requirements. Ginnie Mae also faces the challenge of avoiding the need to ration its commitment authority, which can cause disruption among secondary market participants and harm Ginnie Mae’s credibility. Beginning in 2002, Congress made the agency’s commitment authority available for 2 years rather than 1 year to provide more flexibility, but Ginnie Mae could again bump up against its commitment level cap in the future. Other options to address this problem include raising Ginnie Mae’s commitment authority or requiring the agency to notify Congress when it appears the agency may reach its cap. Each of these measures could have various implications that would need to be considered. Like any agency, Ginnie Mae faces challenges in managing its internal operations in an efficient and cost-effective manner, and in ensuring that appropriate internal controls are in place. This may be especially challenging for Ginnie Mae because it operates with a small staff of about 66 and contracts out most of its operations. Certain weaknesses in Ginnie Mae’s data integrity, along with losses resulting from fraudulent activity in the First Beneficial case, indicate the need for continued improvements in data systems and internal controls. Ginnie Mae has taken some important steps on these issues and has ongoing initiatives, such as its Business Process Improvement Plan. However, given certain data integrity issues we identified, the recency of the First Beneficial case, and that Ginnie Mae’s business plan was only recently approved, it is too early to assess the results of Ginnie Mae’s recent efforts. Finally, given its reliance on contractors to carry out most of its operations, Ginnie Mae will need to pay particular attention to ensuring that its staff have sufficient resources, training, and qualifications to ensure that the agency’s contracts are planned, monitored, and executed appropriately. On behalf of HUD, Ginnie Mae provided written comments on a draft of this report, which are reprinted in appendix II. Ginnie Mae agreed with the report’s analysis of the challenges it faces and with the report’s findings on initiatives Ginnie Mae has taken to address these challenges. It also agreed with our observations related to the importance of improving Ginnie Mae’s data systems and maintaining effective contract management. In addition, Ginnie Mae provided us with technical comments, which we have incorporated where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies to the Secretary of Housing and Urban Development. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our report objectives were to evaluate (1) the state of Ginnie Mae’s market share and guarantee volume, (2) the potential implications of changes in Ginnie Mae’s market share and guarantee volume, and (3) challenges Ginnie Mae faces in fulfilling its mission and the steps that have been or could be taken to address these challenges. To assess the state of Ginnie Mae’s market share and guarantee volume, we obtained data on issued and outstanding mortgage-backed securities (MBS) from the agency’s Integrated Pool Management System and Portfolio Analysis Display System, which obtains its source data from Ginnie Mae’s Mortgage-Backed Securities Information System. We tested the reliability of these data by comparing them within the two data systems and with data from the 2005 Mortgage Market Statistical Annual and the Bond Market Association—sources used widely in the industry to analyze MBS activity. We also compared loan data provided by Ginnie Mae with data maintained by the Department of Veterans Affairs (VA), Rural Housing Service (RHS), and the Office of Public and Indian Housing (PIH) within the Department of Housing and Urban Development (HUD). Our initial comparisons showed significant discrepancies between Ginnie Mae’s source data and that of industry sources. Because Ginnie Mae’s MBS issuance and agency loan endorsement do not occur simultaneously, a lag exists between the date that the loan is endorsed and the date Ginnie Mae is recorded as guaranteeing its securitization. Thus, to provide accurate information on Ginnie Mae’s market share and volume for a given point in time, individual loans must be matched to the Ginnie Mae MBS in which they were pooled. When we began our review, no data for VA, RHS, or PIH loans had been matched with their pool, and data for Federal Housing Administration (FHA) loans had been matched only since 2001. At our request, Ginnie Mae completed the matching of FHA data from 1998 to 2004. Our initial comparison of the portion of Ginnie Mae’s MBS portfolio collateralized by each loan program—that is, by FHA, VA, RHS, and PIH— showed discrepancies as well. As previously discussed, Ginnie Mae could provide us only with estimated percentages because a programming error in the system resulted in the underreporting of FHA loans and the overreporting of VA loans. Because of our request, Ginnie Mae noticed the error and corrected it, and we were able to obtain accurate data on the percentage of loans from each program that were used to collateralize Ginnie Mae MBS. With the corrections Ginnie Mae made, we found the data to be reliable for our purposes. To address all of the objectives, we spoke with and gathered relevant documents from secondary market participants, including five Ginnie Mae- approved issuers and five dealers/institutional investors in Ginnie Mae securities. Among other things, we discussed with them their perceptions of Ginnie Mae and its products and their reasons for investing in or issuing Ginnie Mae securities rather than other MBS products. The issuers were judgmentally selected and represented more than 46 percent of the MBS Ginnie Mae issued in 2003. Three of the issuers focused on single-family FHA loans and the remaining two on multifamily and VA loans. Dealers/institutional investors were also judgmentally selected; among them were the largest broker-dealers of Ginnie Mae MBS, Real Estate Mortgage Investment Conduits, and Platinum securities. We also interviewed and obtained documentation from representatives of secondary market participants that may compete with Ginnie Mae, including Fannie Mae, Freddie Mac, the National Council for State Housing Finance Agencies, and the Federal Home Loan Banks of Chicago and Seattle. We also interviewed representatives of and reviewed documents from Ginnie Mae, HUD’s FHA and PIH programs and its Office of the Inspector General (OIG), VA, RHS, and the Federal Housing Finance Board. In addition, we spoke with relevant trade associations, including the Bond Market Association, National Association of Home Builders, Mortgage Bankers Association, and National Association of Realtors. We conducted a literature search and reviewed Ginnie Mae’s legislative history, relevant laws, regulations, budget documents, performance, and annual reports and guidance, and studies and reports by HUD’s OIG and others. We conducted our work in Washington, D.C., and Boston from October 2004 through September 2005 in accordance with generally accepted government auditing standards. In addition to the contact named above, Jason Bromberg, Assistant Director; Heather Atkins; Daniel Blair; Christine Bonham; Diane Brooks; Emily Chalmers; William Chatlos; Carlos Diz; Austin J. Kelly; Marc Molino; Mitchell B. Rachlis; Paul Thompson; and Franklyn Yao made key contributions to this report.

The Government National Mortgage Association, commonly known as Ginnie Mae, is a wholly owned government corporation that guarantees mortgage-backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans. The agency supports federal housing programs by facilitating the securitization of loans backed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Rural Housing Service, and the Office of Public and Indian Housing within the Department of Housing and Urban Development (HUD). Concerned that Ginnie Mae's share of the overall MBS market has declined significantly, Congress asked us to address (1) the state of Ginnie Mae's market share and guarantee volume, (2) the potential implications of changes in its share and volume, and (3) the challenges Ginnie Mae faces and steps it is taking and could take to address these challenges. Despite its declining share of the overall MBS market, Ginnie Mae continues to serve its key public policy goal of providing a strong secondary market outlet for federally insured and guaranteed housing loans. Ginnie Mae MBS financed more than 90 percent of new FHA-insured and VA-guaranteed loans in fiscal year 2004, and the agency appears to face relatively little competition in this market. Ginnie Mae's total volume has declined in recent years, however, and its share of the overall MBS market has fallen from 42 percent of new securities in 1985 to 7 percent in 2004. This drop is largely the result of the decline in the market share of the FHA and VA loan programs and the concurrent rise in the securitization of non-government-backed mortgages. Further declines in Ginnie Mae's volume could potentially have implications for borrowers, the liquidity of its securities, and federal revenues. For example, Ginnie Mae's securities could become less liquid, although it is unclear at what levels of volume this would occur. In addition, Ginnie Mae's program revenues could decline if its volume decreased. In fiscal year 2004, program revenues exceeded expenses by $295 million, which helped reduce the federal budget deficit. Ginnie Mae faces a number of challenges in responding to changes in the marketplace, meeting stakeholders' needs, and managing its operations, and the agency has been taking steps to address these challenges. For example, it has expanded its product mix to reach more borrowers and has begun disclosing more information on loans underlying its securities to help investors better predict risk. GAO and others have identified opportunities for improvement in Ginnie Mae's data integrity and internal controls. The agency has begun addressing these issues, but it contracts out most of its operations, so ensuring that it has sufficient staff capabilities to plan, monitor, and manage its contracts is essential.

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Our prior report recommended that DOD immediately reverse the $615 million of illegal and otherwise improper closed account adjustments identified in the report and determine the correct accounting for these adjustments after the reversal. Of the $615 million of illegal and otherwise improper adjustments, DOD has agreed that $592 million, or about 96 percent, of the adjustments should not have been made and has reversed the adjustments. However, because of DOD’s long-standing accounting accuracy problems, in many cases, reversing the transactions brought to light additional accounting problems that will require detailed reviews to determine the accounting actions necessary to correct the reversed transactions. As a result, neither DOD nor we can determine how much remains to be corrected as a result of reversing the adjustments. Table 1 provides additional details on DOD’s reversal of the $615 million fiscal year 2000 illegal and otherwise improper closed account adjustments. For the remaining $23 million that has not been reversed, DOD provided us with additional documentation indicating that $8 million of the adjustments were proper and do not need to be reversed. We still consider the remaining $15 million to be unnecessary or unsupported adjustments since DOD has not provided sufficient support to show otherwise. The $592 million of illegal and otherwise improper closed account adjustments discussed in our earlier report that have now been reversed involved 45 contracts. For 30 of the 45 contracts, the reversals identified additional accounting errors that must also be corrected. The 30 contracts include over $457 million (77 percent) of the $592 million in reversed transactions. Because of the complexity of the contracts and time it takes to conduct a complete reaudit, officials at the Defense Finance and Accounting Service’s (DFAS) Columbus Center estimate that it will take over 21,000 hours to correct the accounting for the 30 contracts. For example, for one contract we found that DFAS Columbus had made $210 million of closed account adjustments that should not have been made because the initial disbursement was recorded against the correct ACRN on the contract. The reason given for the adjustment was that DFAS Columbus could not pay a November 1999 invoice from a contractor for $685,000 because the cited ACRN on the invoice did not have sufficient funds. The inability to pay the invoice prompted DFAS to conduct an audit of the contract that resulted in over $590 million of adjustments to closed appropriation accounts. Our earlier audit found that of the $590 million of adjustments, $210 million were unnecessary and should not have been made because the actual disbursements—some of which were made over 10 years earlier—had been recorded correctly. The $210 million was part of the $615 million of illegal or otherwise improper transactions we identified in our earlier audit. In response to our recommendation that DOD reverse and correct the $210 million of unnecessary adjustments, DFAS Columbus reversed all $590 million of the closed account adjustments. According to DFAS officials, when reversing adjustments of this size, they generally have to reverse all the transactions involved with an adjustment not just the canceled ones. After the adjustments were reversed, other errors were created that must now be researched and corrected. For example, for this one contract, the reversal of the contract’s accounting records showed that 63 contract ACRNs had negative unliquidated obligations (NULO) totaling $85.4 million. DFAS Columbus estimates that it will take about 2,300 hours to reaudit and correct the contract. Our earlier review of another contract found that DFAS Columbus had recorded an adjustment that illegally moved $79 million of disbursement charges from fiscal years 1993 through 1995 research and development appropriations to charges against a canceled fiscal year 1992 research and development appropriation. According to the contract files, the adjustment was made to redistribute the disbursement charges in accordance with the “pay oldest funds first” payment terms specified in the contract. However, we found that the redistribution was illegal because it moved disbursement charges back to an appropriation account that had closed several months before the initial disbursement was made. For example, the initial $79 million disbursement occurred in February 1999, but the adjustment resulted in a charge against an appropriation that canceled 4 months earlier on September 30, 1998. DOD agreed that the adjustment was illegal and reversed the $79 million. The reversal identified other accounting errors on the contract that now must be corrected. According to DFAS contract accounting records, as of April 2002, the contract had NULOs totaling over $100 million that will need to be researched and corrected. DFAS Columbus officials estimate that a reaudit of this contract will take over 1,850 hours to complete. DOD officials told us they plan to complete all 30 reaudits to correct the fiscal year 2000 illegal and otherwise improper adjustments by September 30, 2002. In addition to DFAS’s reaudit of the contract, Air Force officials have also initiated an investigation into the circumstances surrounding the initial $79 million illegal adjustment to determine if personnel responsible for monitoring and administering the contract acted improperly, including the possibility that the adjustments may have resulted in Antideficiency Act violations. Air Force officials told us that they plan to complete the investigation and issue their report before the end of fiscal year 2002. We previously reported that the DFAS contract reconciliation system (CRS) and other controls necessary to ensure that adjustments to closed appropriation accounts were proper were not in place. We noted that DOD was in the process of upgrading CRS and correcting other control problems that significantly contributed to many of the illegal or otherwise improper adjustments to closed accounts. However, because DOD did not complete many of these actions until the end of fiscal year 2001, controls were not in place to ensure that the $1.9 billion of closed account adjustments made during fiscal year 2001 were legal and proper. Our evaluation of $291 million (15 percent) of DOD’s reported $1.9 billion fiscal year 2001 closed appropriation account adjustments found that $172 million (59 percent) were either illegal or otherwise improper. These adjustments should not have been made because the initial disbursements (1) occurred after the appropriation being charged had already canceled, (2) occurred before the appropriation charged was enacted, or (3) were charged to the correct appropriation in the first place and no adjustment was necessary. Also included in the $172 million of illegal or otherwise improper closed account adjustments were adjustments that were not sufficiently documented to establish that they were proper. These adjustments were considered improper because agencies must be able to provide documentation to show that the adjustments are legal and that they changed an incorrect charge to a correct one. Table 2 provides additional details on the $172 million of adjustments that should not have been made. DOD officials agreed to reverse and correct the $172 million of illegal and otherwise improper closed account adjustments. The remaining $119 million of the $291 million of adjustments was for adequately documented corrections of errors that DOD had made over the years and, therefore, were not in violation of appropriations law or otherwise improper. DOD officials told us they plan to review another $1.1 billion of fiscal year 2001 closed account adjustments in addition to the $291 million of closed account adjustments that we already reviewed. According to the officials, the additional $1.1 billion of adjustments were selected based on various factors including large dollar amounts or indications that the adjustments may be illegal. The officials noted that completion of the review of additional adjustments would result in detailed reviews of $1.4 billion (about 74 percent) of the total $1.9 billion of the closed account adjustments made during fiscal year 2001. According to the officials, they estimate that the additional reviews will involve several hundred contracts and about 1,000 closed account adjustments. They plan to have the additional reviews and reversals of any illegal or otherwise improper adjustments completed by December 31, 2002. However, the officials told us that because there are so many contracts that may have to be reaudited to correct the accounting, they do not plan to have the reaudits and corrections for fiscal year 2001 closed account adjustments completed until September 2004. In our July 2001 testimony and report, we pointed out that DOD did not have adequate systems, controls, and managerial attention to ensure that the $2.7 billion of fiscal year 2000 adjustments affecting closed appropriation accounts were legal and otherwise proper. Our review disclosed that CRS routinely processed billions of dollars of closed appropriation account adjustments without regard to the requirements of the 1990 account closing law. Further compounding this system deficiency was the lack of DOD oversight on how contract modifications were written and processed, which changed the payment terms of some contracts to improperly make available current and expired funds. As discussed earlier, our follow-on review of fiscal year 2001 closed account adjustments found little improvement over fiscal year 2000. As a result, DOD still could not ensure that closed account adjustments made during fiscal year 2001 were legal and otherwise proper. However, once the controls were fully implemented at the beginning of fiscal year 2002, we found that the first 6 months of fiscal year 2002 closed account adjustments dropped by about 80 percent to $200 million when compared with the same 6 months during fiscal year 2001. In May 2001, DOD began implementing CRS controls to identify and prevent illegal backward adjustments. This control compares the actual disbursement date with the appropriation involved in the adjustment to ensure that the adjustment does not result in moving disbursement charges back to an appropriation that had been canceled before the actual disbursement was made. In September 2001, DFAS upgraded CRS to identify and prevent illegal adjustments from moving disbursement charges forward to an appropriation that had not yet been enacted at the time the initial disbursement was made. In addition to upgrading CRS to identify and prevent illegal closed account adjustments, DOD also changed the CRS default reallocation of adjusting payments from oldest funds first to proration. Under the oldest funds first reallocation method, CRS would change disbursements charged to current and expired appropriation accounts to charges against older appropriation accounts even if the initial disbursement charges were correct. Because the DFAS contract payment system, commonly known as MOCAS (Mechanization of Contract Administration Services), prorated payments across various fund cites in the contract if no payment terms were specified in the contract, this change was intended to reduce errors by making both MOCAS and CRS payment allocation defaults the same. Previously, problems with payment reallocations arose during contract reconciliation when payments that MOCAS had initially allocated across various ACRNs on a pro rata basis were redistributed by CRS across ACRNs on an oldest funds first basis. When this occurred, the CRS payment redistributions would differ substantially from how MOCAS had originally applied the payments. As our previous audit showed, these situations created significant problems by moving payment charges from correct ACRNs to incorrect ACRNs on the contract. For example, in one case, DOD initiated a contract reconciliation because there were insufficient funds remaining on an ACRN to pay a $685,000 contractor invoice, and this redistribution process resulted in moving $210 million of correct payment charges to incorrect ACRNs. According to DFAS Columbus officials, supervisory personnel must now approve any deviation from the CRS default program before CRS controls can be overridden to reallocate disbursements in a manner other than proration. DOD’s reported closed account adjustments during the first 6 months of fiscal year 2002 totaled about $200 million, or about 80 percent less than the over $1 billion of closed account adjustments DOD reportedly made during the same 6-month period of fiscal year 2001. According to DFAS officials, they believe that the significant decline in closed account adjustments is a direct result of increased DOD management and employee emphasis on resolving the problems identified in our earlier report that contributed to illegal and otherwise improper closed account adjustments. While DFAS’s controls had greatly reduced closed account adjustments during the first 6 months of fiscal year 2002, our analysis of closed account transactions found that $253,212 of illegal closed account adjustments had been processed from October 1, 2001, through March 31, 2002. These illegal adjustments moved disbursement charges back to appropriations that had canceled before the initial disbursements occurred. We found these adjustments had processed through a DFAS Columbus computer terminal that did not properly identify and prevent these types of illegal adjustments. DFAS officials could not explain why the computer terminal was not operating properly but took immediate action to upgrade it with the appropriate controls. The officials agreed to reverse and correct the $253,212 of illegal adjustments. Our analysis of subsequent closed account adjustments reported after the upgrade did not identify any additional illegal closed account adjustments. Our earlier testimony and report pointed out that DOD’s illegal and otherwise improper closed account adjustments resulted from the lack of basic controls and managerial attention required to properly account for its disbursements consistent with the 1990 account closing law. We also noted that DOD had been aware since 1996 that one of its major systems allowed for disbursements to be charged in a way that was inconsistent with the law, but had done nothing to fix the problem. This lack of fundamental controls and management oversight fostered an atmosphere in which responsible DOD contracting and accounting personnel took it for granted that it was an acceptable practice to adjust the accounting records to use unspent canceled funds on a contract in order to maximize the use of appropriated funds—a process that we concluded, and DOD agreed, was illegal. We stated that DOD would need to effect changes to its systems, policies, procedures, and the overall weak control environment that fostered the $615 million of illegal and otherwise improper adjustments made during fiscal year 2000. To do this, we pointed out that DOD top management must clearly demonstrate its commitment to adhering to the account closing law and eliminate the abuses of appropriations law. The 80 percent reduction of closed account adjustments during the first 6 months of fiscal year 2002 is an indication that, in the short term, DOD policies, procedures, and management commitment aimed at reducing the amount of illegal and otherwise improper closed account adjustments are having the desired effect. However, DOD’s inability to accurately account for and report on disbursements overall are long-term, major problems that are pervasive and complex in nature. For example, for fiscal year 1999, DFAS data showed that almost $1 of every $3 in contract payment transactions was for adjustments to previously recorded payments— $51 billion of adjustments out of $157 billion in transactions. Some of the key causes of these adjustments—for both closed and unclosed accounts— relate to the complex accounting for contracts along with frequent changes in payment allocation terms. Over the years, we have issued numerous reports discussing DOD’s financial management problems, and we have designated DOD financial management as a high-risk area since 1995. The following discussion on DOD’s use of ACRNs and changes in contract payment allocations is illustrative of the convoluted process that contributes to the need to adjust accounting records to correct errors. Contracts can be assigned anywhere from 1 to over 1,000 ACRNs to accumulate appropriation, budget, and management information. Our review of fiscal years 2000 and 2001 closed account adjustments found that, in many cases, the contracts had large numbers of ACRNs. According to DFAS Columbus officials, numerous ACRNs and changes in payment allocations create payment problems by increasing the amount of data that must be entered and opportunities for errors. These problems also lead to costly and extensive contract reconciliations. For example, our review of fiscal year 2001 closed account adjustments on a Navy contract valued at about $38 million found that the contract contained 548 ACRNs and had been modified over 150 times. Also, according to DFAS Columbus’ reconciliation staff, the contract had received two reconciliations, one of which in 1998 produced 15,322 accounting adjustments. In total, we found about $3 million of fiscal year 2001 closed account adjustments for this contract were not adequately supported and, thus, should not have been made. In discussing the contract’s improper closed account adjustments with DFAS Columbus officials, they agreed that the adjustments were not proper and agreed to reverse and correct them. Because of the large number of ACRNs and contract modifications involved, they estimate that it will take over 9,000 hours to complete the contract audit. Our combined review of the 101 contracts included in our detailed review of fiscal years 2000 and 2001 closed account adjustments found that there were 7,440 ACRNs on the 101 contracts—an average of about 74 ACRNs per contract. As table 3 shows, 38 of the 101 contracts (38 percent) had 51 or more ACRNs. We did not determine for each of these contracts why and for what purpose the numerous ACRNs were being used. However, it is clear that simplified contract accounting will be a key element to reform DOD’s financial management. For example, as we pointed out in our July 2001 report, even a simple purchase could cause extensive and costly rework if assigned numerous ACRNs. We noted that a $1,209 Navy contract for children’s toys, candy, and holiday decorations for a child care center was written with most line items (e.g., bubble gum, tootsie rolls, and balloons) assigned separate ACRNs. A separate requisition number was generated for each item ordered, and a separate ACRN was assigned for each requisition. In total, the contract was assigned 46 ACRNs to account for contract obligations against a single appropriation. To record this payment against the one appropriation DFAS Columbus had to manually allocate the payment to all 46 ACRNs. In addition, the contract was modified three times—twice to correct funding data and once to delete (deobligate) the funding on the contract for out-of-stock items. The modification deleting funding did not cite all the affected ACRNs. DFAS Columbus made errors in both entering and allocating payment data, compounding errors made in the modification. Consequently, DFAS Columbus allocated payment for the toy jewelry line item to fruit chew, jump rope, and jack set ACRNs—all of which should have been deleted by modification. Contract delivery was completed in March 1995, but payment was delayed until October 1995. DFAS Columbus officials acknowledged that this payment consumed an excessive amount of time and effort when compared to the time to process a payment charged to only one ACRN. A single ACRN would also have significantly reduced the amount of data entered into the system and the opportunities for errors. Further compounding the problem of numerous ACRNs are changes in how payments are to be allocated across various ACRNs on a contract. For example, our review of an Air Force contract that had 50 ACRNs contained about $126 million of closed account adjustments of which we found that about $100 million (79 percent) were illegal or otherwise improper. Further, the contract had been modified 292 times for various reasons, including changes to how payments were to be allocated across the various ACRNs. For example, the following instructions were included in contract modifications to specify payment instructions for special ACRN XB—one of several special ACRNs on the contract. Contract modification 94 dated October 22, 1993, stated that, “During FY90 pay FY90 funds first until exhausted and during FY91 pay FY91 funds first until exhausted. After these funds are exhausted, pay from the oldest ACRNs first.” Two years later, contract modification 126 added additional payment terms for special ACRN XB as follows: “During FY90 pay FY90 funds first until exhausted and during FY91 pay FY91 funds first until exhausted. During FY94 pay FY88 funds first until exhausted. After these funds are exhausted, pay from oldest ACRNs first.” In June 2000, modification 160 provided more payment instructions for special ACRN XB. The modification noted that special ACRN XB consisted of funds from both the United States and North Atlantic Treaty Organization (NATO). The payment instructions specified that payments were to be made using the oldest U.S. funds before using NATO funds. According to a July 2000 Air Force memorandum from the Air Force Materiel Command’s Deputy Director of Contracting, the special ACRNs were not to be added to any existing contracts or used in new contracts. The Deputy Director noted that the Air Force still had over 1,300 special ACRNs in the system related to the older contracts, and that there was evidence that special ACRNs were still being created or used for new contract line items or subcontract line items. In discussing this memorandum with responsible Air Force contracting officials, we were told that the Air Force no longer uses special ACRNs and that once all the contracts that currently contain special ACRNs are closed out, errors or other accounting problems caused by this type of contract funding should no longer be a problem. DFAS Columbus officials acknowledged that the combination of numerous ACRNs and modifications that change contract payment allocation terms makes it difficult to maintain accurate payment records. They agreed that the $100 million of illegal and otherwise improper closed account adjustments for the Air Force contract discussed above should not have been made. They told us they plan to reverse and correct the illegal and otherwise improper closed account adjustments on the contract as part of their overall effort to correct fiscal year 2001 closed account adjustments. Because of the numerous ACRNs and contract modifications on the contract, DOD estimates that it will take over 1,500 hours to completely correct the accounting for this contract. In discussing the issues of payment errors caused by numerous ACRNs and changing contract payment allocation terms, military service contracting officials agreed that in the past their contracts contained numerous ACRNs and modifications to change payment allocations. They told us that during the last 2 or 3 years, they have started to write contracts to include more specific payment allocation terms, which should make it much easier for DFAS Columbus to pay contractors without making errors that require subsequent adjustments. Further, on October 1, 2001, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued a memorandum in response to our recommendation that he issue a policy to prohibit the writing of contract modifications to change the payment terms of a contract if the change would result in illegal or otherwise improper adjustments. The memorandum instructed the military service secretaries and defense agency directors to make certain that all contracting activities have procedures in place that ensure compliance with the department’s financial management policies, which currently preclude the improper adjustments we identified in our report. It also required all contract modifications that include adjustments to closed appropriation accounts to be supported with contract file documentation sufficient to establish that the adjustments are legal and proper and received supervisory review. It further required that contract modifications involving closed accounts be approved in writing by the appropriate level comptroller or financial resource manager. DFAS Columbus officials acknowledged that the change in contract writing policies and procedures should result in fewer payment errors and adjustments. While we agree that the changes in contract writing procedures and additional policy requirements should help to reduce errors that require subsequent correcting, we found that there are still thousands of older contracts in MOCAS that have one or more closed accounts that will need to be monitored closely to ensure that illegal or otherwise improper adjustments do not occur. For example, at our request, DFAS Columbus analyzed the MOCAS database to identify contracts for which at least one of the appropriations was canceled. The results of the MOCAS inquiry showed that as of April 2002, there were 15,421 active contracts valued at $519 billion for which at least one appropriation had been canceled. DFAS officials told us that these older contracts may contain errors that will not be discovered until a contract is completed and final contract reconciliation is performed. As we have indicated, since we began our closed account work, and especially since our testimony and report on this issue in July 2001, DOD has taken actions to eliminate illegal or otherwise improper adjustments involving closed account records. As noted earlier in this report, these actions are beginning to produce positive short-term results while efforts to address the long-term problems are still ongoing. At the same time, given the severity of the existing problems and the long-term nature of DOD’s transformation efforts, you asked us to identify options the Congress could consider, including prohibiting some or all adjustments to closed accounts. We basically see two options—do nothing at this time or prohibit any adjustments immediately or shortly after an appropriation account is closed. These options are discussed in the context of our closed account work at DOD. However, options that change the account closing law would also apply to all federal agencies unless the Congress specifically limited them to DOD. One option is to take no legislative action at this time and to continue to allow DOD to adjust closed account records when appropriate to correct accounting errors. This would mean that DOD could make adjustments to closed account records when there is sufficient documentation to show that the (1) disbursement was made when the appropriation account to be charged was available to cover the disbursement, (2) agency either did not record the disbursement when it was made or charged it to the wrong appropriation account at the time, and (3) proposed adjustment will result in the disbursement being charged to the proper appropriation account. Given that DOD’s implementation of controls to identify and prevent illegal and otherwise improper adjustments seem to be having a positive effect based on 6 months of analysis, the Congress could postpone any decision to change the law in order to allow DOD additional time to monitor how its implementation of controls, policies, and procedures needed to eliminate illegal and otherwise improper closed account adjustments is working. However, given DOD’s weak overall control environment, unless DOD’s internal controls and management commitment to this problem are sustained, new ways may be developed to circumvent the controls recently put into place. Thus, there is a risk that, over time, illegal or otherwise improper closed account adjustments could reoccur. If the Congress finds in the future that DOD top management does not sustain its commitment to address its overall disbursement problems, the Congress could require a combination of oversight and reporting by DOD as to the validity of any closed account adjustments. The second option is to amend the account closing law to prohibit any adjustments to an appropriation account after it is closed. Under this option, accounting records of an appropriation account would be final when the account was closed. This option would eliminate adjustments to closed accounts as well as the substantial time and expense associated with making them. It would also provide an additional incentive for DOD to keep better records during the time the account is open since there would be no opportunity to correct the records once the account was closed. At the same time, this change would mean that known errors in accounting records could not be corrected once the account was closed and therefore accounting records would be permanently inaccurate. These inaccurate records could also affect DOD’s ability to promptly pay for goods and services. For example, assume that because of accounting errors associated with a closed appropriation account, the unspent balance of a currently available account was reduced to less than the amount needed to make a subsequent payment. If DOD could not correct the error, it would not be able to make the current payment. In another example, assume that because of accounting errors, the balance of a closed account was less than the amount needed to pay an obligation that had been charged to the closed account when it was open. Current law allows the payment to be made from current funds if the closed account balance exceeds the amount of the payment. Prohibiting all adjustments to closed accounts would make permanent the erroneously reduced balance and therefore the payment could not be made with current funds. In each of these examples, DOD would be unable to pay for the goods or services without obtaining an additional appropriation or other form of legislative relief, which could cause a hardship for the contractor. The Congress could also provide a variation of this option by allowing DOD a limited period, such as 6 months or 1 year, after an account is closed to adjust the accounting records for known errors. This option would provide for finality of records, but only after DOD has some additional opportunity to correct errors it detects immediately after the account is closed. This legislation, while not totally eliminating closed account adjustments, would provide some of the benefits discussed above while increasing the likelihood that DOD records relating to the closed account are more accurate. However, this option also presents some of the same payment and fund availability limitations discussed above. DOD has made significant improvements to its controls to identify and prevent illegal and otherwise improper closed account adjustments as evidenced by the 80 percent reduction of closed account adjustments during the first 6 months of fiscal year 2002. These short-term efforts serve as an example of what can be achieved when DOD takes prompt action to correct known problems through a strong top management commitment. At the same time, closed account adjustments are only a small fraction of the overall disbursement adjustments DOD makes each year as a result of its long-standing financial accounting and management problems. There are no quick fixes to the underlying problems, which must be dealt with over the long term. Nevertheless, there are some additional short-term actions that can be taken by focusing on simplifying accounting and contract payment allocation terms. Modernizing financial management systems, and improving the systems adherence to basic accounting requirements, will ultimately be key to DOD effectively resolving its financial management and contract payment problems. This will require a sustained commitment by DOD’s top management team over a number of years. We recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to help ensure that DFAS Columbus completes its review and correction of the remaining fiscal year 2000 illegal and otherwise improper adjustments, reverse closed account adjustments made during fiscal year 2001 identified in this report as illegal or otherwise improper, determine the entries necessary to correct the accounting for reversed fiscal year 2001 transactions, help ensure that DFAS Columbus completes the review and correction of the additional $1.1 billion of fiscal year 2001 adjustments it has scheduled for detailed review, and continue with DFAS’s top-level management attention and monitoring of the program for future adjustments to closed appropriation accounts. We also recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to continue to monitor these adjustments so that any potential Antideficiency Act violations that may occur are promptly investigated and reported as required by the Antideficiency Act, 31 U.S.C. 1351, and implementing guidance. DOD agreed with our recommendations and outlined its ongoing and planned actions to identify, reverse, and correct illegal and otherwise improper fiscal year 2000 and 2001 closed appropriation account adjustments. DOD pointed out that this process may create adverse accounting conditions for a large number of contracts that will require either complete or partial reaudit to determine the correct accounting necessary to resolve the illegal or otherwise improper closed account adjustments we identified. For example, as we noted in our report, for one contract where DOD made a total of $590 million of closed account adjustments, we found that $210 million of the $590 million of adjustments were unnecessary and should not have been made because the actual disbursements had been recorded correctly. In order to reverse and correct the $210 million of unnecessary adjustments, DOD had to reverse the total $590 million in adjustments, which created other accounting errors that must now be researched and corrected. As our report noted, DOD estimates that it will take about 2,300 hours to resolve all the errors necessary to correct the $210 million of unnecessary adjustments we identified for this contract. DOD said it planned to have all its reaudits and corrective actions completed by September 30, 2004. DOD’s comments are reprinted in appendix II. We are sending copies of the report to interested congressional committees. We are also sending copies of this report to the Secretary of Defense; the Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics; the Secretaries of the Army, Navy, and Air Force; the Director of the Defense Finance and Accounting Service; the Secretary of the Treasury; and the Director of the Office of Management and Budget. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-9505 or [email protected], or Larry W. Logsdon, Assistant Director, at (703) 695-7510 or [email protected]. Major contributors to this report are acknowledged in appendix III. To meet our first objective of monitoring DOD’s efforts to correct the problems we identified in our prior audit, we reviewed DFAS officials' corrective actions taken on 162 adjustments that we previously reported as $615 million of illegal or otherwise improper adjustments. As part of this review, we gathered vouchers that documented the reversal of the adjustments and analyzed financial information from DFAS Columbus’ records and reports, including contracts, contract modifications, shipping notices, invoices, payment vouchers, and schedules of adjustments. We identified and met with the DFAS Columbus officials knowledgeable about each reversed adjustment. We also identified the responsible DFAS or military service locations that maintained the official account records and obtained documentation to show how adjustments were reversed or corrected in the accounting records. To meet our second objective of determining if DOD experienced problems with adjustments to closed appropriation accounts in 2001 similar to the problems with the 2000 adjustments, we monitored DFAS Columbus’ review of $291 million of the $1.9 billion of closed account adjustments DOD reportedly made during fiscal year 2001. DFAS Columbus had already selected the $291 million of closed account adjustments for review at the time we began our audit. We took this approach rather than selecting a large number of adjustments for our own independent review because we knew that DOD had not fully implemented the controls necessary to identify and prevent fiscal year 2001 illegal and otherwise improper closed account adjustments. We reviewed the results of DFAS Columbus’ efforts and worked with staff members responsible for conducting the reviews to resolve any disagreements between DFAS and GAO on whether the documentation showed that the adjustments were legal and proper. As part of our analysis of DFAS Columbus’ reviews, we analyzed documentation supporting DFAS's detailed summaries for each adjustment to determine the reason for the adjustment and whether it was valid. For each adjustment, we reviewed the contract files for supporting hard copy documentation including modifications, invoices, payment vouchers, and MOCAS print screens. We also identified and met with the DFAS Columbus staff members who completed the reviews to discuss the reasons for the adjustments and resolve any differences of opinion between DFAS’s and our conclusions on whether the adjustments were legal and proper. To determine if DOD had implemented the effective system controls, which we identified in our prior report, to its contract reconciliation system to prevent illegal adjustments, we tested the CRS for two types of potentially illegal adjustments during a 6-month period. To do this, we independently analyzed the closed account adjustments included in the CRS database for the first 6 months of fiscal year 2002 to ascertain if CRS had processed any closed account adjustments that resulted in moving a disbursement charge (1) back to an appropriation that was canceled before the actual disbursement was made or (2) forward to an appropriation that had not yet been enacted at the time the actual disbursement was made. We met with responsible DFAS Columbus officials to discuss and resolve any transactions that our analysis identified as violations of either of these two measurements. In instances where there were violations, we met with DFAS Columbus personnel to determine why CRS controls had not prevented the transactions from processing and worked with DFAS’s staff to correct the system deficiencies. We did not validate the accuracy of the CRS database information pertaining to the disbursement dates or appropriations. To meet our third objective of determining why DOD makes so many adjustments to closed accounts, we reviewed the reconciliation summaries for the fiscal years 2000 and 2001 closed account adjustments that we reviewed in detail. We also met with the DFAS Columbus staff members who performed reconciliations to obtain their opinions on the primary reasons why errors occur. However, we did not determine the specific reasons why certain contracts have numerous ACRNs or how the detailed cost information was to be used. Finally, to determine options available to DOD and actions for the Congress to consider that would eliminate or reduce adjustments to closed appropriation accounts, we developed and presented options based on our reviews of fiscal year 2000 and 2001 closed account adjustments and discussions with DOD accounting and procurement officials. We performed our work primarily at the DFAS Center in Columbus, Ohio. We also obtained documentation from the following DFAS locations that were responsible for maintaining official accounting records: Cleveland, and Dayton, Ohio; Denver, Colorado; San Bernardino, California; and St. Louis, Missouri. Our review was conducted from June 2001 through April 2002 in accordance with U.S. generally accepted government auditing standards, except that we did not validate the accuracy of CRS information pertaining to the number of closed account adjustments and related dollar values. Staff members who made key contributions to this report were Bertram J. Berlin, Francine M. Delvecchio, Stephen P. Donahue, Dennis B. Fauber, Jeffrey A. Jacobson, Keith E. McDaniel, and Harold P. Santarelli. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. 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Congress changed the law governing the use of appropriation accounts in 1990 because it found that the Department of Defense (DOD) may have spent hundreds of millions of dollars for purposes that Congress had not approved. The 1990 law provided that, 5 years after the expiration of the period of availability of a fixed-term appropriation, the appropriation account be closed and all remaining balances canceled. After closing, the appropriation account could no longer be used for obligations or expenditures for any purpose. DOD has started the process of correcting the illegal or improper closed account adjustments made during fiscal year 2000. However, this will require substantial effort and, according to DOD, estimates will not be complete before the end of fiscal year 2002. DOD had upgraded its system control features by the end of fiscal year 2001 to preclude many of the wholesale adjustments that GAO had previously identified. Because its system enhancements were done in stages, including some near the end of fiscal year 2001, DOD continued to make large amounts of illegal and otherwise improper closed account adjustments during the year. However, given the intensity of staff efforts to address these issues, it did not expect to complete the correct accounting for transactions found to be in error until September 2004. A lack of fundamental controls and management oversight over the closed accounts was the primary reason DOD was making so many closed account adjustments. DOD's action to resolve its problems with closed account adjustments is beginning to produce positive short-term results. However, if DOD fails to sustain these positive results, Congress could require DOD to validate and report to the Congress all closed account adjustments.

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From its origins as a research project sponsored by the U.S. government, the Internet has grown increasingly important to American businesses and consumers, serving as the host for hundreds of billions of dollars of commerce each year. It is also a critical resource supporting vital services, such as power distribution, health care, law enforcement, and national defense. Similar growth has taken place in other parts of the world. The Internet relies upon a set of functions, called the domain name system, to ensure the uniqueness of each e-mail and Web site address. The rules that govern the domain name system determine which top-level domains (the string of text following the right-most period, such as .gov) are recognized by most computers connected to the Internet. The heart of this system is a set of 13 computers called “root servers,” which are responsible for coordinating the translation of domain names into Internet addresses. Appendix I provides more background on how this system works. The U.S. government supported the implementation of the domain name system for nearly a decade, largely through a Department of Defense contract. Following a 1997 presidential directive, the Department of Commerce began a process for transitioning the technical responsibility for the domain name system to the private sector. After requesting and reviewing public comments on how to implement this goal, in June 1998 the Department issued a general statement of policy, known as the “White Paper.” In this document, the Department stated that because the Internet was rapidly becoming an international medium for commerce, education, and communication, the traditional means of managing its technical functions needed to evolve as well. Moreover, the White Paper stated the U.S. government was committed to a transition that would allow the private sector to take leadership for the management of the domain name system. Accordingly the Department stated that the U.S. government was prepared to enter into an agreement to transition the Internet’s name and number process to a new not-for-profit organization. At the same time, the White Paper said that it would be irresponsible for the U.S. government to withdraw from its existing management role without taking steps to ensure the stability of the Internet during the transition. According to Department officials, the Department sees its role as the responsible steward of the transition process. Subsequently, the Department entered into an MOU with ICANN to guide the transition. ICANN has made significant progress in carrying out MOU tasks related to one of the guiding principles of the transition effort—increasing competition. However, progress has been much slower on activities designed to address the other guiding principles: increasing the stability and security of the Internet; ensuring representation of the Internet community in domain name policy-making; and using private, bottom-up coordination. Earlier this year, ICANN’s president concluded that ICANN faced serious problems in accomplishing the transition and needed fundamental reform. In response, ICANN’s Board established an internal committee to recommend options for reform. ICANN made important progress on several of its assigned tasks related to promoting competition. At the time the transition began, only one company, Network Solutions, was authorized to register names under the three publicly available top-level domains (.com, .net, and .org). In response to an MOU task calling for increased competition, ICANN successfully developed and implemented procedures under which other companies, known as registrars, could carry out this function. As a result, by early 2001, more than 180 registrars were certified by ICANN. The cost of securing these names has now dropped from $50 to $10 or less per year. Another MOU task called on ICANN to expand the pool of available domain names through the selection of new top-level domains. To test the feasibility of this idea, ICANN’s Board selected seven new top-level domains from 44 applications; by March 2002, it had approved agreements with all seven of the organizations chosen to manage the new domains. At a February 2001 hearing before a Subcommittee of the U.S. House of Representatives, witnesses presented differing views on whether the selection process was transparent and based on clear criteria. ICANN’s internal evaluation of this test was still ongoing when we finished our audit work in May 2002. Several efforts to address the White Paper’s guiding principle for improving the security and stability of the Internet are behind schedule. These include developing operational requirements and security policies to enhance the stability and security of the domain name system root servers, and formalizing relationships with other entities involved in running the domain name system. Recent reports by federally sponsored organizations have highlighted the importance of the domain name system to the stability and security of the entire Internet. A presidential advisory committee reported in 1999 that the domain name system is the only aspect of the Internet where a single vulnerability could be exploited to disrupt the entire Internet. More recently, the federal National Infrastructure Protection Center issued several warnings in 2001 stating that multiple vulnerabilities in commonly used domain name software present a serious threat to the Internet infrastructure. In recognition of the critical role that the domain name system plays for the Internet, the White Paper designated the stability and security of the Internet as the top priority of the transition. The MOU tasked ICANN and the Department with developing operational requirements and security policies to enhance the stability and security of the root servers—the computers at the heart of the domain name system. In June 1999, ICANN and the Department entered into a cooperative research and development agreement to guide the development of these enhancements, with a final report expected by September 2000. This deadline was subsequently extended to December 2001 and the MOU between ICANN and the Department was amended to require the development of a proposed enhanced architecture (or system design) for root server security, as well as a transition plan, procedures, and implementation schedule. An ICANN advisory committee, made up of the operators of the 13 root servers and representatives of the Department, is coordinating research on this topic. Although the chairman of the committee stated at ICANN’s November 2001 meeting that it would finish its report by February or March 2002, it had not completed the report as of May 2002. To further enhance the stability of the Internet, the White Paper identified the need to formalize the traditionally informal relationships among the parties involved in running the domain name system. The White Paper pointed out that many commercial interests, staking their future on the successful growth of the Internet, were calling for a more formal and robust management structure. In response, the MOU and its amendments included several tasks that called on ICANN to enter into formal agreements with the parties that traditionally supported the domain name system through voluntary efforts. However, as of May 2002, few such agreements had been signed. ICANN’s Board has approved a model agreement to formalize the relationship between the root server operators and ICANN, but no agreements had been reached with any of the operators as of May 2002. Similarly, there are roughly 240 country-code domains (2-letter top-level domains reserved mainly for national governments), such as .us for the United States. As with the root servers, responsibility for these domains was originally given by the Internet’s developers to individuals who served as volunteers. Although the amended MOU tasked ICANN with reaching contractual agreements with these operators, it has reached agreements with only 2 domain operators as of May 2002. Finally, the amended MOU tasked ICANN with reaching formal agreements with the Regional Internet Registries, each of which is responsible for allocating Internet protocol numbers to users in one of three regions of the world. The registries reported that progress was being made on these agreements, though none had been reached as of May 2002. Progress has also been slow regarding the other two guiding principles outlined in the White Paper, which call for the creation of processes to represent the functional and geographic diversity of the Internet, and for the use of private, bottom-up coordination in preference to government control. In order for the private sector organization to derive legitimacy from the participation of key Internet stakeholders, the White Paper suggested the idea of a board of directors that would balance the interests of various Internet constituencies, such as Internet service providers, domain name managers, technical bodies, and individual Internet users. The White Paper also suggested the use of councils to develop, recommend, and review policies related to their areas of expertise, but added that the board should have the final authority for making policy decisions. The Department reinforced the importance of a representative board in a 1998 letter responding to ICANN’s initial proposal. The Department’s letter cited public comments suggesting that without an open membership structure, ICANN would be unlikely to fulfill its goals of private, bottom-up coordination and representation. ICANN’s Board responded to the Department by amending its bylaws to make it clear that the Board has an “unconditional mandate” to create a membership structure that would elect at-large directors on the basis of nominations from Internet users and other participants. To implement these White Paper principles, the MOU between ICANN and the Department includes two tasks: one relating to developing mechanisms that ensure representation of the global and functional diversity of the Internet and its users, and one relating to allowing affected parties to participate in the formation of ICANN’s policies and procedures through a bottom-up coordination process. In response to these two tasks, ICANN adopted the overall structure suggested by the White Paper. First, ICANN created a policy-making Board of Directors. The initial Board consisted of ICANN’s president and 9 at-large members who were appointed at ICANN’s creation. ICANN planned to replace the appointed at-large Board members with 9 members elected by an open membership to reflect the diverse, worldwide Internet community. Second, ICANN organized a set of three supporting organizations to advise its Board on policies related to their areas of expertise. One supporting organization was created to address Internet numbering issues, one was created to address protocol development issues, and one was created to address domain name issues. Together these three supporting organizations selected 9 additional members of ICANN’s Board–3 from each organization. Thus, ICANN’s Board was initially designed to reflect the balance of interests described in the White Paper. Figure 1 illustrates the relationships among ICANN’s supporting organizations and its Board of Directors, as well as several advisory committees ICANN also created to provide input without formal representation on its Board. Despite considerable debate, ICANN has not resolved the question of how to fully implement this structure, especially the at-large Board members. Specifically, in March 2000, ICANN’s Board noted that extensive discussions had not produced a consensus regarding the appropriate method to select at-large representatives. The Board therefore approved a compromise under which 5 at-large members would be elected through regional, online elections. In October 2000, roughly 34,000 Internet users around the world voted in the at-large election. The 5 successful candidates joined ICANN’s Board in November 2000, replacing interim Board members. Four of the appointed interim Board members first nominated in ICANN’s initial proposal continue to serve on the Board. Parallel with the elections, the Board also initiated an internal study to evaluate options for selecting at-large Board members. In its November 2001 report, the committee formed to conduct this study recommended the creation of a new at-large supporting organization, which would select 6 Board members through regional elections. Overall, the number of at- large seats would be reduced from 9 to 6, and the seats designated for other supporting organizations would increase from 9 to 12. A competing, outside study by a committee made up of academic and nonprofit interests recommended continuing the initial policy of directly electing at-large Board members equal to the number selected by the supporting organizations. This committee also recommended strengthening the at- large participation mechanisms through staff support and a membership council similar to those used by the existing supporting organizations.Because of ongoing disagreement among Internet stakeholders about how individuals should participate in ICANN’s efforts, ICANN’s Board referred the question to a new Committee on ICANN Evolution and Reform. Under the current bylaws, the 9 current at-large Board seats will cease to exist after ICANN’s 2002 annual meeting, to be held later this year. Although the MOU calls on ICANN to design, develop, and test its procedures, the two tasks involving the adoption of the at-large membership process were removed from the MOU when it was amended in August 2000. However, as we have noted, this process was not fully implemented at the time of the amendment because the election did not take place until October 2000, and the evaluation committee did not release its final report until November 2001. When we discussed this amendment with Department officials, they said that they agreed to the removal of the tasks in August 2000 because ICANN had a process in place to complete them. Nearly 2 years later, however, the issue of how to structure ICANN’s Board to achieve broad representation continues to be unresolved and has been a highly contentious issue at ICANN’s recent public meetings. In addition, the amended MOU tasked ICANN with developing and testing an independent review process to address claims by members of the Internet community who were adversely affected by ICANN Board decisions that conflicted with ICANN’s bylaws. However, ICANN was unable to find qualified individuals to serve on a committee charged with implementing this policy. In March 2002, ICANN’s Board referred this unresolved matter to the Committee on ICANN Evolution and Reform for further consideration. In the summer of 2001, ICANN’s current president was generally optimistic about the corporation’s prospects for successfully completing the remaining transition tasks. However, in the face of continued slow progress on key aspects of the transition, such as reaching formal agreements with the root server and country-code domain operators, his assessment changed. In February 2002, he reported to ICANN’s Board that the corporation could not accomplish its assigned mission on its present course and needed a new and reformed structure. The president’s proposal for reform, which was presented to ICANN’s Board in February, focused on problems he perceived in three areas: (1) too little participation in ICANN by critical entities, such as national governments, business interests, and entities that share responsibility for the operation of the domain name system (such as root server operators and country- code domain operators); (2) too much focus on process and representation and not enough focus on achieving ICANN’s core mission; and (3) too little funding for ICANN to hire adequate staff and cover other expenditures. He added that in his opinion, there was little time left to make necessary reforms before the ICANN experiment came to “a grinding halt.” Several of his proposed reforms challenged some of the basic approaches for carrying out the transition. For example, the president concluded that a totally private sector management model had proved to be unworkable. He proposed instead a “well-balanced public-private partnership” that involved an increased role for national governments in ICANN, including having several voting members of ICANN’s Board selected by national governments. The president also proposed changes that would eliminate global elections of at-large Board members by the Internet community, reduce the number of Board members selected by ICANN’s supporting organizations, and have about a third of the board members selected through a nominating committee composed of Board members and others selected by the Board. He also proposed that ICANN’s funding sources be broadened to include national governments, as well as entities that had agreements with ICANN or received services from ICANN. In response, ICANN’s Board instructed an internal Committee on ICANN Evolution and Reform (made up of four ICANN Board members) to consider the president’s proposals, along with reactions and suggestions from the Internet community, and develop recommendations for the Board’s consideration on how ICANN could be reformed. The Committee reported back on May 31, 2002, with recommendations reflecting their views on how the reform should be implemented. For example, the committee built on the ICANN president’s earlier proposal to change the composition of the Board and have some members be selected through a nominating committee process, and to create an ombudsman to review complaints and criticisms about ICANN and report the results of these reviews to the Board. In other cases, the committee agreed with conclusions reached by the president (such as the need for increasing the involvement of national governments in ICANN and improving its funding), but did not offer specific recommendations for addressing these areas. The committee’s report, which is posted on ICANN’s public Web site, invited further comment on the issues and recommendations raised in preparation for ICANN’s June 2002 meeting in Bucharest, Romania. The committee recommended that the Board act in Bucharest to adopt a reform plan that would establish the broad outline of a reformed ICANN, so that the focus could be shifted to the details of implementation. The committee believed that this outline should be then be filled in as much as possible between the Bucharest meeting and ICANN’s meeting in Shanghai in late October 2002. As mentioned previously, the Department is responsible for general oversight of work done under the MOU, as well as the responsibility for determining when ICANN, the private sector entity chosen by the Department to carry out the transition, has demonstrated that it has the resources and capability to manage the domain name system. However, the Department’s public assessment of the status of the transition process has been limited in that its oversight of ICANN has been informal, it has not issued status reports, and it has not publicly commented on specific reform proposals being considered by ICANN. According to Department officials, the Department’s relationship with ICANN is limited to its agreements with the corporation, and its oversight is limited to determining whether the terms of these agreements are being met. They added that the Department does not involve itself in the internal governance of ICANN, is not involved in ICANN’s day-to-day operations, and would not intervene in ICANN’s activities unless the corporation’s actions were inconsistent with the terms of its agreements with the Department. Department officials emphasized that because the MOU defines a joint project, decisions regarding changes to the MOU are reached by mutual agreement between the Department and ICANN. In the event of a serious disagreement with ICANN, the Department would have recourse under the MOU to terminate the agreement. Department officials characterized its limited involvement in ICANN’s activities as being appropriate and consistent with the purpose of the project: to test ICANN’s ability to develop the resources and capability to manage the domain name system with minimal involvement of the U.S. government. Department officials said that they carry out their oversight of ICANN’s MOU-related activities mainly through ongoing informal discussions with ICANN officials. They told us that there is no formal record of these discussions. The Department has also retained authority to approve certain activities under its agreements with ICANN, such as reviewing and approving certain documents related to root server operations. This would include, for example, agreements between ICANN and the root server operators. In addition, the Department retains policy control over the root zone file, the “master file” of top-level domains shared among the 13 root servers. Changes to this file, such as implementing a new top-level domain, must first be authorized by the Department. In addition, the Department sends officials to attend ICANN’s public forums and open Board of Directors meetings, as do other countries and Internet interest groups. According to the Department, it does not participate in ICANN decision-making at these meetings but merely acts as an observer. The Department also represents the United States on ICANN’s Governmental Advisory Committee, which is made up of representatives of about 70 national governments and intergovernmental bodies, such as treaty organizations. The Committee’s purpose is to provide ICANN with nonbinding advice on ICANN activities that may relate to concerns of governments, particularly where there may be an interaction between ICANN’s policies and national laws or international agreements. The Department made a considerable effort at the beginning of the transition to create an open process that solicited and incorporated input from the public in formulating the guiding principles of the 1998 White Paper. However, since the original MOU, the Department’s public comments on the progress of the transition have been general in nature and infrequent, even though the transition is taking much longer than anticipated. The only report specifically called for under the MOU is a final joint project report to document the outcome of ICANN’s test of the policies and procedures designed and developed under the MOU. This approach was established at a time when it was expected that the project would be completed by September 2000. So far, there has been only one instance when the Department provided ICANN with a formal written assessment of the corporation’s progress on specific transition tasks. This occurred in June 1999, after ICANN took the initiative to provide the Department and the general public with a status report characterizing its progress on MOU activities. In a letter to ICANN, the Department stated that while ICANN had made progress, there was still important work to be done. For, example, the Department stated that ICANN’s “top priority” must be to complete the work necessary to put in place an elected Board of Directors on a timely basis, adding that the process of electing at-large directors should be complete by June 2000. ICANN made the Department’s letter, as well as its positive response, available to the Internet community on its public Web site. Although ICANN issued additional status reports in the summers of 2000 and 2001, the Department stated that it did not provide written views and recommendations regarding them, as it did in July 1999, because it agreed with ICANN’s belief that additional time was needed to complete the MOU tasks. Department officials added that they have been reluctant to comment on ICANN’s progress due to sensitivity to international concerns that the United States might be seen as directing ICANN’s actions. The officials stated that they did not plan to issue a status report at this time even though the transition is well behind schedule, but will revisit this decision as the September 2002 termination date for the MOU approaches. When we met with Department officials in February 2002, they told us that substantial progress had been made on the project, but they would not speculate on ICANN’s ability to complete its tasks by September 2002. The following week, ICANN’s president released his report stating that ICANN could not succeed without fundamental reform. In response, Department officials said that they welcomed the call for the reform of ICANN and would follow ICANN’s reform activities and process closely. When we asked for their views on the reform effort, Department officials stated that they did not wish to comment on specifics that could change as the reform process proceeds. To develop the Department’s position on the effort, they said that they are gathering the views of U.S. business and public interest groups, as well as other executive branch agencies, such as the Department of State; the Office of Management and Budget; the Federal Communications Commission; and components of the Department of Commerce, such as the Patent and Trademark Office. They also said that they have consulted other members of ICANN’s Governmental Advisory Committee to discuss with other governments how best to support the reform process. They noted that the Department is free to adjust its relationship with ICANN in view of any new mission statement or restructuring that might result from the reform effort. Department officials said that they would assess the necessity for such adjustments, or for any legislative or executive action, depending on the results of the reform process. In conclusion, Mr. Chairman, the effort to privatize the domain name system has reached a critical juncture, as evidenced by slow progress on key tasks and ICANN’s current initiative to reevaluate its mission and consider options for reforming its structure and operations. Until these issues are resolved, the timing and eventual outcome of the transition effort remain highly uncertain, and ICANN’s legitimacy and effectiveness as the private sector manager of the domain name system remain in question. In September 2002, the current MOU between the Department and ICANN will expire. The Department will be faced with deciding whether the MOU should be extended for a third time, and if so, what amendments to the MOU are needed, or whether some new arrangement with ICANN or some other organization is necessary. The Department sees itself as the responsible steward of the transition, and is responsible for gaining assurance that ICANN has the resources and capability to assume technical management of the Internet domain name system. Given the limited progress made so far and the unsettled state of ICANN, Internet stakeholders have a need to understand the Department’s position on the transition and the prospects for a successful outcome. In view of the critical importance of a stable and secure Internet domain name system to governments, business, and other interests, we recommend that the Secretary of Commerce issue a status report detailing the Department’s assessment of the progress that has been made on transition tasks, the work that remains to be done on the joint project, and the estimated timeframe for completing the transition. In addition, the status report should discuss any changes to the transition tasks or the Department’s relationship with ICANN that result from ICANN’s reform initiative. Subsequent status reports should be issued periodically by the Department until the transition is completed and the final project report is issued. This concludes my statement, Mr. Chairman. I will be pleased to answer any questions that you and other Members of the Subcommittee may have. For questions regarding this testimony, please contact Peter Guerrero at (202) 512-8022. Individuals making key contributions to this testimony included John P. Finedore; James R. Sweetman, Jr.; Mindi Weisenbloom; Keith Rhodes; Alan Belkin; and John Shumann. Although the U.S. government supported the development of the Internet, no single entity controls the entire Internet. In fact, the Internet is not a single network at all. Rather, it is a collection of networks located around the world that communicate via standardized rules called protocols. These rules can be considered voluntary because there is no formal institutional or governmental mechanism for enforcing them. However, if any computer deviates from accepted standards, it risks losing the ability to communicate with other computers that follow the standards. Thus, the rules are essentially self-enforcing. One critical set of rules, collectively known as the domain name system, links names like www.senate.gov with the underlying numerical addresses that computers use to communicate with each other. Among other things, the rules describe what can appear at the end of a domain name. The letters that appear at the far right of a domain name are called top-level domains (TLDs) and include a small number of generic names such as .com and .gov, as well as country-codes such as .us and .jp (for Japan). The next string of text to the left (“senate” in the www.senate.gov example) is called a second-level domain and is a subset of the top-level domain. Each top-level domain has a designated administrator, called a registry, which is the entity responsible for managing and setting policy for that domain. Figure 2 illustrates the hierarchical organization of domain names with examples, including a number of the original top-level domains and the country-code domain for the United States. The domain name system translates names into addresses and back again in a process transparent to the end user. This process relies on a system of servers, called domain name servers, which store data linking names with numbers. Each domain name server stores a limited set of names and numbers. They are linked by a series of 13 root servers, which coordinate the data and allow users to find the server that identifies the site they want to reach. They are referred to as root servers because they operate at the root level (also called the root zone), as depicted in figure 2. Domain name servers are organized into a hierarchy that parallels the organization of the domain names. For example, when someone wants to reach the Web site at www.senate.gov, his or her computer will ask one of the root servers for help. The root server will direct the query to a server that knows the location of names ending in the .gov top-level domain. If the address includes a sub-domain, the second server refers the query to a third server—in this case, one that knows the address for all names ending in senate.gov. This server will then respond to the request with an numerical address, which the original requester uses to establish a direct connection with the www.senate.gov site. Figure 3 illustrates this example. Within the root zone, one of the servers is designated the authoritative root (or the “A root” server). The authoritative root server maintains the master copy of the file that identifies all top-level domains, called the “root zone file,” and redistributes it to the other 12 servers. Currently, the authoritative root server is located in Herndon, Virginia. In total, 10 of the 13 root servers are located in the United States, including 3 operated by agencies of the U.S. government. ICANN does not fund the operation of the root servers. Instead, they are supported by the efforts of individual administrators and their sponsoring organizations. Table 1 lists the operator and location of each root server. Because much of the early research on internetworking was funded by the Department of Defense (DOD), many of the rules for connecting networks were developed and implemented under DOD sponsorship. For example, DOD funding supported the efforts of the late Dr. Jon Postel, an Internet pioneer working at the University of Southern California, to develop and coordinate the domain name system. Dr. Postel originally tracked the names and numbers assigned to each computer. He also oversaw the operation of the root servers, and edited and published the documents that tracked changes in Internet protocols. Collectively, these functions became known as the Internet Assigned Numbers Authority, commonly referred to as IANA. Federal support for the development of the Internet was also provided through the National Science Foundation, which funded a network designed for academic institutions. Two developments helped the Internet evolve from a small, text-based research network into the interactive medium we know today. First, in 1990, the development of the World Wide Web and associated programs called browsers made it easier to view text and graphics together, sparking interest of users outside of academia. Then, in 1992, the Congress enacted legislation for the National Science Foundation to allow commercial traffic on its network. Following these developments, the number of computers connected to the Internet grew dramatically. In response to the growth of commercial sites on the Internet, the National Science Foundation entered into a 5-year cooperative agreement in January 1993 with Network Solutions, Inc., to take over the jobs of registering new, nonmilitary domain names, including those ending in .com, .net, and .org, and running the authoritative root server. At first, the Foundation provided the funding to support these functions. As demand for domain names grew, the Foundation allowed Network Solutions to charge an annual fee of $50 for each name registered. Controversy surrounding this fee was one of the reasons the United States government began its efforts to privatize the management of the domain name system. Working under funding provided by the Department of Defense, a group led by Drs. Paul Mockapetris and Jon Postel creates the domain name system for locating networked computers by name instead of by number. Dr. Postel publishes specifications for the first six generic top-level domains (.com, .org, .edu, .mil, .gov, and .arpa). By July 1985, the .net domain was added. President Bush signs into law an act requiring the National Science Foundation to allow commercial activity on the network that became the Internet. Network Solutions, Inc., signs a 5-year cooperative agreement with the National Science Foundation to manage public registration of new, nonmilitary domain names, including those ending in .com, .net, or .org. President Clinton issues a presidential directive on electronic commerce, making the Department of Commerce the agency responsible for managing the U.S. government’s role in the domain name system. The Department of Commerce issues the “Green Paper,” which is a proposal to improve technical management of Internet names and addresses through privatization. Specifically, the Green Paper proposes a variety of issues for discussion, including the creation of a new nonprofit corporation to manage the domain name system. In response to comments on the Green Paper, the Department of Commerce issues a policy statement known as the “White Paper,” which states that the U.S. government is prepared to transition domain name system management to a private, nonprofit corporation. The paper includes the four guiding principles of privatization: stability; competition; representation; and private, bottom-up coordination. The Internet Corporation for Assigned Names and Numbers (ICANN) incorporates in California. ICANN’s by-laws call for a 19-member Board with 9 members elected “at-large.” The Department of Commerce and ICANN enter into an MOU that states the parties will jointly design, develop, and test the methods and procedures necessary to transfer domain name system management to ICANN. The MOU is set to expire in September 2000. ICANN issues its first status report, which lists ICANN’s progress to date and states that there are important issues that still must be addressed. ICANN and the Department of Commerce enter into a cooperative research and development agreement to study root server stability and security. The study is intended to result in a final report by September 2000. ICANN and the Department of Commerce approve MOU amendment 1 to reflect the roles of ICANN and Network Solutions, Inc. The Department of Commerce contracts with ICANN to perform certain technical management functions related to the domain name system, such as address allocation and root zone coordination. At a meeting in Cairo, Egypt, ICANN adopts a process for external review of its decisions that utilizes outside experts, who will be selected at an unspecified later date. ICANN also approves a compromise whereby 5 at- large Board members will be chosen in regional online elections. ICANN issues its second Status Report, which states that several of the tasks have been completed, but work on other tasks was still under way. At a meeting in Yokahama, Japan, ICANN’s Board approves a policy for the introduction of new top-level domains. The Department of Commerce and ICANN approve MOU amendment 2, which deleted tasks related to membership mechanisms, public information, and registry competition and extended the MOU until September 2001. They also agree to extend the cooperative research and development agreement on root server stability and security through September 2001. ICANN holds worldwide elections to replace 5 of the 9 interim Board members appointed at ICANN’s creation. At a meeting in California, ICANN selects 7 new top-level domain names: .biz (for use by businesses), .info (for general use), .pro (for use by professionals), .name (for use by individuals), .aero (for use by the air transport industry), .coop (for use by cooperatives), and .museum (for use by museums).

This testimony discusses privatizing the management of the Internet domain name system. This system is a vital aspect of the Internet that works like an automated telephone directory, allowing users to reach Web sites using easy-to-understand domain names like www.senate.gov , instead of the string of numbers that computers use when communicating with each other. The U.S. government supported the development of the domain name system, and, in 1997, the President charged the Department of Commerce with transitioning it to private management. The Department issued a policy statement, called the "White Paper," that defined the four guiding principles for the privatization effort as stability, competition, representation, and private, bottom-up coordination. After reviewing several proposals from private sector organizations, the Department chose the Internet Corporation for Assigned Names and Numbers (ICANN), a not-for-profit corporation, to carry out the transition. In November 1998, the Department entered into an agreement with ICANN in the form of a Memorandum of Understanding (MOU) under which the two parties agreed to collaborate on a joint transition project. Progress on and completion of each task is assessed by the Department on a case-by-case basis, with input from ICANN. The timing and eventual outcome of the transition remains highly uncertain. ICANN has made significant progress in carrying out MOU tasks related to one of the guiding principles of the transition effort--increasing competition--but progress has been much slower in the areas of increasing the stability and security of the Internet; ensuring representation of the Internet community in domain name policy-making; and using private bottom-up coordination. Although the transition is well behind schedule, the Department's public assessment of the progress being made on the transition has been limited for several reasons. First, the Department carries out its oversight of ICANN's MOU-related activities mainly through informal discussions with ICANN officials. Second, although the transition is past its original September 2000 completion date, the Department has not provided a written assessment of ICANN's progress since mid-1999. Third, although the Department stated that it welcomed the call for the reform of ICANN, they have not yet taken public position on reforms being proposed.

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The federal government has held funds in trust for Indian tribes since 1820. Enacted in 1887, the General Allotment Act, also known as the Dawes Act, provided for the division of Indian tribal lands into allotments of up to 160 acres for individual tribal members and families. Subsequently, the Indian Reorganization Act, enacted in 1934 and also known as the Wheeler-Howard Act, ended the allotment of tribal lands and extended indefinitely the period that the federal government would hold allotted lands in trust. Many of these allotments remain in trust today, now jointly owned in common by hundreds and, in many cases, thousands of individual Indians, each with an undivided—or fractionated—interest in the whole parcel. As trustee for tribes and Indians, the Secretary of the Interior is required to account for the revenue generated by each interest (amounting, in some cases, to less than 1 cent per year), invest the trust funds, and provide other trust services to the beneficiaries. The Secretary also is responsible for maintaining official Indian land title and ownership records, managing natural resource assets, and probating estates. Much of this responsibility has been delegated to BIA, which has 12 regional offices and 85 agency offices that are located on or near reservations. Beginning in April 1997, Interior has issued several strategic plans for implementing trust reforms. Concerned that Interior had not achieved the desired improvement in trust management, the Secretary in January 2002 initiated an effort to develop a comprehensive, departmentwide approach for improving Indian trust management. On March 28, 2003, Interior issued the Comprehensive Trust Management Plan, which presented a strategic plan to guide the design and implementation of integrated trust reform efforts. Interior’s performance of fiduciary trust business practices nationwide was documented and reported in the As-Is Trust Business Model Report. The information contained in the Comprehensive Trust Management Plan and the As-Is Report is the foundation for the recommendations for reengineered business processes that appear in the To-Be Model—or Fiduciary Trust Model. The Fiduciary Trust Model contains implementation strategies for major business processes, and currently serves as Interior’s guide for trust reform. As a basis for revising the department’s approach for improving Indian trust management, Interior contracted with Electronic Data Systems in 2001 to determine how trust reforms were then being conducted and how they could be improved. The firm’s recommendations included both improvements in trust management and a reorganization of Interior’s agencies carrying out trust management and improvement. In response to these recommendations, the Secretary of the Interior reorganized BIA and OST in April 2003. The reorganization increased OST’s SES positions from 7 to 14 by (1) creating 6 OST regional trust administrators, located at OST’s Albuquerque headquarters, who are responsible for providing account holders with trust services and with overseeing fiduciary trust officers and other personnel in the field and (2) adding an SES position in realigning OST’s management structure by creating three divisions. As shown in table 1, OST’s budget has grown from $34.1 million in fiscal year 1997 to $222.8 million in fiscal year 2006. Similarly, OST’s full-time equivalent positions have increased from 245 employees in fiscal year 1997 to 590 employees in fiscal year 2006. While the growth in budget and staff mainly reflect OST’s efforts to implement reforms and its growing responsibility for trust fund management, OST’s funding also supports other Indian-related activities. For example, in fiscal year 2006, OST transferred (1) $54.4 million to the Office of Historical Trust Accounting, (2) $34.0 million for implementing the Indian Land Consolidation Act activities, (3) $7.6 million to the Office of Hearings and Appeals, (4) $5.6 million to the Interior Solicitor’s Office to cover costs associated with the Cobell v. Kempthorne lawsuit, (5) $1.3 million to BIA for tribal contract and compact appraisals, and (6) $300,000 to Interior’s Chief Information Officer. OST began funding the Office of Historical Trust Accounting in fiscal year 2001 and activities related to the Indian Land Consolidation Act in fiscal year 2000. Responsibility for Indian land appraisals was transferred from BIA to OST in 2002 and is currently managed by OST’s Office of Appraisal Services. In addition to its trust reform activities, OST is responsible for maintaining trust-related Indian records and developing trust investment strategies for beneficiaries. In 1999, OST created the Office of Trust Records to ensure that Indian records are maintained and safeguarded. In September 2003, Interior signed a Memorandum of Understanding with the National Archives and Records Administration to create a national repository for American Indian records, including fiduciary trust records, in Lenexa, Kansas. OST’s Division of Trust Funds Investment is responsible for managing and investing individual Indian and tribal assets. OST is allowed to invest trust funds only in securities backed by the federal government, including U.S. Treasuries and securities from government-sponsored agencies. OST has implemented several key trust fund management reforms, but OST has not prepared a timetable for completing its remaining trust reform activities or identified a date for its termination under the 1994 Act. OST estimates that almost all of the key reforms needed to develop an integrated trust management system and to provide improved trust services will be completed by November 2007, but OST believes some additional improvements are important to make. In particular, once the validation of BIA’s new trust asset and accounting management system (TAAMS) leasing information for Indian lands with recurring income is completed, BIA and OST plan to validate the leasing information for Indian lands that do not have recurring income. The Special Trustee expects these validation activities will be completed by December 2009. Despite the 1994 Act’s requirement, OST has not proposed a termination date for the office once trust reforms are completed. The Special Trustee noted that Interior will need OST’s staff to continue to perform their functions after trust reforms are completed, whether or not OST is terminated, because OST was given responsibility for managing trust fund operations and other trust-related activities after the 1994 Act was enacted. The Special Trustee also added that OST will reduce its expenditures once key trust reforms are completed by terminating contracts, but he believes that OST’s current staff is about the right size needed to manage OST’s operations after trust reforms are completed. However, because OST has not developed a workforce plan that reexamines the expenditures and staffing levels needed for trust fund operations once trust reforms are completed, additional opportunities may exist to further reduce expenditures and OST staff. OST has made important progress in implementing trust fund management reforms and plans to complete almost all of the key reforms by November 2007. Specifically, OST is responsible for trust reforms associated with the trust funds accounting system and the overall integration of the various trust reform automated systems. BIA and OST are responsible for trust reforms associated with its implementation of the TAAMS system for managing land title records and leasing activities for Indian lands. NBC is responsible for developing a management system for Indian land appraisals. OST is responsible for implementing the following trust reforms: Trust Funds Accounting System (TFAS). In March 1998, OST awarded a contract to SEI Investments to use a modified version of its commercial trust accounting system that provides basic collection, accounting, investing, disbursing, and reporting functions. TFAS replaced a module in BIA’s Integrated Records Management System and two OST systems, which could not fully perform trust accounting functions. TFAS was deployed in August 1998 and was fully operational in May 2000. OST continues to contract with SEI Investments at a cost of about $14 million per year for operations and general maintenance, which includes system upgrades twice annually. TFAS is an accounting and investment system that enables the automated production of account statements for individual Indians and tribal account holders. It also allows, for example, automated trade settlements, automated payments of financial asset income, daily securities pricing, and automated reconciliation. In addition, landownership and leasing accounts will be included in TFAS as part of BIA’s and OST’s TAAMS conversion project to ensure that both systems contain accurate and complete information. Trust Funds Receivable. In 2004, OST awarded a contract to Bank of America to centralize the collection of trust payments through a single remittance-processing center, also known as a lockbox, to minimize the risk of loss or theft. Under phase I of the new system, which became effective in October 2005, trust payments are sent to the processing center in Prescott, Arizona, for deposit into trust fund accounts. Previously, BIA and OST personnel in agencies for each of the 12 regions collected trust payments for trust fund account holders and then mailed or deposited the payments. Phase II of this project is to have all collections and distributions automated in TFAS. However, implementation requires the completion of the validation of the land title and leasing data in TAAMS. According to OST officials, full automation of all collections and distributions is scheduled for November 2007. OST officials said that two agencies in BIA’s Southern Plains region completed Phase II by the end of June 2005— the remaining agencies in BIA’s Southern Plains region and one agency in BIA’s Eastern Oklahoma region completed Phase II by the end of January 2006. Several agencies in BIA’s Great Plains region completed Phase II by the end of June 2006—the remaining agencies in BIA’s Great Plains region and several agencies in BIA’s Northwest region completed Phase II by the end of August 2006. BIA’s Rocky Mountain region completed Phase II by the end of July 2006, and BIA’s Navajo region and several agencies in BIA’s Western regions completed Phase II by the end of September 2006. In addition, OST has completed its desktop procedures for handling the receipt of trust funds, and BIA is completing its desktop standardization procedures, with some assistance from OST. Trust Beneficiary Call Center. In December 2004, OST established the Trust Beneficiary Call Center, a centralized call center in its headquarters office in Albuquerque, New Mexico. Through a toll-free telephone number, the call center provides timely responses to beneficiaries’ questions and allows them to access account information. In addition, the call center operators and staff have recently received training and access to TAAMS through OST’s trust portal to enable them to better answer questions about beneficiaries’ assets. If a beneficiary’s question cannot be answered, the call center operator is to refer the question to an OST Fiduciary Trust Officer, generally colocated at the BIA field agencies, to research and respond accordingly. The call center was fully operational by December 2005. In establishing the call center, calls were redirected from preexisting toll- free telephone numbers at BIA field agencies. OST officials told us that the Trust Beneficiary Call Center has helped to relieve some of the workload from OST and BIA staff in the field. OST data show that, as of July 2006, the call center had received over 135,000 calls from beneficiaries, with a first-line resolution rate of about 89 percent. Trust Portal. OST completed the implementation of its trust portal in May 2006. OST’s trust portal provides employees with a single point of access to applications and other resources, such as the trust funds receivable system and the intranet. Currently, the trust portal is available to OST employees and some BIA employees. According to an OST official, various contractors developed the trust portal and OST staff maintain it. Risk Management Program. Beginning in 1999, OST has contracted with CD&L to develop and refine the risk management program for establishing management controls to monitor and evaluate the effectiveness of Interior’s trust operations. The risk management program has evolved over the past few years—the original risk management product was a stand- alone compact disk application that provided an assessment tool to evaluate OST’s business operations. Since then, a Web-based risk management tool, the RM-Plus tool, has been developed to facilitate data collection and reporting for all Interior bureaus and offices with Indian trust responsibilities. OST implemented the RM-Plus in August 2004 and has contracted with Chickasaw Nation Industries (CNI) to operate and maintain the tool. BIA used the RM-Plus tool in 2006 to produce its financial assurance statement at the Southern Plains pilot location. OST officials said that additional revisions are being made to the RM-Plus tool in response to the new requirements in the Office of Management and Budget’s Circular A-123 for ensuring the accountability and cost- effectiveness of agency programs. The RM-Plus is currently being revised to incorporate the circular’s requirements and is scheduled to be completed by March 2007. If other Interior bureaus and offices with trust responsibilities decide to use the RM-Plus tool, OST will assist them by providing advice and access to the RM-Plus tool. BIA and OST are implementing the following trust reforms to develop centralized systems for managing land title records and leasing activities as well as managing and tracking probates for Indian lands: TAAMS. In December 1998, Interior awarded a contract to Artesia to develop TAAMS, a centralized system with two components for managing Indian trust assets: the TAAMS land title system and the leasing module. Over the years, Artesia was bought out by several contractors. Currently, the TAAMS contract is with CGI-AMS. BIA’s TAAMS land title system maintains both current and historical titles—some of these historical titles in the system date back to the original land grant. This system was completed in January 2006. The TAAMS leasing module tracks leases of Indian assets. BIA and OST are currently converting leasing data from BIA’s old legacy systems to TAAMS and integrating TAAMS with TFAS to ensure that both systems have accurate and complete title and leasing information. As a region’s system is converted, OST will provide beneficiaries with asset statements that identify the source of the funds and a listing of assets owned in that region and any active encumbrances, as required by the 1994 Act. Prior to the conversion, the statements that beneficiaries receive will only include information on account balances and account transactions. Before leasing data are converted into TAAMS, BIA’s Land Titles and Records Offices and OST—primarily through a contract with CNI—are implementing the data quality and integrity (DQ&I) project to verify the completeness and accuracy of the TAAMS title and leasing information for Indian lands. As part of the verification, the DQ&I teams compare the TAAMS information with the information contained in the BIA region’s legacy realty system for land tract allotments with recurring income. For each land tract allotment for which the owner(s) and the interest they own do not match, the DQ&I teams compare the TAAMS information against source documents to identify (1) conveyances of title through probate records, deeds, and gift conveyances and (2) active encumbrances, including lease permits, rights of way, and timber sale agreements. This verification is scheduled to be completed in all BIA regions by October 1, 2007, covering land tracts with recurring income for which the legacy lease and title systems do not match. OST also plans to verify the accuracy of the land and leasing records for which TAAMS and the legacy realty system have matching information by comparing the TAAMS information with source documents for a sample of these records. OST and BIA plan to verify title and leasing data for tracts of land without recurring income after October 2007, but a schedule for implementing and completing this work has not yet been developed. OST officials noted that the DQ&I project is labor-intensive. The land validation took about 1 hour per tract in BIA’s Southern Plains region because there are about 12 owners per tract. This validation requires more time in BIA’s Great Plains region, which has about 32 owners per tract, and in BIA’s Rocky Mountain region, which has over 100 owners for some tracts. Probate Case Management and Tracking System. BIA used a modified off-the-shelf software program to develop the probate case management and tracking system, also known as ProTrac, for use by BIA, OST, and Interior’s Office of Hearings and Appeals to manage and track probate cases from initiation to closing. BIA constructed the ProTrac database from manual records, spreadsheets, and trust fund records and, according to a BIA official, has verified its accuracy. BIA is currently developing a paperless version of ProTrac that is scheduled to be implemented by June 2007. NBC is implementing the following trust reform to improve the management of Indian land appraisals: Appraisal Management System. NBC is working with OST to adapt its appraisal request and review tracking system to develop the Indian trust appraisal request system. This new system will centralize the appraisal process and track appraisal requests across Indian country, including the period of time it takes to process a request. NBC and OST completed pilot testing the appraisal management system in the Western region in October 2006. OST estimates that the appraisal management system will be fully implemented by March 2007. OST and BIA managers have overseen the progress of each of the key trust reforms scheduled for implementation by November 2007. OST managers also plan to implement two additional trust reforms. First, the managers plan to verify the accuracy and completeness of TAAMS information for (1) a statistical sample of the tracts of land for which the data in TAAMS and the BIA regional legacy systems match and (2) tracts of Indian land without recurring income. The Special Trustee estimates that this work will be completed by the end of 2009. Second, the OST managers plan to work with BIA to replace the oil and gas distribution system within BIA’s Integrated Records Management System that tracks oil and gas revenue from Indian lands. The new system will, among other things, interface with TFAS and the Minerals Management Service’s system. This system is estimated to cost $2.5 million per year and to be implemented by December 2009. Furthermore, Interior is exploring the conversion of Land Title Mapper to the department’s National Integrated Lands System for standardization purposes. The Land Title Mapper uses satellite imagery and geographic information systems to link the data in the integrated computer system with the physical site. The Special Trustee said the mapper could be completed by 2009 or 2010 and noted that, while the mapper is not a component of the 1994 Act’s trust reforms, it would provide an important service to trust account beneficiaries. Additionally, as trust reforms are completed, OST will conduct employee training, promulgate trust-related regulations, prepare internal procedures, and prepare handbooks. The 1994 Act directed the Special Trustee, within 1 year of appointment, to provide the Congress with a comprehensive strategic plan that, among other things, identifies a timetable for implementing the plan’s trust reforms and a date for OST’s termination once reforms have been implemented. However, the Special Trustee has yet to provide the Congress with a timetable for completing the remaining trust reform activities and a date for OST’s termination, even though OST’s most recent strategic plan—the Comprehensive Trust Management Plan—issued in March 2003, stated that OST would be able to forecast a date for termination within the next 14 months. The lack of a timetable for completing the remaining trust reforms has hindered the ability of the Congress, tribal organizations, and the public to fully assess the status of OST’s trust reforms or to plan for trust fund operations once reforms are completed. The 1994 Act includes a sunset provision for OST but allows the Special Trustee to recommend to the Congress that OST continue operations if it is needed for the efficient discharge of Interior’s trust responsibilities. The Special Trustee told us that Interior will need OST’s staff to continue to perform their functions after trust reforms are completed, whether or not OST is terminated, because the Secretary of the Interior transferred additional staff and responsibilities to OST for managing tribal and individual Indian trust fund accounts and providing other trust services after the passage of the 1994 Act. Specifically, in response to direction in the conference report accompanying Interior’s fiscal year 1996 appropriations bill, Secretarial Order 3197 transferred the Office of Trust Funds Management and other financial trust services from BIA to OST. Subsequently, the Secretary transferred BIA’s land appraisal staff to OST. If OST is terminated, it is unclear where OST responsibilities—including trust fund management and accounting operations, beneficiary services, trust records management, and land appraisals—will be transferred. The Special Trustee told us that OST had decided to use contractors, rather than hire additional OST staff, to implement many of the trust reforms as a way to minimize the size of its permanent staff—the contracts will end once key trust reforms are completed. The Special Trustee also said OST’s SES positions will be reduced from 14 to 13 in the near future, and he noted that Interior is studying whether efficiencies might exist by combining the Chief Information Officer positions in BIA and OST (see fig. 1 for OST’s current organizational chart and SES positions). However, the Special Trustee believes the size of OST’s staff, including the number of SES positions, is about the right size needed to manage OST’s future operations. OST has not developed a workforce plan that reexamines the expenditures and staffing levels needed for trust fund operations—including managing and accounting for trust funds, providing trust services, maintaining trust records, and conducting land appraisals—once trust reforms are completed. The following opportunities may exist to realign or further reduce expenditures and staffing levels: The Trust Program Management Center, which is responsible for implementing trust reforms, currently has 23 staff whose work will be completed when trust reforms are implemented. However, one OST manager noted that, in some cases, the staff members responsible for implementing a given reform were then reassigned to the OST office with operational responsibilities to ensure continuous improvements are made. OST currently has 131 accounting technicians located in many of BIA’s field agencies whose responsibilities for processing the collections and disbursements of account funds will decrease once trust reforms are completed and accounting functions are automated. However, OST managers noted that it is important to have the accounting technicians in the field to perform account maintenance and research accounts. In addition, a BIA manager noted that many account technicians may still be needed to handle checks that might be given to a local BIA office instead of being mailed to OST’s lockbox facility in Prescott, Arizona. Regardless, no plans have been developed to determine either the appropriate number of the accounting technicians needed to carry out future operations or their roles and responsibilities. The Deputy Special Trustee for Field Operations, the six Regional Trust Administrators, and the Fiduciary Trust Officers have been actively involved in implementing trust reforms by coordinating DQ&I and other activities. It is unclear whether seven SES positions will continue to be needed to provide tribal and individual Indian account holders with trust services and to oversee field operations once trust reforms are completed; especially with OST’s 52 Fiduciary Trust Officers generally colocated in BIA’s field agencies and with the Trust Beneficiary Call Center now in place. However, the Special Trustee noted that each of the Regional Trust Administrators has trust banking or legal expertise for providing tribal and individual Indian account holders with important services, and the administrators will expand their outreach to trust account holders as the reforms are completed. Since its inception, OST has relied on contractors to perform many of its trust reform activities as a way to minimize the size of its permanent staff. In fiscal years 2004 and 2005, OST obligated nearly 21 percent of its appropriated funds to contracting. The trust reform activities performed and products provided by the nearly 350 firms with which OST has contracted vary widely. About 66 percent of contracting dollars from fiscal years 2004 and 2005 went to 2 firms. Since 2003, OST has relied primarily on NBC to award and manage contracts. In a May 2006 report, Interior’s Office of Inspector General found that senior OST managers had created an appearance of preferential treatment of a contractor in violation of the standards of ethical conduct. In response, the Special Trustee required that all OST employees in grades GS-12 and above complete a special 2- hour ethics training course, in addition to the annual mandatory ethics training. OST has relied extensively on contractors to perform many of its trust reform activities. During fiscal years 2004 and 2005, OST spent about $89.7 million, or nearly 21 percent, of its total appropriated funds on contracts. Because 48 percent of these appropriated funds was transferred to other offices, such as the Office of Historical Trust Accounting, the amount OST spent on contracting comprised nearly 40 percent of its available funding for these 2 years. During this period, OST paid about $58.8 million, or 66 percent, of these funds to 2 of the nearly 350 firms it used—CNI received $31.1 million and SEI Investments received $27.7 million. (See table 2 for OST’s obligations to its 10 leading contractors.) CNI provides a variety of trust reform work for OST, including risk management, trust data cleanup and encoding, and the development of policy and procedures manuals. Most of the contracting with CNI, an Indian-owned 8(a) small business, was based on an indefinite delivery, indefinite quantity contract. (See app. II for a description of the work that CNI performed under each task order.) An advantage of using this type of contract is that contract task orders can be awarded quickly because there is no requirement for competition. OST also pays SEI Investments about $14 million a year to operate and maintain a version of its commercial trust fund accounting system adapted to meet OST’s needs. Table 3 shows the 10 leading product or service types for which OST used contractors. Most of OST’s obligations to contractors, about $30.3 million, were for data processing and telecommunications services. For example, the DQ&I project for ensuring the accuracy and completeness of the TAAMS database focuses on (1) assisting BIA with document encoding into the trust systems, (2) validating and correcting critical data elements to their respective source documents, and (3) implementing postquality assurance processes. Other major data processing and telecommunications services include developing OST’s Trust Beneficiary Call Center, identifying the owners of whereabouts unknown accounts, and developing risk management processes. Another major service or product type for which contracting funds were allocated was for financial services, at about $28 million. About 99 percent of these funds went to SEI Investments to operate and maintain TFAS. Contractors also provided products and services to OST that were not directly related to trust reform, such as supplying office furniture or providing guard and security services. As trust reform activities are completed, OST plans to reduce funding for contracting accordingly. For example, OST’s fiscal year 2007 budget request proposed to reduce funding by about $4.9 million as a result of the completion of certain contract efforts, including the following reductions: $1,400,000 from the Office of Trust Accountability for contract costs related to defining, developing, facilitating, and delivering trust training programs; $1,050,000 from the Office of Trust Accountability for contract costs related to the development of policies and procedures and upgrades of systems for the reengineering of trust processes; $885,000 from the Office of Trust Accountability for contract costs related to the modeling of business practices for the purposes of risk management; $675,000 from the Office of Trust Review and Audit for contract costs related to the development of the Indian Trust Examiner certification; and $425,000 and $450,000 from the Offices of Field Operations and Trust Services, respectively, for contractors that were providing accounting services, such as data cleanup and encoding. Prior to 2001, OST relied on NBC to provide contracting services through an interagency agreement. However, at OST’s request, Interior delegated contracting authority to OST in January 2001. This delegation was conditioned on (1) the retention of authority by Interior’s Office of Acquisition and Property Management to oversee and approve specified actions and (2) a subsequent evaluation of OST’s operations. In March 2002, the Office of Acquisition and Property Management conducted an acquisition management review that found several problems with OST’s contracting operations. The review team said that many of the problems they found could easily be fixed, and noted that OST’s contracting office was not fully staffed and was still experiencing “growing pains.” The review team’s draft report, which had three broad recommendations, was provided to OST for comment and OST responded in June 2002. However, the report was never issued in final. Subsequently, in July 2003, OST conducted its own study to (1) evaluate the functioning of OST’s contracting office, (2) assess customer satisfaction with contracting services provided, and (3) determine the feasibility (including a cost/benefit and qualitative analysis) of outsourcing acquisition services to either NBC or another Interior office. The internal review found that, although the contracting office had made substantial improvements in response to the acquisition management review, the office still was not operating as effectively as it could. On the basis of proposals received from organizations that provide contracting services and a qualitative evaluation of these organizations, OST found that NBC’s branch in Denver, Colorado, offered the best value for providing contracting services for OST. As a result, OST signed a 5-year interagency agreement with NBC’s Denver branch to provide contracting services beginning on October 1, 2003. NBC’s headquarters conducted an acquisition management review of NBC Denver’s contracting practices in April 2005 and found that, overall, the office was highly effective in providing contracting services. In 2004, OST also began using NBC’s branch in Fort Huachuca, Arizona, because it is responsible for managing the indefinite delivery, indefinite quantity contract with CNI, as we previously discussed. The contract had been originally awarded to CNI on a sole-source basis, which is allowable under Small Business Administration regulations to provide special procurement advantages to businesses owned by Indian tribes that participate in the 8(a) program. OST has used the contract by placing task or delivery orders for implementing several of the trust reforms. In addition to funding contracts for their own trust reform activities, such as TAAMS, BIA also has administered contracts for OST. For example, since fiscal year 2005, BIA has served as the contracting office for a contract with CD&L for risk management. A BIA official stated that this contract is set to expire in December 2006. Finally, GovWorks, one of several federal government franchise funds designated by the Director, Office of Management and Budget, also has provided contracting services for OST. In July 2003, Interior’s Office of Inspector General received allegations that senior OST officials had given CD&L favorable treatment in awarding contract work. The Inspector General’s May 2006 report found that senior OST officials created an appearance of preferential treatment of CD&L, in violation of both the Standards of Ethical Conduct for Employees of the Executive Branch and an internal OST memorandum directing “Arms Length Dealings with Contractors.” The report documents that over several years, OST awarded and continued to extend, without competition, a contract with CD&L for trust fund accounting and risk management services; while at the same time, senior OST officials engaged in extensive outside social activity and exchanged gifts with CD&L executives. The report also stated that OST contract personnel felt pressured by these senior OST officials to continue to award work to CD&L. The Inspector General referred the matter to Interior to take appropriate administrative action and to review the performance of the CD&L contract. In response, the Special Trustee has required that all OST employees at grades GS-12 or above take a special 2-hour ethics training course. The Special Trustee stated that he was satisfied with CD&L’s trust accounting and risk management services. From January 2001 through September 2003, OST had procurement authority and in-house staff were servicing OST’s contracts. In February 2004, after the contracting function was turned over to NBC’s Denver branch, OST attempted to get a follow-on sole-source contract with CD&L for the risk management program. OST officials were anxious to get a follow-on contract to meet a court-ordered June 2004 deadline for implementing the risk management system for all agencies involved with trust records. However, due to a lack of documentation to support a valid justification and because of prior apparent improprieties, NBC officials refused to award a follow-on sole-source contract. Rather than wait 4 to 5 months to award a new contract under the competitive bidding process at NBC’s Denver branch, OST officials went to BIA and placed an order under the General Services Administration’s Mission Oriented Business Integrated Services program, which required a shorter time period to get a contract awarded. The order was placed with CNI in April 2004, and CNI subsequently hired CD&L as a subcontractor through September 2004 to continue the risk management design work. In January 2005, a competitive contract for additional risk management work was awarded to CNI and CD&L, with BIA as the contracting office. OST is in the final stages of implementing the trust fund management reforms that the 1994 Act required. However, the Special Trustee has not provided the Congress with a timetable for completing these reforms, as required by the act. Without a timetable, the Congress cannot readily oversee OST’s implementation of the trust reforms or plan for trust fund operations once reforms are completed. OST also has not developed a plan for future trust fund operations once reforms are completed. Whether or not OST is terminated, the Special Trustee believes that OST’s staff will need to continue to perform their functions after trust reforms are completed because, after the passage of the 1994 Act, the Secretary of the Interior transferred to OST the Office of Trust Funds Management and other offices and personnel responsible for trust fund operations. In addition, OST has not developed a workforce plan that reexamines the responsibilities and needs for trust fund operations. While the Special Trustee plans to reduce OST’s budget by terminating contracts as reforms are completed, he believes that OST’s current size is about right for trust fund operations once reforms are completed. However, a reexamination of OST’s workforce needs might identify opportunities for realigning or further reducing expenditures and staffing levels because, for example, certain job responsibilities may decrease once trust reforms are completed and accounting functions are automated. To improve congressional oversight of the trust reforms and ensure that trust fund accounting operations, once implemented, are economically staffed, we recommend that the Secretary of the Interior direct the Special Trustee to take the following three actions: Provide the Congress with a timetable for completing the trust fund management reforms. In anticipation of completing the trust reforms, provide the Congress with a plan for future trust fund operations, including, if the decision is made to terminate OST, a determination of where these operations will reside. As trust reforms are completed and contracts are terminated, develop a workforce plan that reexamines and proposes staffing levels and funding needs. We provided Interior with a draft of this report for its review and comment. In its written response, Interior agreed with our recommendations, stating that it expects to have a timetable by late-June 2007 for implementing the remaining trust reforms, including a date for the proposed termination or eventual disposition of OST. (See app. III.) However, Interior disagreed with the number of key reforms we identified and attached to its letter a list of 47 additional reforms that OST has completed. We reviewed the 47 reform efforts on Interior’s list and, while they are important activities for the implementation of OST’s trust reforms, we believe they are not key components of OST’s integrated information system that interfaces the trust funds accounting system with BIA’s land title records and asset management systems for Indian lands. Accordingly, we did not revise our report. In addition, Interior provided comments to improve the draft report’s technical accuracy, which we have incorporated as appropriate. To examine OST’s progress in implementing the American Indian Trust Fund Management Reform Act of 1994, we reviewed (1) the 1994 Act and its legislative history; (2) Interior’s appropriations legislation; and (3) relevant Interior documents, including secretarial orders and OST’s March 2003 Comprehensive Trust Management Plan and prior strategic plans that provide the basis for OST’s current reform efforts. We also reviewed various documents showing OST’s progress in implementing trust reforms and interviewed OST and BIA officials regarding the status of trust reform efforts. However, we did not analyze the adequacy of OST’s efforts to ensure that the reforms will result in an integrated computer system with complete and accurate information. In addition, to gain insight into the concerns that tribal organizations have expressed about OST’s trust reform performance, we interviewed executives of the Intertribal Monitoring Association on Indian Trust Funds, the National Congress of American Indians, the Great Plains Tribal Chairman’s Association, the United South and Eastern Tribes, and the Affiliated Tribes of Northwest Indians. Although the tribal organizations we selected reflect some variation in geography and their members include numerous individual Indian tribes, our selections were not intended to be representative of all tribes. To examine OST’s use of contractors in implementing its trust reforms, we obtained specific data elements for fiscal years 2004 and 2005 from the General Services Administration’s FPDS-NG database. These data elements include the amount obligated, the types of goods or services purchased, and various vendor characteristics. FPDS-NG does not include (1) assistance actions, such as grants and cooperative agreements; (2) imprest fund transactions, training authorizations, and micropurchases valued at $2,500 or less that were obtained through the use of a government purchase card; (3) interagency agreements with other federal agencies and organizations; or (4) actions involving transfer of supplies within and among agencies. Finally, total dollars for fiscal year 2006 are incomplete and were not included in this report. To ensure the completeness and accuracy of the FPDS-NG contracting data, we examined NBC contracting documents and interviewed contracting officers at BIA and NBC’s Denver and Fort Huachuca branches as well as selected contracting officer’s technical representatives at OST. We obtained data from FPDS-NG by searching on OST as the funding agency. However, because NBC officials told us this field was not always completed, we also obtained FPDS-NG data by searching on NBC’s contracting office and identifying, by the product or service description, contracts most likely associated with trust reform efforts. In addition, we compared these data with NBC’s procurement tracking system and made adjustments to the FPDS-NG data as necessary. Where discrepancies were found, we corrected the FPDS-NG data to ensure completeness of the data. On the basis of our testing and correction of FPDS-NG data, we are sufficiently confident of the reliability of the data we are reporting. Furthermore, we reviewed the report and associated workpapers of Interior’s Office of Inspector General regarding allegations that senior OST officials had given CD&L preferential treatment in contracting for risk management services. To assess the performance awards and retention allowances that SES officials at OST had received, we analyzed data for fiscal years 2001 through 2005 from the Office of Personnel Management’s Central Personnel Data File, which contains records for most federal employees and is the primary governmentwide source for information on federal employees. Specifically, we examined the number and dollar amount of performance awards and retention allowances provided to OST and compared them with those of other Interior bureaus and other federal agencies. In addition, we obtained documents from Interior’s Minerals Management Service, which is responsible for providing OST with human resources support services—including (1) processing performance awards and retention allowances provided to SES officials at OST and (2) ensuring compliance with the appropriate procedures for determining such awards and allowances. We conducted our review from February 2006 through October 2006 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of the Interior, the Special Trustee for American Indians, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others upon request. This report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. The Department of the Interior (Interior) has provided a retention allowance to one Senior Executive Service (SES) manager at the Office of the Special Trustee for American Indians (OST)—the Principal Deputy Special Trustee. In addition, 7 of the 13 SES managers currently at OST received at least two major awards in 2 years or more. However, from fiscal years 2001 to 2005, the average performance award amounts that SES managers received were generally lower than the average amounts provided to other bureaus and offices within Interior and other federal agencies. Interior’s Executive Resources Board (ERB), currently chaired by the Secretary of the Interior and comprising senior Interior managers, made the final determination on all performance awards and retention allowances provided to SES managers. Each calendar year from 1999 through 2005, Interior has provided OST’s Principal Deputy Special Trustee with a retention allowance because, according to agency justifications, her historical knowledge and managerial ability are needed to ensure Interior’s trust oversight and reform success. Specifically, from 1999 to 2005, Interior’s ERB has reviewed and approved the justification for the retention allowance, which raises the Principal Deputy Special Trustee’s total compensation to the maximum allowable for SES employees—excluding 1999 and 2005, when the Principal Deputy Special Trustee’s compensation was slightly under the total maximum allowable. According to officials of Interior’s Minerals Management Service, retention allowances are reserved for special talent and have been provided to only two Interior SES managers—the other SES manager received a retention allowance in 2002 and 2004. In each year, the Principal Deputy Special Trustee’s retention allowance was lower than the maximum amount provided to an SES manager at all other federal agencies (see table 4). The Special Trustee stated that as OST’s trust reforms are completed, the total compensation provided to the Principal Deputy Special Trustee will be reevaluated. Seven of OST’s SES managers received at least two major awards—a performance award, a special act award, an individual cash award, or a time-off award—in 2 years or more, as follows: The Principal Deputy Special Trustee, who has been in the SES since 1993, received three major awards from fiscal years 2000 to 2006. Specifically, the Principal Deputy Special Trustee received two time-off awards of 80 hours each in fiscal years 2000 and 2004 and a performance award of about $9,700 in fiscal year 2006. In addition to these major awards, the Principal Deputy Special Trustee received the Presidential Rank Award in 2002, one of the government’s most prestigious awards. While the Principal Deputy Special Trustee received cash with the award, the full cash amount could not be provided in 2002 because her total compensation was at the maximum allowable for a federal employee. As a result, she received part of the award in 2002 and the rest of the award in 2003. A manager, who has been in the SES since 1996, received eight major awards from fiscal years 1999 through 2006, including at least one award in 7 of the 8 years. Specifically, in fiscal years 1999 and 2000, this manager received three special act awards that ranged from $1,750 to $10,000. In fiscal years 2002 through 2006, this manager received either a performance award or an individual cash award in each year, ranging from $5,000 to $13,000. A manager, who has been in the SES since 2002, received six major awards from fiscal years 2003 through 2006, including at least one award in each year. Specifically, this manager received two special act awards of $5,000 and $10,000, two time-off awards of 40 hours each, an individual cash award of $5,000, and a performance award of about $7,200. A manager, who has been in the SES since 2002, received three major awards—one award per year from fiscal years 2004 through 2006. This manager received a performance award of $6,900 and two time-off awards of 40 hours and 80 hours. A manager, who has been in the SES since 2004, received two major awards—performance awards of about $12,000 in fiscal year 2005 and about $11,500 in fiscal year 2006. A manager, who has been in the SES since 2004, received two major awards—individual cash awards of $4,300 in fiscal year 2005 and $5,000 in fiscal year 2006. A manager, who has been in the SES since 2004, received two major awards—a performance award of about $8,900 in fiscal year 2005 and an individual cash award of $5,000 in fiscal year 2006. OST’s six other current SES managers have received, at most, one major award. In fiscal year 2005, about 54 percent of OST’s SES managers received at least one major award. In fiscal year 2006, about 69 percent of OST’s SES managers received at least one major award. Table 5 compares the average performance award amounts for SES managers at OST with the average amounts at other bureaus and offices within Interior and other federal agencies. The average performance award amount of OST’s SES performance awards was higher than the average amounts of other bureaus and offices within Interior and other federal agencies in fiscal year 2001—according to the Special Trustee, the performance awards recognized these managers’ many hours of efforts to validate data for the implementation of the trust funds accounting system in 2000. However, the average amounts of OST’s performance awards for fiscal years 2002 through 2005 were generally lower than the average amounts provided to other bureaus and offices within Interior and other federal agencies—excluding fiscal year 2003, when the average amount of OST’s performance awards was slightly higher than the average amount provided to other bureaus and offices within Interior. Interior’s ERB approved each of the major awards provided to OST’s SES managers. Minerals Management Service officials told us that ERB considers supporting documentation and recommendations provided by the Performance Review Board, which is an Interior board that reviews only performance awards, in making its final determination. Woods.

The American Indian Trust Fund Management Reform Act of 1994 established the Office of the Special Trustee for American Indians (OST), within the Department of the Interior, to oversee the implementation of management reforms for funds--derived primarily from Interior's leasing of Indian lands--that Interior holds in trust for many Indian tribes and individuals. Specifically, the act directs that an integrated information system be developed that interfaces the trust fund accounting system with the land title records and asset management systems maintained by Interior's Bureau of Indian Affairs (BIA). GAO examined (1) OST's progress in implementing the trust fund management reforms and (2) the extent to which OST has used contractors in implementing these reforms. GAO reviewed OST's strategic plans and contracting documents and interviewed OST and BIA managers. OST has implemented several key trust fund management reforms, but has not prepared a timetable for completing its remaining trust reform activities and a date for OST's termination, as required by the 1994 Act. OST estimates that almost all key reforms needed to develop an integrated trust management system and to provide improved trust services will be completed by November 2007. Specifically, OST implemented a new trust funds accounting system for processing trust account funds, and BIA and OST are currently validating data for the trust asset and accounting management system for managing Indian land title records and leases for land with recurring income. However, the Special Trustee estimates that data verification for leasing activities will not be completed for all Indian lands until December 2009. OST's most recent strategic plan, issued in 2003, did not include a timetable for implementing trust reforms or a date for OST's termination. The Special Trustee notes that many OST functions, including trust fund operations, trust records management, and appraisal services, need to be performed after reforms are completed. If OST is terminated, these responsibilities would have to be transferred to another Interior office. OST plans to reduce expenditures primarily by terminating contracts once trust reforms are completed. However, OST has not yet developed a workforce plan that reexamines the expenditures and staffing levels needed for trust fund operations once trust reforms are completed. OST has used contractors to perform many of its trust reform activities as a way to minimize the size of its permanent staff. In fiscal years 2004 and 2005, OST allocated $89.7 million, or nearly 21 percent, of its appropriated funds to contracting. About 66 percent of contracting dollars from these 2 fiscal years went to two firms. Over $31 million during this period went to the largest contractor, an Indian-owned 8(a) small business, by adding task orders through an existing contract. OST has primarily relied on Interior's National Business Center to award and manage contracts.

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In 1998, following a presidential call for VA and DOD to start developing a “comprehensive, life-long medical record for each service member,” the two departments began a joint course of action aimed at achieving the capability to share patient health information for active duty military personnel and veterans. Their first initiative, undertaken in that year, was the Government Computer-Based Patient Record (GCPR) project, whose goal was an electronic interface that would allow physicians and other authorized users at VA and DOD health facilities to access data from any of the other agency’s health information systems. The interface was expected to compile requested patient information in a virtual record that could be displayed on a user’s computer screen. In our reviews of the GCPR project, we determined that the lack of a lead entity, clear mission, and detailed planning to achieve that mission made it difficult to monitor progress, identify project risks, and develop appropriate contingency plans. In April 2001 and in June 2002, we made recommendations to help strengthen the management and oversight of the project. In 2001, we recommended that the participating agencies (1) designate a lead entity with final decision-making authority and establish a clear line of authority for the GCPR project and (2) create comprehensive and coordinated plans that included an agreed-upon mission and clear goals, objectives, and performance measures, to ensure that the agencies could share comprehensive, meaningful, accurate, and secure patient health care data. In 2002, we recommended that the participating agencies revise the original goals and objectives of the project to align with their current strategy, commit the executive support necessary to adequately manage the project, and ensure that it followed sound project management principles. VA and DOD took specific measures in response to our recommendations for enhancing overall management and accountability of the project. By July 2002, VA and DOD had revised their strategy and had made progress toward being able to electronically share patient health data. The two departments had refocused the project and named it the Federal Health Information Exchange (FHIE) program and, consistent with our prior recommendation, had finalized a memorandum of agreement designating VA as the lead entity for implementing the program. This agreement also established FHIE as a joint activity that would allow the exchange of health care information in two phases. ● The first phase, completed in mid-July 2002, enabled the one-way transfer of data from DOD’s existing health information system (the Composite Health Care System, CHCS) to a separate database that VA clinicians could access. ● A second phase, finalized in March 2004, completed VA’s and DOD’s efforts to add to the base of patient health information available to VA clinicians via this one-way sharing capability. According to the December 2004 VA/DOD Joint Executive Council Annual Report, FHIE was fully operational, and VA providers at all VA medical centers and clinics nationwide had access to data on separated service members. According to the report, the FHIE data repository at that time contained historical clinical health data on 2.3 million unique patients from 1989 on, and the repository made a significant contribution to the delivery and continuity of care and adjudication of disability claims of separated service members as they transitioned to veteran status. The departments reported total GCPR/FHIE costs of about $85 million through fiscal year 2003. In addition, officials stated that in December 2004, the departments began to use the FHIE framework to transfer pre- and postdeployment health assessment data from DOD to VA. According to these officials, VA has now received about 400,000 of these records. However, not all DOD medical information is captured in CHCS. For example, according to DOD officials, as of September 6, 2005, 1.7 million patient stay records were stored in the Clinical Information System (a commercial product customized for DOD). In addition, many Air Force facilities use a system called the Integrated Clinical Database for their medical information. The revised DOD/VA strategy also envisioned achieving a longer term, two-way exchange of health information between DOD and VA, which may also address systems outside of CHCS. Known as HealthePeople (Federal), this initiative is premised on the departments’ development of a common health information architecture comprising standardized data, communications, security, and high-performance health information systems. The joint effort is expected to result in the secured sharing of health data between the new systems that each department is currently developing and beginning to implement—VA’s HealtheVet VistA and DOD’s CHCS II. ● DOD began developing CHCS II in 1997 and had completed a key component for the planned electronic interface—its Clinical Data Repository. When we last reported in June 2004, the department expected to complete deployment of all of its major system capabilities by September 2008. DOD reported expenditures of about $600 million for the system through fiscal year 2004. ● VA began work on HealtheVet VistA and its associated Health Data Repository in 2001 and expected to complete all six initiatives comprising this system in 2012. VA reported spending about $270 million on initiatives that comprise HealtheVet VistA through fiscal year 2004. Under the HealthePeople (Federal) initiative, VA and DOD envision that, on entering military service, a health record for the service member would be created and stored in DOD’s Clinical Data Repository. The record would be updated as the service member receives medical care. When the individual separated from active duty and, if eligible, sought medical care at a VA facility, VA would then create a medical record for the individual, which would be stored in its Health Data Repository. On viewing the medical record, the VA clinician would be alerted and provided with access to the individual’s clinical information residing in DOD’s repository. In the same manner, when a veteran sought medical care at a military treatment facility, the attending DOD clinician would be alerted and provided with access to the health information in VA’s repository. According to the departments, this planned approach would make virtual medical records displaying all available patient health information from the two repositories accessible to both departments’ clinicians. To achieve this goal requires the departments to be able to exchange computable health information between the data repositories for their future health systems: that is, VA’s Health Data Repository (a component of HealtheVet VistA) and DOD’s Clinical Data Repository (a component of CHCS II). In March 2004, the departments began an effort to develop an interface linking these two repositories, known as CHDR (a name derived from the abbreviations for DOD’s Clinical Data Repository—CDR—and VA’s Health Data Repository—HDR). According to the departments, they planned to be able to exchange selected health information through CHDR by October 2005. Developing the two repositories, populating them with data, and linking them through the CHDR interface would be important steps toward the two departments’ long-term goals as envisioned in HealthePeople (Federal). Achieving these goals would then depend on completing the development and deployment of the associated health information systems—HealtheVet VistA and CHCS II. In our most recent review of the CHDR program, issued in June 2004, we reported that the efforts of DOD and VA in this area demonstrated a number of management weaknesses. Among these were the lack of a well-defined architecture for describing the interface for a common health information exchange; an established project management lead entity and structure to guide the investment in the interface and its implementation; and a project management plan defining the technical and managerial processes necessary to satisfy project requirements. With these critical components missing, VA and DOD increased the risk that they would not achieve their goals. Accordingly, we recommended that the departments ● develop an architecture for the electronic interface between their health systems that includes system requirements, design specifications, and software descriptions; ● select a lead entity with final decision-making authority for the ● establish a project management structure to provide day-to-day guidance of and accountability for their investments in and implementation of the interface capability; and ● create and implement a comprehensive and coordinated project management plan for the electronic interface that defines the technical and managerial processes necessary to satisfy project requirements and includes (1) the authority and responsibility of each organizational unit; (2) a work breakdown structure for all of the tasks to be performed in developing, testing, and implementing the software, along with schedules associated with the tasks; and (3) a security policy. Besides pursuing their long-term goals for future systems through the HealthePeople (Federal) strategy, the departments are working on two demonstration projects that focus on exchanging information between existing systems: (1) Bidirectional Health Information Exchange, a project to exchange health information on shared patients, and (2) Laboratory Data Sharing Interface, an application used to transfer laboratory work orders and results. These demonstration projects were planned in response to provisions of the Bob Stump National Defense Authorization Act of 2003, which mandated that VA and DOD conduct demonstration projects that included medical information and information technology systems to be used as a test for evaluating the feasibility, advantages, and disadvantages of measures and programs designed to improve the sharing and coordination of health care and health care resources between the departments. Figure 1 is a time line showing initiation points for the VA and DOD efforts discussed here, including strategies, major programs, and the recent demonstration projects. VA and DOD have begun to implement applications developed under two demonstration projects that focus on the exchange of electronic medical information. The first—the Bidirectional Health Information Exchange—has been implemented at five VA/DOD locations and the second—Laboratory Data Sharing Interface—has been implemented at six VA/DOD locations. According to a VA/DOD annual report and program officials, Bidirectional Health Information Exchange (BHIE) is an interim step in the departments’ overall strategy to create a two-way exchange of electronic medical records. BHIE builds on the architecture and framework of FHIE, the current application used to transfer health data on separated service members from DOD to VA. As discussed earlier, FHIE provides an interface between VA’s and DOD’s current health information systems that allows one-way transfers only, which do not occur in real time: VA clinicians do not have access to transferred information until about 6 weeks after separation. In contrast, BHIE focuses on the two-way, near-real-time exchange of information (text only) on shared patients (such as those at sites jointly occupied by VA and DOD facilities). This application exchanges data between VA’s VistA system and DOD’s CHCS system (and CHCS II where implemented). To date, the departments reported having spent $2.6 million on BHIE. The primary benefit of BHIE is the near-real-time access to patient medical information for both VA and DOD, which is not available through FHIE. During a site visit to a VA and DOD location in Puget Sound, we viewed a demonstration of this capability and were told by a VA clinician that the near-real-time access to medical information has been very beneficial in treating shared patients. As of August 2005, BHIE was tested and deployed at VA and DOD facilities in Puget Sound, Washington, and El Paso, Texas, where the exchange of demographic, outpatient pharmacy, radiology, laboratory, and allergy data (text only) has been achieved. The application has also been deployed to three other locations this month (see table 1). According to the program manager, a plan to export BHIE to additional locations has been approved. The additional locations were selected based on a number of factors, including the number and types of VA and DOD medical facilities in the area, FHIE usage, and retiree population at the locations. The program manager stated that implementation of BHIE requires training of staff from both departments. In addition, implementation at DOD facilities requires installation of a server; implementation at VA facilities requires installation of a software patch (downloaded from a VA computer center), but no additional equipment. As shown in table 1, five additional implementations are scheduled for the first quarter of fiscal year 2006. Additionally, because DOD stores electronic medical information in systems other than CHCS (such as the Clinical Information System and the Integrated Clinical Database), work is currently under way to allow BHIE to have the ability to exchange information with those systems. The Puget Sound Demonstration site is also working on sharing consultation reports stored in the VA and DOD systems. The Laboratory Data Sharing Interface (LDSI) initiative enables the two departments to share laboratory resources. Through LDSI, a VA provider can use VA’s health information system to write an order for laboratory tests, and that order is electronically transferred to DOD, which performs the test. The results of the laboratory tests are electronically transferred back to VA and included in the patient’s medical record. Similarly, a DOD provider can choose to use a VA lab for testing and receive the results electronically. Once LDSI is fully implemented at a facility, the only nonautomated action in performing laboratory tests is the transport of the specimens. Among the benefits of LDSI is increased speed in receiving laboratory results and decreased errors from multiple entry of orders. However, according to the LDSI project manager in San Antonio, a primary benefit of the project will be the time saved by eliminating the need to rekey orders at processing labs to input the information into the laboratories’ systems. Additionally, the San Antonio VA facility will no longer have to contract out some of its laboratory work to private companies, but instead use the DOD laboratory. To date, the departments reported having spent about $3.3 million on LDSI. An early version of what is now LDSI was originally tested and implemented at a joint VA and DOD medical facility in Hawaii in May 2003. The demonstration project built on this application and enhanced it; the resulting application was tested in San Antonio and El Paso. It has now been deployed to six sites in all. According to the departments, a plan to export LDSI to additional locations has been approved. Table 2 shows the locations at which it has been or is to be implemented. Besides the near-term initiatives just discussed, VA and DOD continue their efforts on the longer term goal: to achieve a virtual medical record based on the two-way exchange of computable data between the health information systems that each is currently developing. The cornerstone for this exchange is CHDR, the planned electronic interface between the data repositories for the new systems. The departments have taken important actions on the CHDR initiative. In September 2004 they successfully completed Phase I of CHDR by demonstrating the two-way exchange of pharmacy information with a prototype in a controlled laboratory environment. According to department officials, the pharmacy prototype provided invaluable insight into each other’s data repository systems, architecture, and the work that is necessary to support the exchange of computable information. These officials stated that lessons learned from the development of the prototype were documented and are being applied to Phase II of CHDR, the production phase, which is to implement the two-way exchange of patient health records between the departments’ data repositories. Further, the same DOD and VA teams that developed the prototype are now developing the production version. In addition, the departments developed an architecture for the CHDR electronic interface, as we recommended in June 2004. The architecture for CHDR includes major elements required in a complete architecture. For example, it defines system requirements and allows these to be traced to the functional requirements, it includes the design and control specifications for the interface design, and it includes design descriptions for the software. Also in response to our recommendations, the departments have established project accountability and implemented a joint project management structure. Specifically, the Health Executive Council has been established as the lead entity for the project. The joint project management structure consists of a Program Manager from VA and a Deputy Program Manager from DOD to provide day-to-day guidance for this initiative. Additionally, the Health Executive Council established the DOD/VA Information Management/Information Technology Working Group and the DOD/VA Health Architecture Interagency Group, to provide programmatic oversight and to facilitate interagency collaboration on sharing initiatives between DOD and VA. To build on these actions and successfully carry out the CHDR initiative, however, the departments still have a number of challenges to overcome. The success of CHDR will depend on the departments’ instituting a highly disciplined approach to the project’s management. Industry best practices and information technology project management principles stress the importance of accountability and sound planning for any project, particularly an interagency effort of the magnitude and complexity of this one. We recommended in 2004 that the departments develop a clearly defined project management plan that describes the technical and managerial processes necessary to satisfy project requirements and includes (1) the authority and responsibility of each organizational unit; (2) a work breakdown structure for all of the tasks to be performed in developing, testing, and implementing the software, along with schedules associated with the tasks; and (3) a security policy. Currently, the departments have an interagency project management plan that provides the program management principles and procedures to be followed by the project. However, the plan does not specify the authority and responsibility of organizational units for particular tasks; the work breakdown structure is at a high level and lacks detail on specific tasks and time frames; and security policy is still being drafted. Without a plan of sufficient detail, VA and DOD increase the risk that the CHDR project will not deliver the planned capabilities in the time and at the cost expected. In addition, officials now acknowledge that they will not meet a previously established milestone: by October 2005, the departments had planned to be able to exchange outpatient pharmacy data, laboratory results, allergy information, and patient demographic information on a limited basis. However, according to officials, the work required to implement standards for pharmacy and medication allergy data was more complex than originally anticipated and led to the delay. They stated that the schedule for CHDR is presently being revised. Development and data quality testing must be completed and the results reviewed. The new target date for medication allergy, outpatient pharmacy, and patient demographic data exchange is now February 2006. Finally, the health information currently in the data repositories has various limitations. ● Although DOD’s Clinical Data Repository includes data in the categories that were to be exchanged at the missed milestone described above: outpatient pharmacy data, laboratory results, allergy information, and patient demographic information, these data are not yet complete. First, the information in the Clinical Data Repository is limited to those locations that have implemented the first increment of CHCS II, DOD’s new health information system. As of September 9, 2005, according to DOD officials, 64 of 139 medical treatment facilities worldwide have implemented this increment. Second, at present, health information in systems other than CHCS (such as the Clinical Information System and the Integrated Clinical Database) is not yet being captured in the Clinical Data Repository. For example, according to DOD officials, as of September 9, 2005, the Clinical Information System contained 1.7 million patient stay records. ● The information in VA’s Health Data Repository is also limited: although all VA medical records are currently electronic, VA has to convert these into the interoperable format appropriate for the Health Data Repository. So far, the data in the Health Data Repository consist of patient demographics and vital signs records for the 6 million veterans who have electronic medical records in VA’s current system, VistA (this system contains all the department’s medical records in electronic form). VA officials told us that they plan next to sequentially convert allergy information, outpatient pharmacy data, and lab results for the limited exchange that is now planned for February 2006. In summary, developing an electronic interface that will enable VA and DOD to exchange computable patient medical records is a highly complex undertaking that could lead to substantial benefits— improving the quality of health care and disability claims processing for the nation’s military members and veterans. VA and DOD have made progress in the electronic sharing of patient health data in their limited, near-term demonstration projects, and have taken an important step toward their long-term goals by improving the management of the CHDR program. However, the departments face considerable work and significant challenges before they can achieve these long-term goals. While the departments have made progress in developing a project management plan defining the technical and managerial processes necessary to satisfy project requirements, this plan does not specify the authority and responsibility of organizational units for particular tasks, the work breakdown structure lacks detail on specific tasks and time frames, and security policy has not yet been finalized. Without a project management plan of sufficient specificity, the departments risk further delays in their schedule and continuing to invest in a capability that could fall short of expectations. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Committee may have at this time. For information about this testimony, please contact Linda D. Koontz, Director, Information Management Issues, at (202) 512-6240 or at [email protected]. Other individuals making key contributions to this testimony include Nabajyoti Barkakati, Barbara S. Collier, Nancy E. Glover, James T. MacAulay, Barbara S. Oliver, J. Michael Resser, and Eric L. Trout. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

For the past 7 years, the Departments of Veterans Affairs (VA) and Defense (DOD) have been working to exchange patient health information electronically and ultimately to have interoperable electronic medical records. Sharing medical information helps (1) promote the seamless transition of active duty personnel to veteran status and (2) ensure that active duty military personnel and veterans receive high-quality health care and assistance in adjudicating their disability claims. This is especially critical in the face of current military responses to national and foreign crises. In testimony before the Veterans' Affairs Subcommittee on Oversight and Investigations in March and May 2004, GAO discussed the progress being made by the departments in this endeavor. In June 2004, at the Subcommittee's request, GAO reported on its review of the departments' progress toward the goal of an electronic two-way exchange of patient health records. GAO is providing an update on the departments' efforts, focusing on (1) the status of ongoing, near-term initiatives to exchange data between the agencies' existing systems and (2) progress in achieving the longer term goal of exchanging data between the departments' new systems. In the past year, VA and DOD have begun to implement applications that exchange limited electronic medical information between the departments' existing health information systems. These applications are (1) Bidirectional Health Information Exchange, a project to achieve the two-way exchange of health information on patients who receive care from both VA and DOD, and (2) Laboratory Data Sharing Interface, an application used to electronically transfer laboratory work orders and results between the departments. The Bidirectional Health Information Exchange application has been implemented at five sites, at which it is being used to rapidly exchange information such as pharmacy and allergy data. Also, the Laboratory Data Sharing Interface application has been implemented at six sites, at which it is being used for real-time entry of laboratory orders and retrieval of results. According to the departments, these systems enable lower costs and improved service to patients by saving time and avoiding errors. VA and DOD are continuing with activities to support their longer term goal of sharing health information between their systems, but the goal of two-way electronic exchange of patient records remains far from being realized. Each department is developing its own modern health information system--VA's HealtheVet VistA and DOD's Composite Health Care System II--and they have taken steps to respond to GAO's June 2004 recommendations regarding the program to develop an electronic interface that will enable these systems to share information. That is, they have developed an architecture for the interface, established project accountability, and implemented a joint project management structure. However, they have not yet developed a clearly defined project management plan to guide their efforts, as GAO previously recommended. Further, they have not yet fully populated the repositories that will store the data for their future health systems, and they have experienced delays in their efforts to begin a limited data exchange. Lacking a detailed project management plan increases the risk that the departments will encounter further delays and be unable to deliver the planned capabilities on time and at the cost expected.

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The Internal Revenue Manual (IRM) describes the desired outcome of an income tax audit as the determination of the correct taxable income and tax liability of the person or entity under audit. In making these determinations, the auditor has a responsibility to both the audited taxpayer and all other taxpayers to conduct a quality audit. IRS uses nine audit standards, which have evolved since the 1960s, to define audit quality. These standards address several issues, such as the scope, techniques, technical conclusions, reports, and time management of an audit, as well as workpaper preparation. Each standard has one or more key elements. (See table I.1 in app. I for a list of these standards and their associated key elements.) Workpapers provide documentation on the scope of the audit and the diligence with which it was completed. According to the IRM, audit workpapers (1) assist in planning the audit; (2) record the procedures applied, tests performed, and evidence gathered; (3) provide support for technical conclusions; and (4) provide the basis for review by management. Audit workpapers also provide the principal support for the auditor’s report, which is to be provided to the audited taxpayer, on findings and conclusions about the taxpayer’s correct tax liability. The primary tool used by IRS to control quality under the nine standards is the review of ongoing audit work. This review is the responsibility of IRS’ first-line supervisors, called group managers, who are responsible for the quality of audits done by the auditors they manage. By reviewing audit workpapers during the audit, group managers attempt to identify problems with audit quality and ensure that the problems are corrected. After an audit closes, IRS uses its Examination Quality Measurement System (EQMS) to collect information about the audit process, changes to the process, level of audit quality, and success of any efforts to improve the process and quality. EQMS staff are to review audit workpapers and assess the degree to which the auditor complied with the audit standards. To pass a standard, the audit must pass all of the key elements. Our observations about the adequacy of the audit workpapers and supervisory review during audits are based on our work during 1996 and 1997 on IRS’ use of financial status audit techniques. Among other things, this work relied on a random sample of individual tax returns that IRS had audited. This sample excluded audits that were unlikely to use financial status audit techniques because the audit did not look at individual taxpayers’ books and records. Such excluded audits involved those done at service centers and those that only passed through various types of tax adjustments from other activities (e.g., partnership audits and refund claims). This random sample included 354 audits from a population of about 421,000 audits that were opened from October 1994 through October 1995 and closed in fiscal years 1995 or 1996. Each audit covered one or more individual income tax returns. The sample of audits from our previous work focused on the frequency in which IRS auditors used financial status audit techniques, rather than on the adequacy of audit workpapers. Consequently, we did not do the work necessary to estimate the extent to which workpapers met IRS’ workpaper standard for the general population of audits. However, our work did identify several cases in which audit workpapers in our sample did not meet IRS’ workpaper standard. We held follow-up discussions about the workpaper and supervisory review requirements, as well as about our observations, with IRS Examination Division officials. On the basis of these discussions, we agreed to check for documentation of group manager involvement by examining employee performance files for nine of our sample audits conducted out of IRS’ Northern California District Office to get a better idea of how the group managers handle their audit inventories and ensure quality. According to IRS officials, these files may contain documentation on case reviews by group managers even though such documentation may not be in the workpapers. We requested comments on a draft of this report from the Commissioner of Internal Revenue. On March 27, 1998, we received written comments from IRS, which are summarized at the end of this letter and are reproduced in appendix II. These comments have been incorporated into the report where appropriate. We did our work at IRS headquarters in Washington, D.C., and at district offices and service centers in Fresno and Oakland, CA; Baltimore, MD; Philadelphia, PA; and Richmond, VA. Our work was done between January and March, 1998, in accordance with generally accepted government auditing standards. One of IRS’ audit standards covers audit workpapers. In general, IRS requires the audit workpapers to support the auditor’s conclusions that were reached during an audit. On the basis of our review of IRS’ audit workpapers, we found that IRS auditors did not always meet the requirements laid out under this workpaper standard. IRS’ workpaper standard requires that workpapers provide the principal support for the auditor’s report and document the procedures applied, tests performed, information obtained, and conclusions reached. The five key elements for this workpaper standard involve (1) fully disclosing the audit trail and techniques used; (2) being clear, concise, legible, and organized and ensuring that workpaper documents have been initialed, labeled, dated, and indexed; (3) ensuring that tax adjustments recorded in the workpapers agree with IRS Forms 4318 or 4700 and the audit report; (4) adequately documenting the audit activity records; and (5) appropriately protecting taxpayers’ rights to privacy and confidentiality. The following are examples of some of the problems we found during our review of IRS audit workpapers: Tax adjustments shown in the workpapers, summaries, and reports did not agree. For example, in one audit, the report sent to the taxpayer showed adjustments for dependent exemptions and Schedule A deductions. However, neither the workpaper summary nor the workpapers included these adjustments. In another audit, the workpaper summary showed adjustments of about $25,000 in unreported wages, but the report sent to the taxpayer showed adjustments of only about $9,000 to Schedule C expenses. Required documents or summaries were not always in the workpaper bundle. For example, we found instances of missing or incomplete activity records and missing workpaper summaries. Workpapers that were in the bundle were not always legible or complete. The required information that was missing included the workpaper number, tax year being audited, date of the workpaper, and auditor’s name or initials. Although we are unable to develop estimates of the overall quality of audit workpapers, IRS has historically found problems with the quality of its workpapers. This observation is supported by evaluations conducted as part of IRS’ EQMS, which during the past 6 years (1992-97) indicated that IRS auditors met all of the key elements of the workpaper standard in no more than 72 percent of the audits. Table 1 shows the percentage of audits reviewed under EQMS that met all the key elements of the workpaper standard. The success rate, as depicted in table 1, indicates whether all of the key elements within the standard were met. That is, if any one element is not met, the standard is not met. Another indicator of the quality of the audit workpapers is how often each element within a standard meets the criteria of that element. Table I.2 in appendix I shows this rate, which IRS calls the pass rate, for the key elements of the workpaper standard. Workpapers are an important part of the audit effort. They are a tool to use in formulating and documenting the auditor’s findings, conclusions, and recommended adjustments, if any. Workpapers are also used by third-party reviewers as quality control and measurement instruments. Documentation of the auditor’s methodology and support for the recommended tax adjustments are especially important when the taxpayer does not agree with the recommendations. In these cases, the workpapers are to be used to make decisions about how much additional tax is owed by the taxpayer. Inadequate workpapers may result in having the auditor do more work or even in having the recommended adjustment overturned. IRS’ primary quality control mechanism is supervisory review of the audit workpapers to ensure adherence to the audit standards. However, our review of the workpapers in the sampled audits uncovered limited documentation of supervisory review. As a result, the files lacked documentation that IRS group managers reviewed workpapers during the audits to help ensure that the recommended tax adjustments were supported and verified, and that the audits did not unnecessarily burden the audited taxpayers. The IRM requires that group managers review the audit work to assess quality and ensure that audit standards are being met, but it does not indicate how or when such reviews should be conducted. However, the IRM does not require that documentation of this review be maintained in the audit files. We found little documentation in the workpapers that group managers reviewed workpapers before sharing the audit results with the taxpayer. In analyzing the sampled audits, we recorded whether the workpapers contained documentation that a supervisor had reviewed the workpapers during the audit. We counted an audit as having documentation of being reviewed if the group manager made notations in the workpapers on the audit findings or results; we also counted audits in which the workpapers made some reference to a discussion with the group manager about the audit findings. On the basis of our analysis of the sampled audits closed during fiscal years 1995 and 1996, we estimated that about 6 percent of the workpapers in the sample population contained documentation of group manager review during the audits. In discussions about our estimate with IRS Examination Division officials, they noted that all unagreed audits (i.e., those audits in which the taxpayers do not agree with the tax adjustments) are to be reviewed by the group managers, and they pointed to the manager’s initials on the notice of deficiency as documentation of this review. We did not count reviews of these notices in our analysis because they occurred after IRS sent the original audit report to the taxpayer. If we assume that workpapers for all unagreed audits were reviewed, our estimate on the percentage of workpapers with documentation of being reviewed increases from 6 percent to about 26 percent. Further, we analyzed all unagreed audits in our sample to see how many had documentation of group manager review during the audit, rather than after the audit results were sent to the taxpayer; this would be the point at which the taxpayer either would agree or disagree with the results. We found documentation of such a review in 12 percent of the unagreed audits. The Examination Division officials also said that a group manager may review the workpapers without documentation of that review being recorded in the workpapers. Further, they said that group managers had limited time to review workpapers due to many other responsibilities. The officials also told us that group managers can be involved with audits through means other than review of the workpapers. They explained that these managers monitor their caseload through various processes, such as evaluations of auditors’ performance during or after an audit closes, monthly discussions with auditors about their inventory of audits, reviews of auditors’ time charges, reviews of audits that have been open the longest, and visits to auditors located outside of the district office. The Examination Division officials also noted that any time the audit is expanded, such as by selecting another of the taxpayer’s returns or adding a related taxpayer or return, this action must be approved by the group manager. According to these officials, these other processes may involve a review of audit workpapers, but not necessarily during the audit. We agreed that we would check for documentation of these other processes in our nine sample audits from IRS’ District Office located in Oakland. We found documentation of workload reviews for one of these nine sample audits. In these monthly workload reviews, supervisors are to monitor time charges to an audit. In one other audit, documentation showed that a special unit within the Examination Division reviewed and made changes to the form used to record data for input into IRS’ closed audits database. However, none of this documentation showed supervisory review of the audit workpapers. If any other forms of supervisory involvement with these audits had occurred, the documentation either had been removed from the employee performance file as part of IRS’ standard procedure or was not maintained in a way that we could relate it back to a specific taxpayer. As a result, we do not know how frequently these other processes for supervisory involvement occurred and whether substantive reviews of the audits were part of these processes. IRS is currently drafting changes to the IRM relating to workpapers. In the draft instructions, managers are required to document managerial involvement. This documentation may include signatures, notations in the activity record, or summaries of discussions in the workpapers. When completed, this section is to become part of the IRM’s section on examination of returns. According to an IRS official, comments from IRS’ field offices on the draft changes are not due into headquarters until May 1998. IRS audits tax returns to ensure that taxpayers pay the correct amount of tax. If auditors do quality work, IRS is more likely to meet this goal while minimizing the burden on taxpayers. Quality audits should also encourage taxpayers to comply voluntarily. Supervisory review during the audits is a primary tool in IRS’ efforts to control quality. IRS requires group managers to ensure the quality of the audits, leaving much discretion on the frequency and nature of their reviews during an audit. IRS officials noted that group managers are to review workpapers if taxpayers disagree with the auditor’s report on any recommended taxes. The IRM does not specifically require that all of these supervisory reviews be documented in the workpapers, even though generally accepted government auditing standards do require such documentation. However, recent draft changes to the IRM may address this issue by requiring such documentation. We found little documentation of such supervisory reviews, even though these reviews can help to avoid various problems. For example, supervisory review could identify areas that contribute to IRS’ continuing problems in creating audit workpapers that meet its standard for quality. Since fiscal year 1992, the quality of workpapers has been found wanting by IRS’ EQMS. Inadequately documented workpapers raise questions about whether supervisory review is controlling audit quality as intended. These questions cannot be answered conclusively, however, because the amount of supervisory review cannot be determined. The lack of documentation on workpaper review raises questions about the extent of supervisory involvement with the audits. Proposed changes to the IRM’s sections on examination of returns require documentation of management involvement in the audit process. We recommend that the IRS Commissioner require audit supervisors to document their review of audit workpapers as a control over the quality of audits and the associated workpapers. On March 25, 1998, we met with IRS officials to obtain comments on a draft of this report. These officials included the Acting Deputy Chief Compliance Officer, the Assistant Commissioner for Examination and members of his staff, and a representative from IRS’ Office of Legislative Affairs. IRS documented its comments in a March 27, 1998, letter from the IRS Commissioner, which we have reprinted in appendix II. In this letter, IRS agreed to make revisions to the IRM instructions for the purpose of implementing our recommendation by October 1998. The letter included an appendix outlining adoption plans. The IRS letter also expressed two concerns with our draft report. First, IRS said our conclusion about the lack of evidence of supervisory review of audit workpapers was somewhat misleading and pointed to examples of other managerial practices, such as on-the-job visitations, to provide oversight and involvement in cases. We do not believe our draft report was misleading. As IRS acknowledges in its letter, when discussing the lack of documentation of supervisory review, we also described these other managerial practices. Second, IRS was concerned that our draft report appeared to consider these other managerial practices insufficient. Our draft report did not discuss the sufficiency of these practices but focused on the lack of documentation of supervisory review, including these other managerial practices. We continue to believe that documentation of supervisory review of workpapers is needed to help ensure quality control over the workpapers and audits. At the March 25, 1998, meeting, IRS provided technical comments to clarify specific sections of the draft report that described IRS processes. IRS officials also discussed the distinction between supervisory review and documentation of that review. We have incorporated these comments into this report where appropriate. We are sending copies of this report to the Subcommittee’s Ranking Minority Member, the Chairmen and Ranking Minority Members of the House Ways and Means Committee and the Senate Committee on Finance, various other congressional committees, the Director of the Office of Management and Budget, the Secretary of the Treasury, the IRS Commissioner, and other interested parties. We will also make copies available to others upon request. Major contributors to this report are listed in appendix III. If you have any questions concerning this report, please contact me at (202) 512-9110. The Office of Compliance Specialization, within the Internal Revenue Service’s (IRS) Examination Division, has responsibility for Quality Measurement Staff operations and the Examination Quality Measurement System (EQMS). Among other uses, IRS uses EQMS to measure the quality of closed audits against nine IRS audit standards. The standards address the scope, audit techniques, technical conclusions, workpaper preparation, reports, and time management of an audit. Each standard includes additional key elements describing specific components of a quality audit. Table I.1 summarizes the standards and the associated key elements. Table I.1: Summary of IRS’ Examination Quality Measurement System Auditing Standards (as of Oct. 1996) Measures whether consideration was given to the large, unusual, or questionable items in both the precontact stage and during the course of the examination. This standard encompasses, but is not limited to, the following fundamental considerations: absolute dollar value, relative dollar value, multiyear comparisons, intent to mislead, industry/business practices, compliance impact, and so forth. Measures whether the steps taken verified that the proper amount of income was reported. Gross receipts were probed during the course of examination, regardless of whether the taxpayer maintained a double entry set of books. Consideration was given to responses to interview questions, the financial status analysis, tax return information, and the books and records in probing for unreported income. Measures whether consideration was given to filing and examination potential of all returns required by the taxpayer including those entities in taxpayer’s sphere of influence/responsibility. Required filing checks consist of the analysis of return information and, when warranted, the pick-up of related, prior and subsequent year returns. In accordance with Internal Revenue Manual 4034, examinations should include checks for filing information returns. (continued) Measures whether the issues examined were completed to the extent necessary to provide sufficient information to determine substantially correct tax. The depth of the examination was determined through inspection, inquiry, interviews, observation, and analysis of appropriate documents, ledgers, journals, oral testimony, third-party records, etc., to ensure full development of relevant facts concerning the issues of merit. Interviews provided information not available from documents to obtain an understanding of the taxpayer’s financial history, business operations, and accounting records in order to evaluate the accuracy of books/records. Specialists provided expertise to ensure proper development of unique or complex issues. Measures whether the conclusions reached were based on a correct application of tax law. This standard includes consideration of applicable law, regulations, court cases, revenue rulings, etc. to support technical/factual conclusions. Measures whether applicable penalties were considered and applied correctly. Consideration of the application of appropriate penalties during all examination is required. Measures the documentation of the examination’s audit trail and techniques used. Workpapers provided the principal support for the examiner’s report and documented the procedures applied, tests performed, information obtained, and the conclusions reached in the examination. Measures the presentation of the audit findings in terms of content, format, and accuracy. Addresses the written presentation of audit findings in terms of content, format, and accuracy. All necessary information is contained in the report, so that there is a clear understanding of the adjustments made and the reasons for those adjustments. Measures the utilization of time as it relates to the complete audit process. Time is an essential element of the Auditing Standards and is a proper consideration in analyses of the examination process. The process is considered as a whole and at examination initiation, examination activities, and case closing stages. (Table notes on next page) IRS uses the key element pass rate as one measure of audit quality. This measure computes the percentage of audits demonstrating the characteristics defined by the key element. According to IRS, the key element pass rate is the most sensitive measurement and is useful when describing how an audit is flawed, establishing a baseline for improvement, and identifying systemic changes. Table I.2 shows the pass rates for the key elements of the workpaper standard for fiscal years 1992 through 1997 for office and field audits. Table I.2: Key Element Pass Rate for EQMS Workpaper Standard for District Audits From Fiscal Years 1992-97 Key element pass rate by fiscal year1995 (10/94-3/95) 1995 (4/95-9/95) Legend: n/a = not applicable The key element “Disclosure” was added in the middle of fiscal year 1995. Kathleen E. Seymour, Evaluator-in-Charge Louis G. Roberts, Senior Evaluator Samuel H. Scrutchins, Senior Data Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO reviewed the condition of the Internal Revenue Service's (IRS) audit workpapers, including the documentation of supervisory review. GAO noted that: (1) during its review of IRS' financial status audits, the workpapers did not always meet the requirements under IRS' workpaper standards; (2) standards not met in some audit workpapers included the expectation that: (a) the amount of tax adjustments recorded in the workpapers would be the same as the adjustment amounts shown in the auditor's workpaper summary and on the report sent to the taxpayer; and (b) the workpaper files would contain all required documents to support conclusions about tax liability that an auditor reached and reported to the taxpayer; (3) these shortcomings with the workpapers are not new; (4) GAO found documentation on supervisory review of workpapers prepared during the audits in an estimated 6 percent of the audits in GAO's sample; (5) in the remaining audits, GAO found no documentation that the group managers reviewed either the support for the tax adjustments or the report communicating such adjustments to the taxpayer; (6) IRS officials indicated that all audits in which the taxpayer does not agree with the recommended adjustments are to be reviewed by the group managers; (7) if done, this review would occur after the report on audit results was sent to the taxpayer; (8) even when GAO counts all such unagreed audits, those with documentation of supervisory review would be an estimated 26 percent of the audits in GAO's sample population; (9) GAO believes that supervisory reviews and documentation of such reviews are important because they are IRS' primary quality control process; (10) proper reviews done during the audit can help ensure that audits minimize burden on taxpayers and that any adjustments to taxpayers' liabilities are supported; (11) although Examination Division officials recognized the need for proper reviews, they said IRS group managers cannot review workpapers for all audits because of competing priorities; (12) these officials also said that group managers get involved in the audit process in ways that may not be documented in the workpapers; (13) they stated that these group managers monitor auditors' activities through other processes, such as by reviewing the time that auditors spent on an audit, conducting on-the-job visits, and talking to auditors about their cases and audit inventory; and (14) in these processes, however, the officials said that group managers usually were not reviewing workpapers or validating the calculations used to recommend adjustments before sending the audit results to the taxpayer.

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Congress authorized State’s ATA program in 1983 through the Foreign Assistance Act. According to the legislation the purpose of ATA is “(1) to enhance the antiterrorism skills of friendly countries by providing training and equipment to deter and counter terrorism; (2) to strengthen the bilateral ties of the United States with friendly governments by offering concrete assistance in this area of great mutual concern; and (3) to increase respect for human rights by sharing with foreign civil authorities modern, humane, and effective antiterrorism techniques.” ATA offers a wide range of counterterrorism assistance to partner nations, but most assistance consists of (1) training courses on tactical and strategic counterterrorism issues and (2) grants of counterterrorism equipment, such as small arms, bomb detection equipment, vehicles, and computers. ATA curricula and training focus on enhancing critical counterterrorism capabilities, which cover issues such as crisis management and response, cyberterrorism, dignitary protection, and related areas. According to DS/T/ATA, all its courses emphasize law enforcement under the rule of law and sound human rights practices. ATA is State’s largest counterterrorism program, and receives appropriations under the Nonproliferation, Anti-Terrorism, Demining, and Related Programs account. Fiscal year 2002 appropriations for ATA increased to about $158 million—over six times the level of funding appropriated in fiscal year 2000. Appropriations have fluctuated since fiscal year 2002, but increased to almost $171 million in fiscal year 2007. From fiscal years 2002 to 2007, program assistance for the top 10 recipients of ATA allocations ranged from about $11 million to about $78 million. The top 10 recipients represented about 57 percent of ATA funding allocated for training and training-related activities over the 6-year period. ATA funding for the other 89 partner nations that received assistance during this period ranged from $9,000 to about $10.7 million. The Coordinator for Counterterrorism, the head of S/CT, is statutorily charged with the overall supervision (including policy oversight of resources) and coordination of the U.S. government’s counterterrorism activities. The broadly mandated role of the Assistant Secretary for Diplomatic Security, the head of the Bureau of Diplomatic Security, includes implementing security programs to protect diplomatic personnel and advise chiefs of mission on security matters. Specific roles and responsibilities for S/CT and DS/T/ATA regarding ATA are described in a 1991 internal policy guidance memorandum, the Omnibus Diplomatic Security Act of 1986, and incorporated into State’s Foreign Affairs Manual. S/CT is responsible for leading the initial assessment of a partner nation’s counterterrorism needs, and DS/T/ATA is responsible for developing annual, country-specific plans. Under current program operations, DS/T/ATA conducts an initial assessment of a new participant nation’s counterterrorism capabilities, and conducts subsequent assessments— referred to as program reviews—every 2 to 3 years thereafter. In general, the needs assessments include input from the embassy teams, but the assessments themselves are conducted by technical experts contracted by DS/T/ATA. According to DS/T/ATA, the purpose of the needs assessment and program review process is to determine the forms of assistance for a partner nation to detect, deter, deny, and defeat terrorism; and to evaluate program effectiveness. S/CT provides minimal policy guidance to DS/T/ATA to help determine assistance priorities and ensure that it supports broader U.S. policy goals. In addition, S/CT and DS/T/ATA did not systematically use country- specific needs assessments and program reviews to plan what types of assistance to provide partner nations in accordance with State policy guidance. The assessments we reviewed had weaknesses and inconsistencies. According to State officials, S/CT places countries on a tiered list in one of four priority categories based on criteria that address several factors, including country-specific threats and the level and depth of diplomatic and political engagement in a country. State officials indicated that other factors also may be considered in determining whether and where a country is placed on the list, such as the presence of a U.S. military base or a planned international sporting or cultural event with U.S. participation. Since 2006, S/CT has reviewed and discussed the tiered list—including changes, additions, or deletions—with DS/T/ATA during quarterly meetings. In addition to the quarterly meetings, an S/CT official told us that they had established a series of regional roundtable discussions in 2006 between S/CT regional subject experts and DS/T/ATA counterparts. According to the S/CT official, the roundtables were intended as a means of identifying priority countries and their counterterrorism needs for purposes of developing budget requests. S/CT provides little guidance to DS/T/ATA beyond the tiered list, although the 1991 State policy guidance memorandum states that S/CT’s written policy guidance for the program should include suggested country training priorities. While S/CT provides some additional guidance to DS/T/ATA during quarterly meetings and on other occasions, DS/T/ATA officials in headquarters and the field stated they received little or no guidance from S/CT beyond the tiered list. As a result, neither S/CT nor DS/T/ATA could ensure that program assistance provided to specific countries supports broader U.S. antiterrorism policy goals. Other factors beyond S/CT’s tiered list of countries, such as unforeseen events or new governmental initiatives, also influence which countries receive program assistance. We found that 10 countries on the tiered list did not receive ATA assistance in fiscal year 2007, while 13 countries not on the tiered list received approximately $3.2 million. S/CT and DS/T/ATA officials stated that assistance does not always align with the tiered list because U.S. foreign policy objectives sometimes cause State, in consultation with the President’s National Security Council, to provide assistance to a non-tiered-list country. According to the 1991 State policy guidance memorandum and DS/T/ATA standard operations procedures, ATA country-specific needs assessments and program reviews are intended to guide program management and planning. However, S/CT and DS/T/ATA did not systematically use the assessments to determine what types of assistance to provide to partner nations or develop ATA country-specific plans. Although the 1991 State policy memorandum states that S/CT should lead the assessment efforts, a senior S/CT official stated that S/CT lacks the capacity to do so. As a result, DS/T/ATA has led interagency assessment teams in recent years, but the assessments and recommendations for types of assistance to be provided may not fully reflect S/CT policy guidance concerning overall U.S. counterterrorism priorities. DS/T/ATA officials responsible for five of the top six recipients of ATA support—Colombia, Kenya, Indonesia, Pakistan, and the Philippines—did not consistently use ATA country needs assessments and program reviews in making program decisions or to create annual country assistance plans. In some instances, DS/T/ATA officials responsible for in-country programs had not seen the latest assessments for their respective countries, and some said that the assessments they had reviewed were either not useful or that they were used for informational purposes only. The Regional Security Officer, Deputy Regional Security Officer, and DS/T/ATA Program Manager for Kenya had not seen any of the assessments that had been conducted for the country since 2000. Although the in-country program manager for Kenya was familiar with the assessments from her work in a previous position with DS/T/ATA, she stated that in general, the assessments were not very useful for determining what type of assistance to provide. She said that the initial needs assessment for Kenya failed to adequately consider local needs and capacity. The Regional Security Officer and Assistant Regional Security Officer for Indonesia stated they had not seen the latest assessment for the country. The DS/T/ATA program manager for Indonesia said that he recalled using one of the assessments as a “frame of reference” in making program and resource decisions. The in-country program manager also recalled seeing one of the assessments, but stated that he did not find the assessment useful given the changing terrorist landscape; therefore, he did not share it with his staff. The DS/T/ATA Program Manager for Pakistan stated that decisions on the types of assistance to provide in Pakistan were based primarily on the knowledge and experience of in-country staff regarding partner nation needs, rather than the needs assessments or program reviews. He added that he did not find the assessments useful, as the issues identified in the latest (2004) assessment for the country were outdated. We reviewed 12 of the 21 ATA country-specific needs assessments and program reviews that, according to ATA annual reports, DS/T/ATA conducted between 2000 and 2007 for five of the six in-country programs. The assessments and reviews generally included a range of recommendations for counterterrorism assistance, but did not prioritize assistance to be provided or include specific timeframes for implementation. Consequently, the assessments did not consistently provide a basis for targeting program assistance to the areas of a partner nation’s greatest counterterrorism assistance need. Only two of the assessments—a 2000 needs assessment for Indonesia and a 2003 assessment for Kenya—prioritized the recommendations, although a 2004 assessment for Pakistan and a 2005 assessment for the Philippines listed one or two recommendations as priority ATA efforts. In addition, the information included in the assessments was not consistent and varied in linking recommendations to capabilities. Of the 12 assessments we reviewed: Nine included narrative on a range of counterterrorism capabilities, such as border security and explosives detection, but the number of capabilities assessed ranged from 5 to 25. Only four of the assessments that assessed more than one capability linked recommendations provided to the relevant capabilities. Six included capability ratings, but the types of ratings used varied. For example, a 2003 assessment for Colombia rated eight capabilities from 1 through 5, but the 2004 assessment rated 24 capabilities, using poor, low, fair, or good. Two used a format that DS/T/ATA began implementing in 2001. The assessments following the new format generally included consistent types of information and clearly linked recommendations provided to an assessment of 25 counterterrorism capabilities. However, they did not prioritize recommendations or include specific timeframes for implementing the recommendations. Although the 1991 State policy memorandum states that DS/T/ATA should create annual country assistance plans that specify training objectives and assistance to be provided based upon the needs assessments and program reviews, we found that S/CT and DS/T/ATA did not systematically use the assessments to create annual plans for the five in-country programs. DS/T/ATA officials we interviewed regarding the five in-country programs stated that in lieu of relying on the assessments or country assistance plans, program and resource decisions were primarily made by DS/T/ATA officials in the field based on their knowledge and experience regarding partner nation needs. Some DS/T/ATA officials said they did not find the country assistance plans useful. The program manager for Pakistan stated that he used the country assistance plan as a guide, but found that it did not respond to changing needs in the country. The ATA program manager for Kenya said that he had not seen a country assistance plan for that country. We requested ATA country assistance plans conducted during fiscal years 2000-2006 for the five in-country programs included in our review, but S/CT and DS/T/ATA only provided three plans completed for three of the five countries. Of these, we found that the plans did not link planned activities to recommendations provided in the needs assessments and program reviews. For example, the plan for the Philippines included a brief reference to a 2005 needs assessment, but the plan did not identify which recommendations from the 2005 assessment were intended to be addressed by current or planned efforts. S/CT has mechanisms to coordinate the ATA program with other U.S. government international counterterrorism training assistance and to help avoid duplication of efforts. S/CT chairs biweekly interagency working group meetings of the Counterterrorism Security Group’s Training Assistance Subgroup to provide a forum for high-level information sharing and discussion among U.S. agencies implementing international counterterrorism efforts. S/CT also established the Regional Strategic Initiative in 2006 to coordinate regional counterterrorism efforts and strategy. S/CT described the Regional Strategic Initiative as a series of regionally based, interagency meetings hosted by U.S. embassies to identify key regional counterterrorism issues and develop a strategic approach to addressing them, among other goals. In the four countries we visited, we did not find any significant duplication or overlap among U.S. agencies’ country-specific training programs aimed at combating terrorism. Officials we met with in each of these countries noted that they participated in various embassy working group meetings, such as Counterterrorism Working Group and Law Enforcement Working Group meetings, during which relevant agencies shared information regarding operations and activities at post. DS/T/ATA officials also coordinated ATA with other counterterrorism efforts through daily informal communication among cognizant officials in the countries we visited. In response to concerns that ATA lacked elements of adequate strategic planning and performance measurement, State took action to define goals and measures related to the program’s mandated objectives. S/CT and DS/T/ATA, however, did not systematically assess sustainability—that is, the extent to which assistance has enabled partner nations to achieve and maintain advanced counterterrorism capabilities. S/CT and DS/T/ATA lacked clear measures and processes for assessing sustainability, and program managers did not consistently include sustainability in ATA planning. State did not have measurable performance goals and outcomes related to the mandated objectives for ATA prior to fiscal year 2003, but has recently made some progress to address the deficiency, which had been noted in reports by State’s Office of Inspector General. Similarly, State developed specific goals and measures for each of the program’s mandated objectives in response to a 2003 Office of Management and Budget assessment. Since fiscal year 2006, State planning documents, including department and bureau-level performance plans, have stated that enabling partner nations to achieve advanced and sustainable counterterrorism capabilities is a key outcome. S/CT and DS/T/ATA officials further confirmed that sustainability is the principal intended outcome and focus of program assistance. In support of these efforts, DS/T/ATA appointed a Sustainment Manager in November 2006 to, among other things, coordinate with other DS/T/ATA divisions to develop recommendations and plans to assist partner nations in developing sustainable counterterrorism capabilities. Despite progress towards establishing goals and intended outcomes, State had not developed clear measures and a process for assessing sustainability and had not integrated the concept into program planning. The Government Performance and Results Act of 1993 requires agencies in charge of U.S. government programs and activities to identify goals and report on the degree to which goals are met. S/CT and DS/T/ATA officials noted the difficulty in developing direct quantitative measures of ATA outcomes related to partner nations’ counterterrorism capabilities. Our past work also has stressed the importance of establishing program goals, objectives, priorities, milestones, and measures to use in monitoring performance and assessing outcomes as critical elements of program management and effective resource allocation. We found that the measure for ATA’s principal intended program outcome of sustainability is not clear. In its fiscal year 2007 Joint Performance Summary, State reported results and future year targets for the number of countries that had achieved an advanced, sustainable level of counterterrorism capability. According to the document, partner nations that achieve a sustainable level of counterterrorism would graduate from the program and no longer receive program assistance. However, program officials in S/CT and DS/T/ATA directly responsible for overseeing ATA were not aware that the Joint Performance Summary listed numerical targets and past results for the number of partner nations that had achieved sustainability, and could not provide an explanation of how State assessed the results. DS/T/ATA’s Sustainment Manager also could not explain how State established and assessed the numerical targets in the reports. The Sustainment Manager further noted that, to his knowledge, S/CT and DS/T/ATA had not yet developed systematic measures of sustainability. DS/T/ATA’s mechanism for evaluating partner nation capabilities did not include guidance or specific measures to assess sustainability. According to program guidance and DS/T/ATA officials, needs assessments and program reviews are intended to establish a baseline of a partner nation’s counterterrorism capabilities and quantify progress through subsequent reviews. DS/T/ATA officials also asserted that the process is intended to measure the results of program assistance. However, the process did not explicitly address sustainability, and provided no specific information or instruction regarding how reviewers are to assess sustainability. Moreover, the process focused on assessing a partner nation’s overall counterterrorism capabilities, but did not specifically measure the results of program assistance. DS/T/ATA had not systematically integrated sustainability into country- specific assistance plans, and we found a lack of consensus among program officials about how to address the issue. In-country program managers, embassy officials, instructors, and partner nation officials we interviewed held disparate views on how to define sustainability across all ATA participant countries, and many were not aware that sustainability was the intended outcome. Several program officials stated that graduating a country and withdrawing or significantly reducing program assistance could result in a rapid decline in the partner nation’s counterterrorism capabilities, and could undermine other program objectives, such as improving bilateral relations. Further, although State has listed sustainability in State-level planning documents since 2006, S/CT and DS/T/ATA had not issued guidance on incorporating sustainability into country-specific planning, and none of the country assistance plans we reviewed consistently addressed the outcome. As a result, the plans did not include measurable annual objectives targeted at enabling the partner nation to achieve sustainability. For example, Colombia’s assistance plan listed transferring responsibility for the antikidnapping training to the Colombian government and described planned activities to achieve that goal. However, the plan did not include measurable objectives to determine whether activities achieved intended results. Since 1996, State has not complied with a congressional mandate to report to Congress on U.S. international counterterrorism assistance. Additionally, State’s annual reports on ATA contained inaccurate data regarding basic program information, did not provide systematic assessments of program results, and lacked other information necessary to evaluate program effectiveness. In 1985, Congress amended the Foreign Assistance Act requiring the Secretary of State to report on all assistance related to international terrorism provided by the U.S. government during the preceding fiscal year. Since 1996, State has submitted ATA annual reports rather than the broader report required by the statute. A S/CT official noted confusion within State over what the statute required and he asserted that the ATA annual report, which is prepared by DS/T/ATA, and State’s annual “Patterns of Global Terrorism” report were sufficiently responsive to congressional needs. He further noted that, in his view, it would be extremely difficult for State to compile and report on all U.S. government terrorism assistance activities, especially given the significant growth of agencies’ programs since 2001. Officials in State’s Bureau of Legislative Affairs indicated that, to their knowledge, they had never received an inquiry from congressional staff about the missing reports. Recent ATA annual reports have contained inaccurate data relating to basic program information on numbers of students trained and courses offered. For example, Afghanistan. According to annual reports for fiscal years 2002 to 2005, 15 Afghan students were trained as part of a single training event over the 4-year period. DS/T/ATA subsequently provided us data for fiscal year 2005, which corrected the participation total in that year from 15 participants in 1 training event to 1,516 participants in 12 training events. Pakistan. According to the fiscal year 2005 ATA annual report, ATA delivered 17 courses to 335 participants in Pakistan. Supporting tables in the same report listed 13 courses provided to 283 participants, and a summary report provided to us by DS/T/ATA reported 13 courses provided to 250 course participants. DS/T/ATA officials acknowledged the discrepancies and noted that similar inaccuracies could be presumed for prior years and for other partner nations. The officials indicated that inaccuracies and omissions in reports of the training participants and events were due to a lack of internal policies and procedures for recording and reporting program data. In the absence of documented policies and procedures, staff developed various individual processes for collecting the information that resulted in flawed data reporting. Additionally, DS/T/ATA officials told us that its inadequate information management system and a lack of consistent data collection procedures also contributed to inaccurate reporting. We reviewed ATA annual reports for fiscal years 1997 through 2005, and found that the reports varied widely in terms of content, scope, and format. Moreover, the annual reports did not contain systematic assessments of program performance or consistent information on program activity, such as number and type of courses delivered, types of equipment provided, and budget activity associated with program operations. In general, the reports contained varying levels of detail on program activity, and provided only anecdotal examples of program successes, from a variety of sources, including U.S. embassy officials, ATA instructors, and partner nation officials. DS/T/ATA program officials charged with compiling the annual reports for the past 3 fiscal years noted that DS/T/ATA did not have guidance on the scope, content, or format for the reports. Although ATA plays a central role in State’s broader effort to fight international terrorism, deficiencies in how the program is guided, managed, implemented, and assessed could limit the program’s effectiveness. Specifically, minimal guidance from S/CT makes it difficult to determine the extent to which program assistance directly supports broader U.S. counterterrorism policy goals. Additionally, deficiencies with DS/T/ATA’s needs assessments and program reviews may limit their utility as a tool for planning assistance and prioritizing among several partner nations’ counterterrorism needs. As a result, the assessments and reviews are not systematically linked to resource allocation decisions, which may limit the program’s ability to improve partner nation’s counterterrorism capabilities. Although State has made some progress in attempting to evaluate and quantitatively measure program performance, ATA still lacks a clearly defined, systematic assessment and reporting of outcomes, which makes it difficult to determine the overall effectiveness of the program. This deficiency, along with State’s noncompliance with mandated reporting requirements, has resulted in Congress having limited and incomplete information on U.S. international counterterrorism assistance and ATA efforts. Such information is necessary to determine the most effective types of assistance the U.S. government can provide to partner nations in support of the U.S. national security goal of countering terrorism abroad. In our February 2008 report, we suggested that Congress should reconsider the requirement that the Secretary of State provide an annual report on the nature and amount of U.S. government counterterrorism assistance provided abroad, given the broad changes in the scope and nature of U.S. counterterrorism assistance abroad in conjunction with the fact that the report has not been submitted since 1996. We also recommended that the Secretary of State take the following four actions: 1. Revisit and revise internal guidance (the 1991 State policy memorandum and Foreign Affairs Manual, in particular) to ensure that the roles and responsibilities for S/CT and DS/T/ATA are still relevant and better enable State to determine which countries should receive assistance and what type, and allocate limited ATA resources. 2. Ensure that needs assessments and program reviews are both useful and linked to ATA resource decisions and development of country- specific assistance plans. 3. Establish clearer measures of sustainability, and refocus the process for assessing the sustainability of partner nations’ counterterrorism capabilities. The revised evaluation process should include not only an overall assessment of partner nation counterterrorism capabilities, but also provide guidance for assessing the specific outcomes of ATA. 4. Comply with the congressional mandate to report to Congress on U.S. international counterterrorism assistance. In commenting on our report, State agreed overall with our principal findings and recommendations to improve its ATA program guidance, the needs assessment and program review process, and its assessments of ATA program outcomes. State noted that the report highlighted the difficulties in assessing the benefits of developing and improving long-term antiterrorism and law enforcement relationships with foreign governments. State also outlined a number of ongoing and planned initiatives to address our recommendations. As noted in our report, we will follow up with State to ensure that these initiatives have been completed, as planned. Although State supported the matter we suggested for congressional consideration, it did not specifically address our recommendation that it comply with the congressional mandate to report on U.S. counterterrorism assistance. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. For questions regarding this testimony, please contact Charles Michael Johnson, Jr. (202) 512-7331 or [email protected]. Albert H. Huntington, III, Assistant Director; Matthew E. Helm; Elisabeth R. Helmer; and Emily Rachman made key contributions in preparing this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of State's (State) Antiterrorism Assistance (ATA) program's objectives are to provide partner nations with counterterrorism training and equipment, improve bilateral ties, and increase respect for human rights. State's Office of the Coordinator for Counterterrorism (S/CT) provides policy guidance and its Bureau of Diplomatic Security, Office of Antiterrorism, Assistance (DS/T/ATA), manages program operations. GAO assessed (1) State's guidance for determining ATA priorities, (2) how State coordinates ATA with other counterterrorism programs, (3) the extent State established ATA program goals and measures, and (4) State's reporting on U.S. counterterrorism assistance. This statement is based on a February 2008, GAO report titled Combating Terrorism: State Department's Antiterrorism Program Needs Improved Guidance and More Systematic Assessments of Outcomes, GAO-08-336 (Washington, D.C.: Feb. 29, 2008). S/CT provides minimal guidance to help prioritize ATA program recipients, and S/CT and DS/T/ATA did not systematically align ATA assistance with U.S. assessments of foreign partner counterterrorism needs. S/CT provided policy guidance to DS/T/ATA through quarterly meetings and a tiered list of priority countries, but the list did not provide guidance on country counterterrorism-related program goals, objectives, or training priorities. S/CT and DS/T/ATA also did not consistently use country-specific needs assessments and program reviews to plan assistance. S/CT had established mechanisms to coordinate the ATA program with other U.S. international efforts to combat terrorism. S/CT held interagency meetings with officials from the Department of State, Defense, Justice, and Treasury and other agencies as well as ambassador-level regional strategic coordinating meetings. GAO did not find any significant duplication or overlap among the various U.S. international counterterrorism efforts. State had made progress in establishing goals and intended outcomes for the ATA program, but S/CT and DS/T/ATA did not systematically assess the outcomes and, as a result, could not determine the effectiveness of program assistance. For example, although sustainability is a principal focus, S/CT and DS/T/ATA had not set clear measures of sustainability or integrated sustainability into program planning. State reporting on U.S. counterterrorism assistance abroad was incomplete and inaccurate. S/CT had not provided a congressionally mandated annual report to Congress on U.S. government-wide assistance related to combating international terrorism since 1996. After 1996, S/CT has only submitted to Congress annual reports on the ATA program, such as the number of students trained and courses offered. Moreover, these reports contained inaccurate program information. Additionally, the reports lacked comprehensive information of the results on program assistance that would be useful to Congress.

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There are two approaches for reorganizing or terminating a large financial company. Large financial companies may be reorganized or liquidated under a judicial bankruptcy process or resolved under special legal and regulatory resolution regimes that have been created to address insolvent financial entities such as insured depository institutions and insurance companies. Bankruptcy is a federal court procedure, the goal of which is to help individuals and businesses eliminate or restructure debts they cannot repay and help creditors receive some payment in an equitable manner. Generally the filing of a bankruptcy petition operates as an automatic stay; that is, it stops most lawsuits, foreclosures, and other collection activities against the debtor. Equitable treatment of creditors means all creditors with substantially similar claims are classified similarly and receive the same treatment. For example, a class of secured creditors— those with liens or other secured claims against the debtor’s property— will receive similar treatment as to their secured claims. Business debtors may seek liquidation, governed primarily by Chapter 7 of the Code, or reorganization, governed by Chapter 11. Proceedings under Chapters 7 and 11 can be voluntary (initiated by the debtor) or involuntary (generally initiated by at least three creditors holding at least a certain minimum amount of claims against the debtor). In an involuntary proceeding, the debtor can defend against the proceeding, including presenting objections. The judge subsequently decides whether to grant the creditors’ request and permit the bankruptcy to proceed, dismiss the request, or enter any other appropriate order. A Chapter 7 proceeding is a court-supervised procedure by which a trustee takes over the assets of the debtor’s estate subject to limited exemptions, reduces them to cash, and makes distributions to creditors, subject to the rights of secured creditors to the collateral securing their loans to the debtor. A reorganization proceeding under Chapter 11 allows debtors to continue some or all of their operations subject to court supervision as a way to satisfy creditor claims. The debtor typically remains in control of its assets, and is called a debtor-in-possession (DIP). Under certain circumstances, the court can direct the U.S. Trustee to appoint a Chapter 11 trustee to take over the affairs of the debtor. As shown in figure 1, a firm going through a Chapter 11 bankruptcy generally will pass through several stages. Among these are: First-day motions. The most common first-day motions relate to the continued operation of the debtor’s business and involve matters such as requests to use cash collateral—liquid assets on which secured creditors have a lien or claim—and obtaining financing, if any. Disclosure. The disclosure statement must include information on the debtor’s assets, liabilities, and business affairs sufficient to enable creditors to make informed judgments about how to vote on the debtor’s reorganization plan and must be approved by the bankruptcy court. Plan of reorganization. A debtor has an exclusive right to file a plan of reorganization within the first 120 days of bankruptcy. The plan describes how the debtor intends to reorganize and treat its creditors. The plan divides claims against the debtor into separate classes and specifies the treatment each class will receive. The court may confirm the plan if, among other things, each class of allowed creditors has accepted the plan or the class is not impaired by the plan. If not all classes of impaired creditors vote to accept the plan, the court can still confirm the plan if it is shown that it is fair to all impaired creditors. Reorganization. Possible outcomes, which can be used in combination, include (1) distribution under a plan of the proceeds of a pre-plan sale of the assets of the company (in whole or in part), sometimes called a section 363 sale. Section 363 of the Code permits sales that are free and clear of creditor claims of property of the estate; (2) liquidation of the company’s assets with approval of the court, through means other than a 363 sale; and (3) reorganization of the company, in which it emerges from bankruptcy with new contractual rights and obligations that replace or supersede those it had before filing for bankruptcy protection. The debtor, creditors, trustee, or other interested parties may initiate adversary proceedings—in effect, a lawsuit within the bankruptcy case to preserve or recover money or property, to subordinate a claim of another creditor to their own claims, or for similar reasons. Furthermore, the The U.S. bankruptcy system involves multiple federal entities. Bankruptcy courts are located in 90 federal judicial districts; however, as we reported in 2011, the Southern District of New York and the District of Delaware adjudicate a majority of larger corporate or business bankruptcy cases. The Judicial Conference of the United States serves as the judiciary’s principal policymaking body and recommends national policies on all aspects of federal judicial administration. In addition, AOUSC serves as the central administrative support entity for the Judicial Conference and the federal courts, including bankruptcy courts. The Federal Judicial Center is the education and research agency for the federal courts and assists bankruptcy courts with reports and assessments relating to the administration and management of bankruptcy cases. Finally, the Department of Justice’s U.S. Trustee Program and the judiciary’s Bankruptcy Administrator Program oversee bankruptcy trustees and promote integrity and efficiency in the bankruptcy system by overseeing the administration of bankruptcy estates. A preference action can be asserted for payments made to an insider within a year prior to the bankruptcy filing. Large, complex financial companies that are eligible to file for bankruptcy generally file under Chapter 11 of the Code. Such companies operating in the United States engage in a range of financial services activities. Many are organized under both U.S. and foreign laws. The U.S. legal structure is frequently premised on a parent holding company owning regulated subsidiaries (such as depository institutions, insurance companies, broker-dealers, and commodity brokers) and nonregulated subsidiaries that engage in financial activities. Certain financial institutions may not file as debtors under the Code and other entities face special restrictions in using the Code: Insured depository institutions. Under the Federal Deposit Insurance Act, FDIC serves as the conservator or receiver for insured depository institutions placed into conservatorship or receivership under applicable law. Insurance companies. Insurers generally are subject to oversight by state insurance commissioners, who have the authority to place them into conservatorship, rehabilitation, or receivership. Broker-dealers. Broker-dealers can be liquidated under the Securities Investor Protection Act (SIPA) or under a special subchapter of Chapter 7 of the Code. However, broker-dealers may not file for reorganization under Chapter 11. Commodity brokers. Commodity brokers, which include futures commission merchants, foreign futures commission merchants, clearing organizations, and certain other entities in the derivatives industry, can only use a special subchapter of Chapter 7 for bankruptcy relief. Regulators often play a role in financial company bankruptcies. With the exception of CFTC and SEC, the Code does not explicitly name federal financial regulators as a party of interest with a right to be heard before the court. In practice, regulators frequently appear before the court in financial company bankruptcies. For example, as receiver of failed insured depository institutions, FDIC’s role in bankruptcies of bank holding companies is typically limited to that of creditor. CFTC has the express right to be heard and raise any issues in a case under Chapter 7. SEC has the same rights in a case under Chapter 11. SEC may become involved in a bankruptcy particularly if there are issues related to disclosure or the issuance of new securities. SEC and CFTC are, in particular, involved in Chapter 7 bankruptcies of broker-dealers and commodity brokers. In the event of a broker-dealer liquidation, pursuant to SIPA the bankruptcy court retains jurisdiction over the case and a trustee, selected by the Securities Investor Protection Corporation (SIPC), typically administers the case. SEC may participate in any SIPA proceeding as a party. The Code does not restrict the federal government from providing DIP financing to a firm in bankruptcy, and in certain cases it has provided such funding—for example, financing under the Troubled Asset Relief Program (TARP) in the bankruptcies of General Motors and Chrysler. The authority to make new financial commitments under TARP terminated on October 3, 2010. In July 2010, the Dodd-Frank Act amended section 13(3) of the Federal Reserve Act to prohibit the establishment of an emergency lending program or facility for the purpose of assisting a single and specific company to avoid bankruptcy. Nevertheless, the Federal Reserve may design emergency lending programs or facilities for the purpose of providing liquidity to the financial system. Although the automatic stay generally preserves assets and prevents creditors from taking company assets in payment of debts before a case is resolved and assets are systematically distributed, the stay is subject to exceptions, one of which can be particularly important in a financial institution bankruptcy. These exceptions—commonly referred to as the “safe harbor provisions”—pertain to certain financial and derivative contracts, often referred to as qualified financial contracts (QFC). The types of contracts eligible for the safe harbors are defined in the Code. They include derivative financial products, such as forward contracts and swap agreements that financial companies (and certain individuals and nonfinancial companies) use to hedge against losses from other transactions or speculate on the likelihood of future economic developments. Repurchase agreements, which are collateralized instruments that provide short-term financing for financial companies and others, also generally receive safe-harbor treatment. Under the safe-harbor provisions, most counterparties that entered into a qualifying transaction with the debtor may exercise certain contractual rights even if doing so otherwise would violate the automatic stay. In the event of insolvency or the commencement of bankruptcy proceedings, the nondefaulting party in a QFC may liquidate, terminate, or accelerate the contract, and may offset (net) any termination value, payment amount, or other transfer obligation arising under the contract when the debtor files for bankruptcy. That is, generally nondefaulting counterparties subtract what they owe the bankrupt counterparty from what that counterparty owes them (netting), often across multiple contracts. If the result is positive, the nondefaulting counterparties can sell any collateral they are holding to offset what the bankrupt entity owes them. If that does not fully settle what they are owed, the nondefaulting counterparties are treated as unsecured creditors in any final liquidation or reorganization. OLA gives FDIC the authority, subject to certain constraints, to resolve large financial companies, including a bank holding company or a nonbank financial company designated for supervision by the Federal Reserve, outside of the bankruptcy process. This regulatory resolution authority allows for FDIC to be appointed receiver for a financial company if the Secretary of the Treasury, in consultation with the President, determines, upon the recommendation of two-thirds of the Board of Governors of the Federal Reserve and (depending on the nature of the financial firm) FDIC, SEC, or the Director of the Federal Insurance Office, among other things, that the firm’s failure and its resolution under applicable law, including bankruptcy, would have serious adverse effects on U.S. financial stability and no viable private-sector alternative is available to prevent the default. In December 2013, FDIC released for public comment a notice detailing a proposed single-point-of-entry (SPOE) approach to resolving a systemically important financial institution under OLA. Under the SPOE approach, as outlined, FDIC would be appointed receiver of the top-tier U.S. parent holding company of a covered financial company determined to be in default or in danger of default pursuant to the appointment process set forth in the Dodd-Frank Act. Immediately after placing the parent holding company into receivership, FDIC would transfer assets (primarily the equity and investments in subsidiaries) from the receivership estate to a bridge financial company. By allowing FDIC to take control of the firm at the parent holding company level, this approach could allow subsidiaries (domestic and foreign) carrying out critical services to remain open and operating. In a SPOE resolution, at the parent holding company level, shareholders would be wiped out, and unsecured debt holders would have their claims written down to reflect any losses that shareholders cannot cover. The resolution of globally active large financial firms is often associated with complex international, legal, and operational challenges. The resolution of failed financial companies is subject to different national frameworks. During the recent financial crisis, these structural challenges led to government rescues or disorderly liquidations of systemic firms. Insolvency laws vary widely across countries. The legal authorities of some countries are not designed to resolve problems in financial groups operating through multiple legal entities that span borders. Some resolution authorities may not encourage cooperative solutions with foreign resolution authorities. Regulatory and legal regimes may conflict. Depositor preference, wholesale funding arrangements, derivatives, and repurchase agreements are often treated differently among countries when a firm enters bankruptcy. Some resolution authorities may lack the legal tools or authority to share information with relevant foreign authorities about the financial group as a whole or subsidiaries or branches. Country resolution authorities may have as their first responsibility the protection of domestic financial stability and minimization of any risk to public funds. For instance, if foreign authorities did not have full confidence that national and local interests would be protected, the assets of affiliates or branches of a U.S.-based financial institution chartered in other countries could be ring fenced or isolated and wound down separately under the insolvency laws of other countries thus complicating home-country resolution efforts. In 2005, the United States adopted Chapter 15 of the U.S. Bankruptcy Code. Chapter 15 is based on the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (UNCITRAL). The model law is intended to promote coordination between courts in different countries during insolvencies and has been adopted in 21 jurisdictions. More than 450 Chapter 15 cases have been filed since its adoption, with more than half filed in the Southern District of New York and the District of Delaware. Among the stated objectives of Chapter 15 are promoting cooperation between U.S. and foreign parties involved in a cross-border insolvency case, providing for a fair process that protects all creditors, and facilitating the rescue of a distressed firm. In pursuit of these goals, Chapter 15 authorizes several types of coordination, including U.S. case trustees or other authorized entities operating in foreign countries on behalf of a U.S. bankruptcy estate; foreign representatives having direct access to U.S. courts, including the right to commence a proceeding or seek recognition of a foreign proceeding; and U.S. courts communicating information they deem important, coordinating the oversight of debtors’ activities, and coordinating proceedings. Chapter 15 excludes the same financial institutions that are generally not eligible to file as debtors under the Code (such as insured depository institutions and U.S. insurance companies), with the exception of foreign insurance companies. It also excludes broker-dealers that can be liquidated under SIPA or a special provision of Chapter 7 of the Code and commodity brokers that can be liquidated under a different special provision of Chapter 7. Based on the UNCITRAL model law, Chapter 15 contains a public policy exception that allows a U.S. court to refuse cooperation and coordination if doing so would be “manifestly contrary to the public policy of the United States.” Since we last reported on financial company bankruptcies in July 2013, no changes have been made to Chapters 7, 11, or 15 of the Bankruptcy Code relating to large financial companies, although two bills were introduced in the 113th Congress that would have attempted to address challenges associated with the reorganization of large financial firms as governed by Chapter 11 of the Code. Neither bill was signed into law nor re-introduced in the current Congress, as of March 12, 2015. The Taxpayer Protection and Responsible Resolution Act (S. 1861) was introduced in the Senate on December 19, 2013. The bill would have added a new chapter to the Code—”Chapter 14: Liquidation, Reorganization, or Recapitalization of a Covered Financial Corporation”— that would have generally applied to bank holding companies or corporations predominantly engaged in activities that the Federal Reserve Board has determined are financial in nature. Its provisions would have made changes to the role of regulators, changed the treatment of QFCs, and specifically designated judges to hear Chapter 14 cases, as the following examples illustrate. The proposal would have repealed the regulatory resolution regime in Title II of the Dodd-Frank Act—revoking FDIC’s role as a receiver of a failed or failing financial company under OLA—and returned all laws changed by Title II to their pre-Title II state. The proposal would have allowed the Federal Reserve Board to commence an involuntary bankruptcy and granted the Federal Reserve Board the right to be heard before the court. The proposal would have allowed the court to transfer assets of the estate to a bridge company (on request of the Federal Reserve Board or the trustee and after notice and hearing and not less than 24 hours after the start of the case). The court would have been able to order transfer of assets to a bridge company only under certain conditions (including that a preponderance of evidence indicated the transfer was necessary to prevent imminent substantial harm to U.S. financial stability). FDIC also would have been granted the right to be heard before the court on matters related to the transfer of property to the bridge company. However, this proposal would have explicitly prohibited the Federal Reserve Board from providing DIP financing to a company in bankruptcy or to a bridge company and provided no specific alternative non-market source of funding. The Taxpayer Protection and Responsible Resolution Act (S. 1861) also would have changed the treatment of QFCs in bankruptcy. The rights to liquidate, terminate, offset, or net QFCs would have been stayed for up to 48 hours after bankruptcy filing (or the approval of the petition from the Federal Reserve Board). During the stay, the trustee would have been able to perform all payment and delivery obligations under the QFC that became due after the case commenced. The stay would have been terminated if the trustee failed to perform any payment or delivery obligation. Furthermore, QFCs would not have been able to be transferred to the bridge company unless the bridge assumed all contracts with a counterparty. If transferred to the bridge company, the QFCs could not have been terminated or modified for certain reasons, including the fact that a bankruptcy filing occurred. Aside from the limited exceptions, QFC counterparties would have been free to exercise all of their pre-existing contractual rights, including termination. Finally, the Taxpayer Protection and Responsible Resolution Act (S. 1861) would have required the Chief Justice to designate no fewer than 10 bankruptcy judges with expertise in cases under Title 11 in which a financial institution is a debtor to be available to hear a Chapter 14 case. Additionally, the Chief Justice would have been required to designate at least one district judge from each circuit to hear bankruptcy appeals under Title 11 concerning a covered financial corporation. A second bankruptcy reform proposal, the Financial Institution Bankruptcy Act of 2014 (H.R. 5421), was passed by voice vote by the House of Representatives on December 1, 2014, and would have added a new Subchapter V under Chapter 11. Generally, the proposed subchapter would have applied to bank holding companies or corporations with $50 billion or greater in total assets and whose activities, along with its subsidiaries, are primarily financial in nature. The Financial Institution Bankruptcy Act (H.R. 5421) contained provisions similar or identical to those in the Taxpayer Protection and Responsible Resolution Act (S. 1861) that would have affected the role of regulators, treatment of QFCs, and designation of judges. For example, this proposal would have allowed an involuntary bankruptcy to be commenced by the Federal Reserve Board and allowed for the creation of a bridge company to which assets of the debtor holding company could be transferred. This proposal also would have granted the Federal Reserve Board and FDIC the right to be heard before the court, as well as the Office of the Comptroller of the Currency and SEC (which are not granted this right under the Taxpayer Protection and Responsible Resolution Act). The changes to the treatment of QFCs under this proposal were substantively similar to those under the Taxpayer Protection and Responsible Resolution Act (S. 1861). In addition, the Financial Institution Bankruptcy Act (H.R. 5421) would have required that the Chief Justice would designate no fewer than 10 bankruptcy judges to be available to hear a Subchapter V case. The Chief Justice also would have been required to designate not fewer than three judges of the court of appeals in not fewer than four circuits to serve on an appellate panel. Although the two bills have similarities, there are significant differences. For example, the Financial Institution Bankruptcy Act (H.R. 5421) would not have repealed Title II of the Dodd-Frank Act. Instead, Title II would have remained an alternative to resolving a firm under the Bankruptcy Code. Also, the Financial Institution Bankruptcy Act (H.R. 5421) would not have restricted the Federal Reserve Board from providing DIP financing to a financial firm under the proposed subchapter. Furthermore, the Financial Institution Bankruptcy Act (H.R. 5421) would have given the court broad power in the confirmation of the bankruptcy plan to consider the serious adverse effect that any decision in connection with Subchapter V might have on financial stability in the United States. By contrast, the Taxpayer Protection and Responsible Resolution Act (S. 1861) mentioned financial stability as a consideration in specific circumstances, such as whether the Federal Reserve Board could initiate an involuntary bankruptcy under Chapter 14, or whether the court could order a transfer of the debtor’s property to the bridge company. Certain provisions in these bills resembled those in OLA and may have facilitated a resolution strategy similar to FDIC’s SPOE strategy under OLA. For example, each of the bankruptcy reform bills and FDIC’s SPOE strategy under OLA would have allowed for the creation of a bridge company, in which assets, financial contracts, and some legal entities of the holding company would have been transferred, allowing certain subsidiaries to have maintained operations. In addition, OLA, like the bills, included a temporary stay for QFCs. OLA uses a regulatory approach to resolution, while the bankruptcy reform bills in the 113th Congress would have maintained a judicial approach to resolution. Some experts have expressed concern that a regulatory resolution may not adequately ensure the creditors’ rights to due process. For example, experts attending GAO’s 2013 bankruptcy reform roundtables noted that if preferences were given to some counterparties or creditors during a temporary stay, other counterparties or creditors would have the right to take action to recover value later in the process, as opposed to having a judge consider the views of all of the parties prior to making any decisions. However, as we reported in July 2013, other experts have stated that the judicial process of bankruptcy does not contemplate systemic risk, or have some of the tools available for minimizing the systemic risk associated with the failure of a systemically important financial institution. For example, to act quickly in cases involving large and complex financial companies, courts might need to shorten notice periods and limit parties’ right to be heard, which could compromise due process and creditor rights. In the United States, the judicial process under bankruptcy remains the presumptive method for resolving financial institutions, even those designated as systemically important. A third proposal would have more narrowly amended the Code. The 21st Century Glass-Steagall Act of 2013 (S. 1282 in the Senate and H.R. 3711 in the House) contained a provision that would have repealed all safe- harbor provisions for QFCs. This legislative proposal was neither signed into law nor re-introduced in the current Congress, as of March 12, 2015. Some experts have identified the safe-harbor treatment of QFCs under the Code as a challenge to an orderly resolution in bankruptcy. For example, safe-harbor treatment can create significant losses to the debtor’s estate, particularly for financial institution debtors that often are principal users of these financial products. As we previously reported in July 2011, some experts we interviewed suggested that modifying the safe harbor provisions might help to avoid or mitigate the precipitous decline of the asset values typical in financial institution bankruptcies. For example, these experts suggested that the treatment of QFCs in the Lehman bankruptcy contributed to a significant and rapid loss of asset values to the estate. Other experts we spoke with in 2011 suggested that safe-harbor treatment might lessen market discipline. Because counterparties entered into QFCs may close out their contracts even if doing so would otherwise violate the automatic stay, the incentive to monitor the risk of each other could be reduced. Additionally, as we reported in July 2013, attendees of our roundtable discussions on bankruptcy reform noted that the safe harbors lead to a larger derivatives market and greater reliance on short-term funding because QFCs would not be subject to a stay, which could increase systemic risk in the financial system. However, others argue that a repeal of the safe-harbor provisions could have adverse effects. As we previously reported in July 2011, these experts assert that subjecting any QFCs to the automatic stay in bankruptcy would freeze many assets of the counterparties of the failed financial institution, causing a chain reaction and a subsequent systemic financial crisis. In January 2011, regulatory officials we spoke with also told us that the safe harbor provisions uphold market discipline through margin, capital, and collateral requirements. They said that the requirement for posting collateral limits the amount of risk counterparties are willing to undertake. In addition, during the 2013 expert roundtable on financial company bankruptcies, one expert noted that one of the goals of safe harbors is to limit market turmoil during a bankruptcy—that is, they are to prevent the insolvency of one firm from spreading to other firms. In the United States the presumptive mechanism to resolve a failed cross- border large financial company continues to be through the judicial bankruptcy process, though no statutory changes have been made to Chapter 15 of the Code or the U.S. judicial bankruptcy process to address impediments to an orderly resolution of a large, multinational financial institution. However, while some structural challenges discussed earlier remain, others, such as conflicting regulatory regimes and the treatment of cross-border derivatives, are being addressed through various efforts. For example, the Federal Reserve and FDIC have taken certain regulatory actions mandated by the Dodd-Frank Act authorities toward facilitating orderly resolution, including efforts that could contribute to cross-border coordination. Specifically, certain large financial companies must provide the Federal Reserve and FDIC with periodic reports of their plans for rapid and orderly resolution in the event of material financial distress or failure under the Code. The resolution plans or living wills are to demonstrate how a company could be resolved in a rapid manner under the Code. FDIC and the Federal Reserve have said that the plans were expected to address potential obstacles to global cooperation, among others. In 2014, FDIC and the Federal Reserve sent letters to a number of large financial companies identifying specific shortcomings with the resolution plans that those firms will need to address in their 2015 submissions, due on or before July 1, 2015, for the first group of filers. International bodies have also focused on strengthening their regulatory structures to enable the orderly resolution of a failing large financial firm and have taken additional actions to facilitate cross-border resolutions. In October 2011, the Financial Stability Board (FSB)—an international body that monitors and makes recommendations about the global financial system—issued a set of principles to guide the development of resolution regimes for financial firms active in multiple countries. For example, each jurisdiction should have the authority to exercise resolution powers over firms, jurisdictions should have policies in place so that authorities are not reliant on public bailout funds, and statutory mandates should encourage a cooperative solution with foreign authorities. In addition, in December 2013 the European Parliament and European Council reached agreement on the European Union’s (EU) Bank Recovery and Resolution Directive, which establishes requirements for national resolution frameworks for all EU member states and provides for resolution powers and tools. For example, member states are to appoint a resolution authority, institutions must prepare and maintain recovery plans, resolution authorities are to assess the extent to which firms are resolvable without the assumption of extraordinary financial support, and authorities are to cooperate effectively when dealing with the failure of cross-border banks. Unlike the United States, EU and FSB do not direct resolution authorities to use the bankruptcy process developed for corporate insolvency situations. In a letter to the International Swaps and Derivatives Association (ISDA) in 2013, FDIC, the Bank of England, BaFin in Germany, and the Swiss Financial Market Supervisory Authority called for changes in the exercise of termination rights and other remedies in derivatives contracts following commencement of an insolvency or resolution action. In October 2014, 18 major global financial firms agreed to sign a new ISDA Resolution Stay Protocol to facilitate the cross-border resolution of a large, complex institution. This protocol was published and these 18 financial firms agreed to it on November 12, 2014, and certain provisions of which became effective in January 2015. Generally, parties adhering to this protocol have agreed to be bound by certain limitations on their termination rights and other remedies in the event one of them becomes subject to certain resolution proceedings, including OLA. These stays are intended to give resolution authorities and insolvency administrators time to facilitate an orderly resolution of a troubled financial firm. The Protocol also incorporates certain restrictions on creditor contractual rights that would apply when a U.S. financial holding company becomes subject to U.S. bankruptcy proceedings, including a stay on cross-default rights that would restrict the counterparty of a non-bankrupt affiliate of an insolvent U.S. financial holding company from immediately terminating its derivatives contracts with that affiliate. Finally, a United Nations working group (tasked with furthering adoption of the UNCITRAL Model Law) included the insolvency of large and complex financial institutions as part of its focus on cross-border insolvency. In 2010, Switzerland proposed that the working group study the feasibility of developing an international instrument for the cross- border resolution of large and complex financial institutions. The working group has acknowledged and has been monitoring the work undertaken by FSB, Basel Committee on Banking Supervision, the International Monetary Fund, and EU. We provided a draft of this report to AOUSC, CFTC, Departments of Justice and the Treasury, FDIC, Federal Reserve, and SEC for review and comment. The agencies did not provide written comments. We received technical comments from the Department of the Treasury, FDIC, Federal Reserve, and SEC, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, Director of the Administrative Office of the U.S. Courts, the Chairman of the Commodity Futures Trading Commission, Attorney General, the Secretary of the Treasury, the Chairman of the Federal Deposit Insurance Corporation, the Director of the Federal Judicial Center, the Chair of the Board of Governors of the Federal Reserve System, the Chair of the Securities and Exchange Commission, and other interested parties. The report also is available at no charge on the GAO web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact Cindy Brown Barnes at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III. In our July 2011 and July 2012 reports on the bankruptcy of financial companies, we reported on the status of the bankruptcy proceedings of, among other financial companies, Lehman Brothers Holdings Inc., MF Global, and Washington Mutual. In the 2011 report, we found that comprehensive data on the number of financial companies in bankruptcies were not readily available. We collected information to update the status of the bankruptcy proceedings for Lehman Brothers Holdings Inc., MF Global, and Washington Mutual. Since we last reported in July 2012, in each case, additional payments to creditors have been distributed and litigation with various parties is ongoing. Lehman Brothers Holdings Inc. (Lehman) was an investment banking institution that offered equity, fixed-income, trading, asset management, and other financial services. In 2008, Lehman was the fourth largest U.S. investment bank and had been in operation since 1850. It had 209 registered subsidiaries in 21 countries. On September 15, 2008, Lehman filed Chapter 11 cases in the U.S. Bankruptcy Court. Its affiliates filed for bankruptcy over subsequent months. Some of Lehman’s affiliates also filed bankruptcy or insolvency proceedings in foreign jurisdictions. There are three different legal proceedings involving (1) the holding company or LBHI, (2) the U.S. broker dealer or LBI, and (3) the U.K. broker dealer or LBIE. On September 19, 2008, Lehman’s broker-dealer was placed into liquidation under the Securities Investor Protection Act (SIPA). The bankruptcy court approved the sale of LBI’s assets to Barclays PLC on September 20, 2008—5 days after the filing of the LBHI Chapter 11 case. In March 2010, LBHI debtors filed their proposed Chapter 11 plan. In December 2010, a group of senior creditors filed an alternative plan. Since then, various plan amendments and counter plans were filed. In December 2011, the U.S. Bankruptcy Court for the Southern District of New York confirmed a reorganization plan for LBHI and the plan took effect in March 2012. LBHI had more than 100,000 creditors. As of October 2, 2014, some $8.6 billion had been distributed to LBHI creditors in the nonpriority unsecured claims class. The Trustee of LBI has distributed more than $106 billion to 111,000 customers. As of September 2014, £34 billion has been distributed by the LBIE Administrator to counterparties in the House Estate (general unsecured estate) and the Trust Estate (Client Assets, Client Money and Omnibus Trust). In February 2015, the bankruptcy court approved a second interim distribution of $2.2 billion to general unsecured creditors with allowed claims. This would bring the total distributions to allowed general unsecured creditors to approximately 27 percent. There is ongoing litigation involving a breach of a swap with Giants Stadium, the payment of creditor committee members’ legal fees, and transactions with foreign entities, according to an official of the U.S. Trustees Program. Litigation concerning issues surrounding the sale of LBI assets to Barclays PLC also continues. On December 15, 2014, the SIPA Trustee filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the lower court rulings that awarded $4 billion of margin cash assets to Barclay’s. MF Global Holdings Ltd. (MFGH) was one of the world’s leading brokers in markets for commodities and listed derivatives. The firm was based in the United States and had operations in Australia, Canada, Hong Kong, India, Japan, Singapore, and the U.K. On October 31, 2011, MFGH and one of its affiliates filed Chapter 11 cases in the U.S. Bankruptcy Court for the Southern District of New York. In the months following four other affiliates filed for relief in Bankruptcy Court. Also, on October 31, 2011, the Securities Investor Protection Corporation (SIPC) commenced a SIPA case against MF Global’s broker-dealer subsidiary (MFGI). The SIPA trustee has been liquidating the firm’s assets and distributing payments to its customers on a rolling basis pursuant to a claims resolution procedure approved by the bankruptcy court overseeing the case. MFGI was required to pay $1.2 billion in restitution to its customers as well as a $100 million penalty. In December 2014, CFTC obtained a federal court consent order against MFGH requiring it to pay $1.2 billion or the amount necessary in restitution to ensure the claims of MFGI are paid in full. The bankruptcy court confirmed a liquidation plan for MFGH on April 22, 2013, which became effective in June 2013. As of the end of 2013, the SIPA trustee reported the probability of a 100 percent recovery of allowed net equity claims for all commodities and securities customers of MFGI. As of mid-December 2014, 100 percent of the distributions through the SIPA trustee have been completed to substantially all categories of commodities and securities customers and 39 percent of the first interim distribution on allowed unsecured claims. The trustee started to make $551 million in distributions to general creditors on October 30, 2014. An interim payment of $518.7 million went to unsecured general claimants and covered 39 percent of their allowed claims. A reserve fund of $289.8 million was to be held for unresolved unsecured claims and a reserve fund of $9.9 million will be held for unresolved priority claims. In April 2014, the SIPA trustee began final distributions to all public customers. With this distribution a total of $6.7 billion was to have been returned to over 26,000 securities and commodities futures customers. General creditor claims totaling more than $23 billion in asserted amounts, as substantial unliquidated claims, were filed in this proceeding as of the end of June 2014. As of December 2014, the SIPA trustee reports that of 7,687 general creditor claims asserted or reclassified from customer status, only 23 claims remain unresolved. Current litigation surrounds a malpractice complaint against PricewaterhouseCoopers (the company’s former auditor) and an investigation of the officers, according to an official of the U.S. Trustees Program. Washington Mutual Inc. was a thrift holding company that had 133 subsidiaries. Its subsidiary Washington Mutual Bank was the largest savings and loan association in the United State prior to its failure. In the 9 days prior to receivership by the Federal Deposit Insurance Corporation (FDIC), there were more than $16.7 billion in depositor withdrawals. At the time of its filing, Washington Mutual had about $32.9 billion in total assets and total debt of about $8.1 billion. Its failure was the largest bank failure in U.S. history. On September 25, 2008, the Office of Thrift Supervision found Washington Mutual Bank to be unsafe and unsound, closed the bank, and appointed FDIC as the receiver. FDIC as receiver then took possession of the bank’s assets and liabilities and transferred substantially all the assets and liabilities to JPMorgan Chase for $1.9 billion. On September 26, 2008, Washington Mutual and its subsidiary WMI Investment Corporation filed Chapter 11 cases in U.S. Bankruptcy Court for the District of Delaware. On March 12, 2010, Washington Mutual, FDIC, and JPMorgan Chase announced that they had reached a settlement on disputed property and claims. This was called the global settlement. On July 28, 2010, the bankruptcy court approved the appointment of an examiner, selected by the U.S. Trustee’s office, to investigate the claims of various parties addressed by the global settlement. The seventh amended plan was confirmed by the court on February 24, 2012. The plan established a liquidating trust—the Washington Mutual Liquidating Trust (WMILT)—to make subsequent distributions to creditors on account of their allowed claims. Upon the effective date of the plan, Washington Mutual became a newly reorganized company, WMI Holdings Corp. consisting primarily of its subsidiary WMI Mortgage Reinsurance Company, Inc. In 2012, there was an initial distribution of $6.5 billion. Since that initial distribution, an additional $660 million has been distributed to creditors, according to officials at the U.S. Trustees Program, including a distribution of $78.4 million paid on August 1, 2014. In August 2013, WMILT, pursuant to an order by the U.S. Bankruptcy Court for the District of Delaware, filed a declaratory judgment in the U.S. District Court for the Western District of Washington against FDIC, the Board of Governors of the Federal Reserve System (Federal Reserve), and 90 former employees who were also claimants in the bankruptcy proceeding. Certain employee claimants have asserted cross-claims against FDIC and the Federal Reserve, contending that the banking agencies are without authority to assert limits on payment from troubled institutions that are contingent on termination of a person’s employment over WMILT, because WMILT is a liquidating trust. After the case was transferred to the U.S. Bankruptcy Court for the District of Delaware in July 2014 and all pending motions terminated, most of the parties stipulated to withdraw the reference to the bankruptcy court. FDIC moved to dismiss the complaint on September 5, 2014. The proposed order to withdraw the reference and the briefing on the motion to dismiss remains pending. Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) mandated that we report on the orderliness and efficiency of financial company bankruptcies every year for 3 years after passage of the act, in the fifth year, and every 5 years thereafter. This report, the fourth in the series, examines (1) recent changes to the U.S. Bankruptcy Code (Code) and (2) efforts to improve cross-border coordination to facilitate the liquidation and reorganization of failed large financial companies under bankruptcy. For each of our objectives, we reviewed relevant regulations and laws, including the Code and the Dodd-Frank Act as well as GAO reports that addressed bankruptcy issues and financial institution failures. We specifically reviewed the reports we issued during the first 3 years of the mandate as well as reports written under the same or similar mandates by the Administrative Office of the United States Courts (AOUSC) and the Board of Governors of the Federal Reserve System (Federal Reserve). We interviewed officials from the following federal agencies due to their role in financial regulation and bankruptcy proceedings: AOUSC; the Commodity Futures Trading Commission (CFTC); Federal Deposit Insurance Corporation (FDIC); Department of Justice; Department of the Treasury (Treasury), including officials who support the Financial Stability Oversight Council (FSOC); Federal Reserve; and Securities and Exchange Commission (SEC). We also updated our review of published economic and legal research on the financial company bankruptcies that we had originally completed during the first year of the mandate (see appendix I). For the original search, we relied on Internet search databases (including EconLit and Proquest) to identify studies published or issued after 2000 through 2010. To address our first objective, we reviewed Chapters 7, 11, or 15 of the Bankruptcy Code for any changes. In addition, we reviewed legislation proposed in the 113th Congress that would change the Code for financial company bankruptcies. We also reviewed academic literature on financial company bankruptcies and regulatory resolution, transcripts of congressional hearings on bankruptcy reform, and transcripts from expert roundtables on bankruptcy reform that were hosted by GAO in 2013. To address our second objective, we reviewed Chapter 15 of the Bankruptcy Code, which relates to coordination between U.S. and foreign jurisdictions in bankruptcy cases in which the debtor is a company with foreign operations, for any changes. In addition, we sought information on U.S. and international efforts to improve coordination of cross-border resolutions from the federal agencies we interviewed. We also reviewed and analyzed documentary information from the Bank of England, Basel Committee on Banking Supervision, European Union, the Financial Stability Board, BaFin in Germany, International Monetary Fund, Swiss Financial Market Supervisory Authority, and the United Nations. To update the three bankruptcy cases of Lehman Brothers Holdings, Inc.; MF Global Holdings, Ltd.; and Washington Mutual, Inc. discussed in our July 2011 and July 2012 reports, we sought available information—for example, trustee reports and reorganization plans—on these cases from CFTC, FDIC, Federal Reserve, and SEC; AOUSC, the Department of Justice, and Treasury. In addition, we collected information from prior GAO reports, bankruptcy court documents, and the trustees in each case. To determine whether there were new bankruptcy filings of large financial companies such as those in our case studies, we inquired of AOUSC, CFTC, FDIC, Department of Justice, Treasury, Federal Reserve, and SEC. We also conducted a literature review, which did not show evidence of any new bankruptcy cases filed by large financial companies. We conducted this performance audit from June 2014 to March 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Karen Tremba, Assistant Director; Nancy S. Barry; Patrick Dynes; Risto Laboski; Marc Molino; Barbara Roesmann; Jessica Sandler; and Jason Wildhagen made key contributions to this report. Technical assistance was provided by JoAnna Berry.

The challenges associated with the bankruptcies of large financial companies during the 2007-2009 financial crisis raised questions about the effectiveness of the U.S. Bankruptcy Code and international coordination for resolving complex financial institutions with cross-border activities. The Dodd-Frank Act mandates that GAO report on an ongoing basis on ways to make the U.S. Bankruptcy Code more effective in resolving certain failed financial companies. GAO has issued three reports on this issue. This fourth report addresses (1) recent changes to the U.S. Bankruptcy Code and (2) efforts to improve cross-border coordination to facilitate the liquidation or reorganization of failed large financial companies under bankruptcy. GAO reviewed laws, court documents, regulations, prior GAO reports, and academic literature on financial company bankruptcies and regulatory resolution. GAO also reviewed documentation from foreign financial regulators and international bodies such as the Financial Stability Board. GAO interviewed officials from the Administrative Office of the United States Courts, Department of Justice, Department of the Treasury, and financial regulators with a role in bankruptcy proceedings. GAO makes no recommendations in this report. The Department of the Treasury, Federal Reserve, FDIC, and the Securities and Exchange Commission provided technical comments on a draft of the report that GAO incorporated as appropriate. The U.S. Bankruptcy Code (Code) chapters dealing with the liquidation or reorganization of a financial company have not been changed since GAO last reported on financial company bankruptcies in July 2013. However, bills introduced in the previous Congress would, if re-introduced and passed, make broad changes to the Code relevant to financial company bankruptcies. The Financial Institution Bankruptcy Act of 2014 (H.R. 5421) and Taxpayer Protection and Responsible Resolution Act (S.1861) would have expanded to varying degrees the powers of the Board of Governors of the Federal Reserve System (Federal Reserve) and Federal Deposit Insurance Corporation (FDIC) and would have imposed a temporary stay on financial derivatives (securities whose value is based on one or more underlying assets) that are exempt from the automatic stay under the Code. That stay would prohibit a creditor from seizing or taking other action to collect what the creditor is owed under the financial derivative. The bills also would have added to the Code processes for the resolution of large, complex financial companies similar in some ways to provisions currently in the Orderly Liquidation Authority (OLA) in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which grants FDIC the authority to resolve failed systemically important financial institutions under its receivership. For example, each bill would have allowed for the creation of a bridge company, in which certain assets and financial contracts of the holding-company would be transferred, allowing certain subsidiaries to continue their operations. The 21st Century Glass-Steagall Act of 2013—a bill introduced in the House of Representatives (H.R. 3711) and the Senate (S. 1282)—would have repealed safe-harbor provisions that allow most counterparties in a qualifying transaction with the debtor to exercise certain contractual rights even if doing so would otherwise violate the automatic stay. As of March 12, 2015, these legislative proposals had not been re-introduced in Congress. In the United States, the presumptive mechanism to resolve a failed large financial company with cross-border operations is through the judicial bankruptcy process. Since GAO's 2013 report, no changes have been made to the chapter of the Code that relates to coordination between U.S. and foreign jurisdictions in bankruptcy cases in which the debtor has foreign operations. Some structural challenges remain, such as conflicting regulatory regimes related to the treatment of financial contracts between parties in different countries when a firm enters bankruptcy, but efforts are underway to address them. Regulators have implemented a Dodd-Frank Act provision that requires certain large financial firms to submit a resolution plan to assist with an orderly bankruptcy process, which regulators expect to help address potential problems with international cooperation, among others. However, in 2014, FDIC and the Federal Reserve identified shortcomings with the plans for a number of large financial companies that those firms are to address in their 2015 submissions. Further, international bodies, such as the Financial Stability Board—an international body that monitors and makes recommendations about the global financial system—have focused on having countries adopt a regulatory approach to resolutions. Other recent actions include a January 2015 stay protocol for derivatives contracts developed by the International Swaps and Derivatives Association that is intended to give regulators time to facilitate an orderly resolution of a troubled firm.

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The electricity industry, as shown in figure 1, is composed of four distinct functions: generation, transmission, distribution, and system operations. Once electricity is generated—whether by burning fossil fuels; through nuclear fission; or by harnessing wind, solar, geothermal, or hydro energy—it is generally sent through high-voltage, high-capacity transmission lines to local electricity distributors. Once there, electricity is transformed into a lower voltage and sent through local distribution lines for consumption by industrial plants, businesses, and residential consumers. Because electric energy is generated and consumed almost instantaneously, the operation of an electric power system requires that a system operator constantly balance the generation and consumption of power. Utilities and others own and operate electricity assets, which may include generation plants, transmission lines, distribution lines, and substations— structures often seen in residential and commercial areas that contain technical equipment such as switches and transformers to ensure smooth, safe flow of current and regulate voltage. Utilities may be owned by investors, municipalities, and individuals (as in cooperative utilities). System operators—sometimes affiliated with a particular utility or sometimes independent and responsible for multiple utility areas— manage the electricity flows. These system operators manage and control the generation, transmission, and distribution of electric power using control systems—IT- and network-based systems that monitor and control sensitive processes and physical functions, including opening and closing circuit breakers. As we have previously reported, the effective functioning of the electricity industry is highly dependent on these control systems. Nevertheless, for many years, aspects of the electricity network lacked (1) technologies— such as sensors—to allow system operators to monitor how much electricity was flowing on distribution lines, (2) communications networks to further integrate parts of the electricity grid with control centers, and (3) computerized control devices to automate system management and recovery. As the electricity industry has matured and technology has advanced, utilities have begun taking steps to update the electricity grid—the transmission and distribution systems—by integrating new technologies and additional IT systems and networks. Though utilities have regularly taken such steps in the past, industry and government stakeholders have begun to articulate a broader, more integrated vision for transforming the electricity grid into one that is more reliable and efficient; facilitates alternative forms of generation, including renewable energy; and gives consumers real-time information about fluctuating energy costs. This vision—the smart grid—would increase the use of IT systems and networks and two-way communication to automate actions that system operators formerly had to make manually. Electricity grid modernization is an ongoing process, and initiatives have commonly involved installing advanced metering infrastructure (smart meters) on homes and commercial buildings that enable two-way communication between the utility and customer. Other initiatives include adding “smart” components to provide the system operator with more detailed data on the conditions of the transmission and distribution systems and better tools to observe the overall condition of the grid (referred to as “wide-area situational awareness”). These include advanced, smart switches on the distribution system to reroute electricity around a troubled line and high-resolution, time-synchronized monitors—called phasor measurement units—on the transmission system. The use of smart grid systems may have a number of benefits, including improved reliability with fewer and shorter outages, downward pressure on electricity rates resulting from the ability to shift peak demand, an improved ability to more efficiently use alternative sources of energy, and an improved ability to detect and respond to potential attacks on the grid. Both the federal government and state governments have authority for overseeing the electricity industry. For example, the Federal Energy Regulatory Commission (FERC) regulates rates for wholesale electricity sales and transmission of electricity in interstate commerce. This includes approving whether to allow utilities to recover the costs of investments they make to the transmission system, such as some smart grid investments. Meanwhile, local distribution and retail sales of electricity are generally subject to regulation by state public utility commissions. State and federal authorities also play key roles in overseeing the reliability of the electric grid. State regulators generally have authority to oversee the reliability of the local distribution system. The North American Electric Reliability Corporation (NERC) is the federally designated U.S. Electric Reliability Organization, and is overseen by FERC. NERC has responsibility for conducting reliability assessments and developing and enforcing mandatory standards to ensure the reliability of the bulk power system—i.e., facilities and control systems necessary for operating the transmission network and certain generation facilities needed for reliability. NERC develops reliability standards collaboratively through a deliberative process involving utilities and others in the industry, which are then sent to FERC for approval. These standards include critical infrastructure protection standards for protecting electric utility-critical and cyber-critical assets. FERC has responsibility for reviewing and approving the reliability standards or directing NERC to modify them. In addition, the Energy Independence and Security Act of 2007 established federal policy to support the modernization of the electricity grid and required actions by a number of federal agencies, including the National Institute of Standards and Technology (NIST), FERC, and the Department of Energy. With regard to cybersecurity, the act required NIST and FERC to take the following actions: NIST was to coordinate development of a framework that includes protocols and model standards for information management to achieve interoperability of smart grid devices and systems. As part of its efforts to accomplish this, NIST identified cybersecurity standards for these systems and the need to develop guidelines for organizations such as electric companies on how to securely implement smart grid systems. In January 2011, we reported that NIST had identified 11 standards involving cybersecurity that support smart grid interoperability and had issued the first version of a cybersecurity guideline. In February 2012, NIST issued the 2.0 version of the framework that, according to NIST documents, added 22 standards, specifications, and guidelines to the 75 standards NIST recommended as being applicable to the smart grid in the 1.0 version from January 2010. In September 2014, NIST issued the first revision of the cybersecurity guidelines. FERC was to adopt standards resulting from NIST’s efforts that it deemed necessary to ensure smart grid functionality and interoperability. However, according to FERC officials, the statute did not provide specific additional authority to allow FERC to require utilities or manufacturers of smart grid technologies to follow these standards. As a result, any standards identified and developed through the NIST-led process are voluntary unless regulators use other authorities to indirectly compel utilities and manufacturers to follow them. Like threats affecting other critical infrastructures, threats to the electricity industry and its transmission and distribution systems are evolving and growing and can come from a wide array of sources. Risks to cyber- based assets can originate from unintentional or intentional threats. Unintentional threats can be caused by, among other things, natural disasters, defective computer or network equipment, software coding errors, and careless or poorly trained employees. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled insiders, foreign nations engaged in espionage and information warfare, and terrorists. These adversaries vary in terms of their capabilities, willingness to act, and motives, which can include seeking monetary gain or pursuing a political, economic, or military advantage. For example, adversaries possessing sophisticated levels of expertise and significant resources to pursue their objectives—sometimes referred to as “advanced persistent threats”—pose increasing risks. They make use of various techniques— or exploits—that may adversely affect federal information, computers, software, networks, and operations, such as a denial of service, which prevents or impairs the authorized use of networks, systems, or applications. The potential impact of these threats is amplified by the connections between industrial control systems, supervisory control and data acquisition (or SCADA) systems, information systems, the Internet, and other infrastructures, which create opportunities for attackers to disrupt critical services, including electrical power. The increased reliance on IT systems and networks also exposes the electric grid to potential and known cybersecurity vulnerabilities. These include an increased number of entry points and paths that can be exploited; the introduction of new, unknown vulnerabilities resulting from an increased use of new system and network technologies; wider access to systems and networks due to increased connectivity; an increased amount of customer information being collected and transmitted, which creates a tempting target for potential attackers. We and others have also reported that smart grid and related systems have known cyber vulnerabilities. For example, cybersecurity experts have demonstrated that certain smart meters can be successfully attacked, possibly resulting in disruption to the electricity grid. In addition, we have reported that control systems used in industrial settings such as electricity generation have vulnerabilities that could result in serious damages and disruption if exploited. Further, in 2007, the Department of Homeland Security, in cooperation with the Department of Energy, ran a test that demonstrated that a vulnerability commonly referred to as “Aurora” had the potential to allow unauthorized users to remotely control, misuse, and cause damage to a small commercial electric generator. Moreover, in 2008, the Central Intelligence Agency reported that malicious activities against IT systems and networks have caused disruption of electric power capabilities in multiple regions overseas, including a case that resulted in a multicity power outage. In January 2014, the Director of National Intelligence testified that industrial control systems and SCADA systems used in electrical power distribution and other industries provided an enticing target to malicious actors and that, although newer architectures provide flexibility, functionality, and resilience, large segments remain vulnerable to attack, which might cause significant economic or human impact. Further, in 2015 the Director testified that studies asserted that foreign cyber actors were developing means to access industrial control systems remotely, including those that manage critical infrastructures such as electric power grids. As government, private sector, and personal activities continue to move to networked operations, the threat will continue to grow. Cyber incidents continue to affect the electric industry. For example, the Department of Homeland Security’s Industrial Control Systems Cyber Emergency Response Team noted that the number of reported cyber incidents affecting control systems of companies in the electricity subsector increased from 3 in 2009 to 25 in 2011. The response team reported that the energy sector, which includes the electricity subsector, led all others in fiscal year 2014 with 79 reported incidents. Reported incidents affecting the electricity subsector have had a variety of impacts, including hacks into smart meters to steal power, failure in control systems devices requiring power plants to be shut down, and malicious software disabling safety monitoring systems. As we have previously reported, multiple entities have taken steps to help secure the electricity grid, including NERC, NIST, FERC, and the Departments of Homeland Security and Energy. For example, NERC developed critical infrastructure standards for protecting electric utility– critical and cyber-critical assets. These standards established requirements for key cybersecurity-related controls: the identification of critical cyber assets, security management, personnel and training, electronic “security perimeters,” physical security of critical cyber assets, systems security management, incident reporting and response planning, and recovery plans for critical cyber assets. In December 2011 we reported that NERC’s cybersecurity standards, along with supplementary guidance, were substantially similar to NIST guidance applicable at the time to federal agencies. NERC had also published security guidelines for companies to consider for protecting electric infrastructure systems, although these guidelines were voluntary and typically not checked for compliance. For example, some of this guidance was intended to assist entities in identifying and developing a list of critical cyber assets. As of October 2015, NERC listed about 30 critical infrastructure protection standards for cybersecurity, some of which were subject to enforcement, some which were subject to future enforcement, and some which were pending regulatory filing or approval. NERC also had enforced compliance with mandatory cybersecurity standards through its Compliance Monitoring and Enforcement Program, including assessing monetary penalties for violations. NIST, in accordance with its responsibilities under the Energy Independence and Security Act of 2007, has identified cybersecurity standards for smart grid systems. Specifically, in August 2010 NIST had identified 11 such standards and issued the first version of a cybersecurity guideline. As we reported in January 2011, NIST’s guidelines largely addressed key cybersecurity elements, with the exception of the risk of attacks using both cyber and physical means—an element essential to securing smart grid systems. We recommended that NIST finalize its plan and schedule for incorporating the missing elements into its guidelines. In 2014, NIST issued updated guidelines, which address the relationship of smart grid cybersecurity to cyber-physical attacks and cybersecurity testing and certification. In addition, the updated guidelines describe the relationship of smart grid cybersecurity to NIST’s cybersecurity framework that was issued in February 2014. This framework, which was developed in accordance with Executive Order 13636, is to enable organizations—regardless of size, degree of cybersecurity risk, or cybersecurity sophistication—to apply the principles and best practices of risk management to improving the cybersecurity and resilience of critical infrastructure. FERC had also taken several actions, including reviewing and approving NERC’s critical infrastructure protection standards in 2008. It had also directed NERC to make changes to the standards to improve cybersecurity protections. However, in 2012 the FERC Chairman stated that many of the outstanding directives had not been incorporated into the standards. We also noted in our January 2011 report that FERC had begun reviewing smart grid standards identified by NIST, but declined to adopt them due to insufficient consensus. The Department of Homeland Security, in its capacity as the lead federal agency for cyber-critical infrastructure protection, had issued recommended practices to reduce risks to industrial control systems in critical infrastructure sectors, including the electricity subsector. The department has also provided on-site support to respond to and analyze security incidents and shared actionable intelligence, vulnerability information, and threat analysis with companies in the electricity subsector. In addition, the department, in accordance with Executive Order 13636, established a program to promote the adoption of the NIST cybersecurity framework. As the lead agency responsible for critical infrastructure protection efforts in the energy sector, the Department of Energy, as we reported in December 2011, was involved in efforts to assist the electricity subsector in the development, assessment, and sharing of cybersecurity standards, according to department officials. In addition, the department has created sector-specific guidance to assist the sector in implementing the NIST cybersecurity framework. The guidance includes sections that explain framework concepts for its application, identify example resources that may support framework use, provide a general approach to framework implementation, and identify an example of a tool-specific approach to implementing the framework. In our January 2011 report we identified a number of key challenges that industry and government stakeholders faced in securing the systems and networks supporting the electricity grid. Monitoring implementation of cybersecurity standards. Best practices for information security call for monitoring the extent to which security controls have been implemented. In our report, we noted that FERC had not developed an approach coordinated with other regulators to monitor, at a high level, the extent to which industry follows the voluntary smart grid standards it adopts. We recommended that FERC, in coordination with state regulators and groups that represent utilities subject to less FERC and state regulation, periodically evaluate the extent to which utilities and manufacturers are following voluntary interoperability and cybersecurity standards and develop strategies for addressing any gaps in compliance with standards that are identified as a result of this evaluation. However, FERC has not implemented this recommendation. While FERC reported that it has taken steps to collaborate with stakeholders, it has not taken steps to determine the extent to which the voluntary standards have been integrated into products or whether they are effective. Monitoring such efforts would help FERC and other regulators know if their approach to standards setting is effective or if changes are needed. Clarifying regulatory responsibilities. Experts we spoke with during the course of our review in 2011 expressed concern that there was a lack of clarity about the division of responsibility between federal and state regulators, particularly regarding cybersecurity. While jurisdictional responsibility has historically been determined by whether a technology is located on the transmission or distribution system, experts raised concerns that smart grid technology may blur these lines because, for example, devices deployed on parts of the grid traditionally subject to state jurisdiction could, in the aggregate, affect the reliability of the transmission system, which falls under federal jurisdiction. Experts also noted concern about the ability of regulatory bodies to respond quickly to evolving cybersecurity threats. Clarifying these responsibilities could help improve the effectiveness of efforts to protect smart grid technology from cyber threats. Taking a comprehensive approach to cybersecurity. To secure their systems and information, entities should adopt an integrated, organization-wide program for managing information security risk. Such an approach helps ensure that risk management decisions are aligned strategically with the organization’s mission and security controls are effectively implemented. However, as we reported in 2011, experts told us that the existing federal and state regulatory environment had created a culture within the utility industry of focusing on compliance with regulatory requirements instead of one focused on achieving comprehensive and effective cybersecurity. By taking such a comprehensive approach, utilities could better mitigate cybersecurity risk. Ensuring that smart grid systems have built-in security features. Information systems should be securely configured, including having the ability to record events that take place on networks to allow for detecting and analyzing potential attacks. Nonetheless, experts told us that certain currently available smart meters had not been designed with a strong security architecture and lacked important security features, such as event logging. By ensuring that smart grid systems are securely designed, utilities could enhance their ability to detect and analyze attacks, reducing the risk that attacks will succeed and helping to prevent them from recurring. Effectively sharing cybersecurity information. Information sharing is a key element in the model established by federal policy for protecting critical infrastructure. However, the electric industry lacked an effective mechanism to disclose information about cybersecurity vulnerabilities, incidents, threats, lessons learned, and best practices. For example, experts we spoke with stated that while the industry had an information-sharing center, it did not fully address these information needs. Establishing quality processes for information sharing will help provide utilities with the information needed to adequately protect cyber assets against attackers. Establishing metrics for evaluating cybersecurity. Metrics are important for comparing the effectiveness of competing cybersecurity solutions and determining what mix of solutions will make the most secure system. The electric industry, however, was challenged by a lack of cybersecurity metrics, making it difficult to determine the extent to which investments in cybersecurity improve the security of smart grid systems. Developing such metrics could provide utilities with key information for making informed and cost-effective decisions on cybersecurity investments. In our January 2011 report, we recommended that FERC, working with NERC as appropriate, assess whether any cybersecurity challenges identified in our report should be addressed in commission cybersecurity efforts. Since that time, FERC took the following actions. First, in 2011, it began evaluating whether cybersecurity challenges, including those identified in our report, should be addressed under the agency’s existing cyber security authority and efforts. As a part of this effort, the commission directed NERC to revise the electricity industry’s critical infrastructure protection (CIP) standards with the aim of addressing, among other things, cybersecurity challenges identified in our report. In November 2013, NERC issued updated CIP standards to address these and other cybersecurity challenges. Second, the commission held a technical conference in 2011 in which it solicited feedback from industry stakeholders to help inform the agency’s cybersecurity efforts. Third, in September 2012, the commission established an Office of Energy Infrastructure Security, which is to, among other things, help mitigate cybersecurity threats to electricity industry facilities, and to improve cybersecurity information sharing. In summary, as they become increasingly reliant on computerized technologies, the electricity industry’s systems and networks are susceptible to an evolving array of cyber-based threats. Key entities, including NERC and FERC, are critical to approving and disseminating cybersecurity guidance and standards, while NIST, DHS, and the Department of Energy have additional roles to play in providing guidance and providing other forms of support for protecting the sector against cyber threats. Moreover, without monitoring the implementation of voluntary cybersecurity standards in the industry, FERC does not know the extent to which such standards have been adopted or whether they are effective. Given the increasing use of information and communications technology in the electricity subsector and the evolving nature of cyber threats, continued attention can help mitigate the risk these threats pose to the electricity grid. Chairman Weber, Chairwoman Comstock, Ranking Members Grayson and Lipinski, and Members of the Subcommittees, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. If you or your staffs have any questions about this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other staff who contributed to this statement include Franklin J. Rusco, Director; Michael W. Gilmore; Bradley W. Becker; Kenneth A. Johnson; Jon R. Ludwigson; Lee McCracken; Jonathan Wall; and Jeffrey W. Woodward. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The electric power industry—including transmission and distribution systems—increasingly uses information and communications technology systems to automate actions with the aim of improving the electric grid's reliability and efficiency. However, these “smart grid” technologies may be vulnerable to cyber-based attacks and other threats that could disrupt the nation's electricity infrastructure. Several federal entities have responsibilities for overseeing and helping to secure the electricity grid. Because of the proliferation of cyber threats, since 2003 GAO has designated protecting the systems supporting U.S. critical infrastructure (which includes the electricity grid) as a high-risk area. GAO was asked to provide a statement on opportunities to improve cybersecurity for the electricity grid. In preparing this statement, GAO relied on previous work on efforts to address cybersecurity of the electric sector. GAO reported in 2011 that several entities—the North American Electric Reliability Corporation (NERC), the National Institute of Standards and Technology (NIST), the Federal Energy Regulatory Commission (FERC), the Department of Homeland Security (DHS), and the Department of Energy (DOE)—had taken steps to help secure the electric grid. These included developing cybersecurity standards and other guidance to reduce risks. While these were important efforts, GAO at that time also identified a number of challenges to securing the electricity grid against cyber threats: Monitoring implementation of cybersecurity standards : GAO found that FERC had not developed an approach, coordinated with other regulatory entities, to monitor the extent to which the electricity industry was following voluntary smart grid standards, including cybersecurity standards. Clarifying regulatory responsibilities: The nature of smart grid technology can blur traditional lines between the portions of the grid that are subject to federal or state regulation. In addition, regulators may be challenged in responding quickly to evolving cybersecurity threats. Taking a comprehensive approach to cybersecurity: Entities in the electricity industry (e.g., utilities) often focused on complying with regulations rather than taking a holistic and effective approach to cybersecurity. Ensuring that smart grid systems have built-in security features: Smart grid devices (e.g., meters) did not always have key security features such as the ability to record activity on systems or networks, which is important for detecting and analyzing attacks. Effectively sharing cybersecurity information: The electricity industry did not have a forum for effectively sharing information on cybersecurity vulnerabilities, incidents, threats, and best practices. Establishing cybersecurity metrics: The electricity industry lacked sufficient metrics for determining the extent to which investments in cybersecurity improved the security of smart grid systems. Since 2011, additional efforts have been taken to improve cybersecurity in the sector. For example, in 2013, NERC issued updated standards to address these and other cybersecurity challenges. NIST also updated its smart grid cybersecurity standards in 2014. It has also developed a cybersecurity framework for critical infrastructure, and DHS and DOE have efforts under way to promote its adoption. In addition, FERC assessed whether these and other challenges should be addressed in its ongoing cybersecurity efforts. However, FERC did not coordinate with other regulators to identify strategies for monitoring compliance with voluntary cybersecurity standards in the industry, as GAO had recommended. As a result, FERC does not know the extent to which such standards have been adopted or whether they are effective. Given the increasing use of information and communications technology in the electricity subsector and the evolving nature of cyber threats, continued attention can help mitigate the risk these threats pose to the electricity grid. In its 2011 report, GAO recommended that (1) NIST improve its cybersecurity standards, (2) FERC assess whether challenges identified by GAO should be addressed in ongoing cybersecurity efforts, and (3) FERC coordinate with other regulators to identify strategies for monitoring compliance with voluntary standards. The agencies agreed with the recommendations, but FERC has not taken steps to monitor compliance with voluntary standards.

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As we reported earlier this year, mission-critical skills gaps within the federal workforce pose a high risk to the nation. Regardless of whether the shortfalls are in such government-wide occupations as cybersecurity and acquisitions, or in agency-specific occupations such as nurses at the Veterans Health Administration, skills gaps impede the federal government from cost-effectively serving the public and achieving results. Agencies can have skills gaps for different reasons: they may have an insufficient number of people or their people may not have the appropriate skills or abilities to accomplish mission-critical work. Moreover, current budget and long-term fiscal pressures, the changing nature of federal work, and a potential wave of employee retirements that could produce gaps in leadership and institutional knowledge, threaten to aggravate the problems created by existing skills gaps. According to our analysis of OPM data, government-wide more than 34 percent of federal employees on-board by the end of fiscal year 2015 will be eligible to retire by 2020 (see figure 1). Some agencies, such as the Department of Housing and Urban Development, will have particularly high eligibility levels by 2020. Various factors can affect when individuals actually retire, and some amount of retirement and other forms of attrition can be beneficial because it creates opportunities to bring fresh skills on board and it allows organizations to restructure themselves to better meet program goals and fiscal realities. But if turnover is not strategically monitored and managed, gaps can develop in an organization’s institutional knowledge and leadership. While numerous tools are available to help agencies address their talent needs, our past work has identified problems across a range of personnel systems and functions. For example: Classification system: The GS system has not kept pace with the government’s evolving requirements. Recruiting and hiring: Federal agencies need a hiring process that is applicant friendly, flexible, and meets policy requirements. Pay system: Employees are compensated through an outmoded system that (1) rewards length of service rather than individual performance and contributions, and (2) automatically provides across- the-board annual pay increases, even to poor performers. Performance management: Developing modern, credible, and effective employee performance management systems and dealing with poor performers have been long-standing challenges for federal agencies. Employee engagement: Additional analysis and sharing of promising practices could improve employee engagement and performance. As we reported in 2012, Congress’s policy calls for federal workers’ pay under the GS system to be aligned with comparable nonfederal workers’ pay. Across-the-board pay adjustments are to be based on private sector salary growth. Locality adjustments are designed to reduce the gap between federal and nonfederal pay in each locality to no more than 5 percent. The President’s Pay Agent is the entity charged with determining the disparities between federal and nonfederal pay in each locality; it measures federal pay based on OPM records that identify GS employees by occupation and grade level, and nonfederal pay based on U.S. Bureau of Labor Statistics data (BLS). In 2012, the Pay Agent has recommended that the underlying model and methodology for estimating pay gaps be reexamined to ensure that private sector and federal sector pay comparisons are as accurate as possible. As of December 2016, no such reexamination has taken place. The across-the-board and locality pay increases may be made every year, and are not linked to performance. Pay increases and monetary awards that are linked to performance ratings as determined by the agencies’ performance appraisal systems include within-grade increases, ratings-based cash awards, and quality step increases, and are available to GS employees. Within-grade increases are the least strongly linked to performance, ratings-based cash awards are more strongly linked to performance depending on the rating system the agency uses, and quality step increases are also more strongly linked to performance. The composition of the federal workforce has changed over the past 30 years, with the need for clerical and blue collar roles diminishing and professional, administrative, and technical roles increasing. As a result, today’s federal jobs require more advanced skills at higher grade levels than in years past. Additionally, we have found that federal jobs, on average, require more advanced skills and degrees than private sector jobs. This is because a higher proportion of federal jobs than nonfederal are in skilled occupations such as science, engineering, and program management, while a lower proportion of federal jobs than nonfederal are in occupations such as manufacturing, construction, and service work. The result is that the federal workforce is on average more highly educated than the private sector workforce. As we reported in 2014, a key federal human capital management challenge is how best to balance the size and composition of the federal workforce so that it is able to deliver the high quality services that taxpayers demand, within the budgetary realities of what the nation can afford. Recognizing that the federal government’s pay system does not align well with modern compensation principles (where pay decisions are based on the skills, knowledge, and performance of employees as well as the local labor market), Congress has provided various agencies with exemptions from the current system to give them more flexibility in setting pay. Thus, a long-standing federal human capital management question is how to update the entire federal compensation system to be more market based and performance oriented. This type of system is a critical component of a larger effort to improve organizational performance. Our 2005 work showed that implementing a more market-based and more performance-oriented pay system is both doable and desirable. However, we also found that it is not easy. For one thing, agencies should have effective performance management systems that link individual expectations to organizational results. Moreover, representatives of public, private, and nonprofit organizations, in discussing the successes and challenges they have experienced in designing and implementing their own results-oriented pay systems, told us at the time they had to shift from a culture where compensation is based on position and longevity to one that is performance-oriented, affordable and sustainable. As we have reported in the past, these organizations’ experiences with their own market-based and performance-oriented pay systems provide useful lessons learned that will be important to consider to the extent the federal government moves toward a more results-oriented pay system. Lessons learned identified in our 2005 report include the following: 1. Focus on a set of values and objectives to guide the pay system. Values represent an organization’s beliefs and boundaries, and objectives articulate the strategy to implement the system. 2. Examine the value of employees’ total compensation to remain competitive in the labor market. Organizations consider a mix of base pay plus other monetary incentives, benefits and deferred compensation, such as retirement pay, as part of a competitive compensation system. 3. Build in safeguards to enhance the transparency and ensure the fairness of pay decisions. Safeguards are the precondition to linking pay systems with employee knowledge, skills, and contributions to results. 4. Devolve decision-making on pay to appropriate levels. When devolving such decision making, overall core processes help ensure reasonable consistency in how the system is implemented. 5. Provide training on leadership, management, and interpersonal skills to facilitate effective communication. Such skills as setting expectations, linking individual performance to organizational results, and giving and receiving feedback need renewed emphasis to make such systems succeed. 6. Build consensus to gain ownership and acceptance for pay reforms. Employee and stakeholder involvement needs to be meaningful and not pro forma. 7. Monitor and refine the implementation of the pay system. While changes are usually inevitable, listening to employee views and using metrics helps identify and correct problems over time. Our prior work has found that across a range of human capital functions, while in some cases statutory changes may be needed to advance reforms, in many instances improvements are within the control of federal agencies. These improvements include such actions as improving the coordination of hiring specialists and hiring managers on developing recruitment strategies and up-to-date position descriptions in vacancy announcements. Indeed, Congress has already provided agencies with a number of tools and flexibilities to help them build and maintain a high- performing workforce. Going forward, it will be important for agencies to make effective use of those tools and for Congress to hold agencies accountable for doing so. Among other things, our work has shown that the tone starts at the top. Agency leaders and managers should set an example that human capital is important and is directly linked to performance—it is not a transactional function. As we noted in our 2017 high-risk update, agencies can drive improvements to their high risk areas—including strategic human capital management—through such steps as: Sustained leadership commitment, including developing long-term priorities and goals, and providing continuing oversight and accountability; Ensuring agencies have adequate capacity to address their personnel issues, including collaborating with other agencies and stakeholders as appropriate; Identifying root causes of problems and developing action plans to address them, including establishing goals and performance measures; Monitoring actions by, for example, tracking performance measures and progress against goals; and Demonstrating progress by showing issues are being effectively managed and root causes are being addressed. Our list of leading human capital management practices may be helpful as well. Covering such activities as strategic workforce planning, recruitment and hiring, workforce development, and employee engagement, among others, agencies can use this information to strengthen how they recruit, retain, and develop their employees and Congress can hold agencies accountable for using them. OPM has taken some important steps as well. For example, in December 2016, OPM finalized revisions to its strategic human capital management regulation that include the new Human Capital Framework. This framework is to be used in 2017 by agencies to plan, implement, evaluate, and improve human capital policies and programs. Our recent work on federal hiring, classification, addressing poor performance, and the capacity of federal human resource functions are illustrative of some of the areas in need of attention. To help ensure agencies have the talent they need to meet their missions, we have found that federal agencies should have a hiring process that is simultaneously applicant friendly, sufficiently flexible to enable agencies to meet their needs, and consistent with statutory requirements, such as hiring on the basis of merit. Key to achieving this is the hiring authority used to bring applicants onboard. Congress and the President have created a number of hiring authorities to expedite the hiring process or to achieve certain public policy goals, such as facilitating the entrance of certain groups into the civil service. As we reported in 2016, we found that of the 105 hiring authorities used in fiscal year 2014, agencies relied on 20 of those authorities for 91 percent of the 196,226 new appointments made that year. OPM officials said at the time they did not know if agencies relied on a small number of authorities because agencies are unfamiliar with other authorities, or if they have found other authorities to be less effective. Although OPM tracks such data as agency time-to-hire, we found this information was not used by OPM or agencies to analyze the effectiveness of hiring authorities. As a result, OPM and agencies did not know if authorities were meeting their intended purposes. By analyzing hiring authorities, OPM and agencies could identify opportunities to refine authorities, expand access to specific authorities found to be highly efficient and effective, and eliminate those found to be less effective. We recommended that OPM, working with agencies, strengthen hiring efforts by (1) analyzing the extent to which federal hiring authorities are meeting agencies’ needs, and (2) using this information to explore opportunities to refine, eliminate, or expand authorities as needed, among other recommendations. OPM concurred with our recommendations, and reported it had reviewed hiring authorities related to the entry-level Pathways Program and for hiring seasonal employees. The GS classification system is a mechanism for organizing federal white- collar work—notably for the purpose of determining pay—based on a position’s duties, responsibilities, and difficulty, among other things. A guiding principle of the GS classification system is that employees should earn equal pay for substantially equal work. We and others have found that the work of the federal government has become more highly skilled and specialized than the GS classification system was designed to address when it was created in 1949 when most of the federal workforce was engaged in clerical work. While there is no one right way to design a classification system, in 2014, we identified eight key attributes that are important for a modern, effective classification system. Collectively, these attributes provide a useful framework for considering refinements or reforms to the current system. These key attributes are described in table 1. We concluded in 2014 that the inherent tension between some of these attributes, and the values policymakers and stakeholders emphasize could have large implications for pay, the ability to recruit and retain mission critical employees, and other aspects of personnel management. This is one reason why—despite past proposals—changes to the current system have been few, as finding the optimal mix of attributes that is acceptable to all stakeholders is difficult. In 2014, we recommended that OPM (1) work with stakeholders to examine ways to modernize the classification system, (2) develop a strategy to track and prioritize occupations for review and updates, and (3) develop cost-effective methods to ensure agencies are classifying correctly. OPM partially concurred with the first and third recommendation but did not concur with the second recommendation. Instead, OPM officials said they already tracked and prioritized occupations for updates. However, they were unable to provide documentation of their actions. In April 2017, OPM officials said they meet regularly with the interagency classification policy forum to inform classification implementation and had reviewed and canceled 21 occupational series that were minimally used by agencies. In our 2015 report, we noted how federal agencies’ ability to address poor performance has been a long-standing issue. Employees and agency leaders share a perception that more needs to be done to address poor performance, as even a small number of poor performers can affect agencies’ capacity to meet their missions. More generally, without effective performance management, agencies risk losing (or failing to utilize) the skills of top talent. They also may miss the opportunity to observe and correct poor performance. Among other things, we found effective performance management helps agencies establish a clear “line of sight” between individual performance and organizational success and using core competencies helps to reinforce organizational objectives. Agencies should also make meaningful distinctions in employee performance levels. However, we found that 99 percent of permanent, non-senior executive service employees in 2013 received a rating at or above fully successful, with around 61 percent rated as “outstanding” or “exceeds fully successful.” Importantly, in 2015 we found that good supervisors are key to the success of any performance management system. Supervisors provide the day-to-day performance management activities that can help sustain and improve the performance of more talented staff and can help marginal performers to become better. As a result, agencies should promote people into supervisory positions because of their supervisory skills (in addition to their technical skills) and ensure that new supervisors receive sufficient training in performance management. Likewise, a cultural shift might be needed among agencies and employees to acknowledge that a rating of “fully successful” is already a high bar and should be valued and rewarded and that “outstanding” is a difficult level to achieve. Further, in 2015 we found that probationary periods for new employees provide supervisors with an opportunity to evaluate an individual’s performance to determine if an appointment to the civil service should become final. However, some Chief Human Capital Officers (CHCO) said supervisors often do not use this time to make performance-related decisions about an employee’s performance because they may not know that the probationary period is ending or they have not had time to observe performance in all critical areas. In our prior work, we recommended that OPM educate agencies on ways to notify supervisors that an individual’s probationary period is ending and that the supervisor needs to make a decision about the individual’s performance and also to determine whether there are occupations in which the probationary period should extend beyond 1-year to provide supervisors with sufficient time to assess an individual’s performance. OPM concurred with the first recommendation and partially concurred with the second. In January 2017, OPM issued guidance to agency about supervisors notification of a probationary period ending, but officials said OPM had not taken action on extending the probationary period. In 2014, we found that many agency CHCO said their offices did not have the capacity to lead strategic human capital management activities such as talent management, workforce planning, and promoting high performance and a results-oriented culture. Instead, these offices remained focused on transactional human resource activities like benefits and processing personnel actions. As a result, officials said agency decision makers often did not seek out and draw upon the expertise of human capital experts to inform their deliberations. Perhaps further reflecting the varying capabilities of agency human capital offices across government, some CHCOs at the time said that agency leaders did not fully understand the potential for strategic human capital management and had not elevated the role of the human capital office to better support an agency’s operations and mission. The human resources specialist occupation continues to be one of six government-wide, mission-critical skills gap areas identified by OPM. Our recent work on the Veterans Health Administration (VHA) demonstrates how capacity shortfalls in an agency’s personnel office can adversely impact an organization’s mission. Among other things, we found that the recruitment and retention challenges VHA is experiencing with its clinical workforce are due, in part to attrition among its human resource employees and unmet staffing targets within medical center personnel offices. We concluded that until VHA strengthens its human resource capacity, it will not be positioned to effectively support its mission to serve veterans’ healthcare needs. We made 12 recommendations to Veterans Affairs (VA) to improve the human resource capacity and oversight of human resource functions at its medical centers; develop a modern, credible employee performance management system; and establish clear accountability for efforts to improve employee engagement. VA concurred with nine recommendations and partially concurred with three recommendations to improve VHA’s performance management system. Under OPM’s leadership, several steps have been taken as part of a cross agency group focused on improving the capacity of human resource specialists. For example, OPM reported that it increased registration in its Human Resources University and validated career path guides for classification, recruitment and hiring policy, and employee relations. As part of our ongoing oversight of OPM’s and agencies’ efforts to close government-wide mission critical skill gaps, we will continue to assess the progress being made in improving the human capital infrastructure within agencies needed to better support agencies’ planning and programmatic functions. In conclusion, given the long-term fiscal challenges facing the nation and ongoing operational and accountability issues across government, agencies must identify options to meet their missions with fewer resources. The federal compensation system should allow the government to cost-effectively attract, motivate, and retain a high- performing, agile workforce necessary to meet those missions. At the same time, our work has shown that agencies already have a number of tools and flexibilities available to them that can significantly improve executive branch personnel management and do so sooner, rather than later. Going forward, it will be important to hold agencies accountable for fully leveraging those resources. Chairman Chaffetz, Ranking Member Cummings, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff have any questions about this statement, please contact Robert Goldenkoff at (202) 512-2757 or e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony include Chelsa Gurkin, Assistant Director; Dewi Djunaidy, Analyst-in-Charge; Ann Czapiewski; Karin Fangman; Krista Loose; Susan Sato; Cynthia Saunders; and Stewart W. Small. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

A careful consideration of federal pay is an essential part of fiscal stewardship and is necessary to support the recruitment and retention of a talented, agile, and high-performing federal workforce. High-performing organizations have found that the life-cycle of human capital management activities—including workforce planning, recruitment, on-boarding, compensation, engagement, succession planning, and retirement programs—need to be aligned for the cost-effective achievement of an organization's mission. However, despite some improvements, strategic human capital management—and more specifically, skills gaps in mission critical occupations—continues to be a GAO high-risk area. This testimony is based on a body of GAO work primarily issued between June 2012 and March 2017. It focuses on (1) lessons learned in creating a more market driven, results-oriented approach to federal pay, and (2) opportunities, in addition to pay and benefits, that OPM and agencies could use to be more competitive in the labor market and address skills gaps. GAO's prior work has shown that implementing a market-based and more performance-oriented federal pay system is both doable and desirable, and should be part of a broader strategy of change management and performance improvement initiatives. In 2005, GAO identified the following key themes that highlight the leadership and management strategies high-performing organizations collectively considered in designing and managing a pay system that is performance oriented, affordable, and sustainable. Specifically, they: 1. Focus on a set of values and objectives to guide the pay system. 2. Examine the value of employees' total compensation to remain competitive in the labor market. 3. Build in safeguards to enhance the transparency and ensure the fairness of pay decisions. 4. Devolve decision-making on pay to appropriate levels. 5. Provide clear and consistent communication so that employees at all levels can understand how compensation reforms are implemented. 6. Build consensus to gain ownership and acceptance for pay reforms. 7. Monitor and refine the implementation of the pay system. While the federal compensation system may need to be re-examined, Congress has already provided agencies with tools and flexibilities to build and maintain a high-performing workforce. They include, for example: Hiring process GAO reported in 2016 that the Office of Personnel Management (OPM) and selected agencies had not evaluated the effectiveness of hiring authorities. By evaluating them, of which over 100 were used in 2014, OPM and agencies could identify ways to expand access to those found to be more effective, and eliminate those found to be less effective. General Schedule (GS) classification system The federal government has become more highly skilled and specialized than the GS classification system was designed to address at its inception in 1949. OPM and stakeholders should examine ways to make the classification system consistent with attributes GAO identified of a modern, effective classification system, such as internal and external equity. Performance management Credible and effective performance management systems are a strategic tool to achieve organizational results. These systems should emphasize “a line a sight” between individual performance and organizational success, and use core competencies to reinforce organizational objectives, among other things. Human resources capacity The human resources specialist occupation is a mission critical skills gap area. Chief Human Capital Officers have reported that human resources specialists do not have the skills to lead strategic human capital management activities. Strengthening this capacity could help agencies better meet their missions. Over the years, GAO has made recommendations to agencies and OPM to improve their strategic human capital management efforts. OPM and agencies generally concurred. This testimony discusses actions taken to implement key recommendations to improve federal hiring and classification.

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About 90 percent of the costs associated with GWOT fall into two accounts—military personnel and operation and maintenance. Military personnel funds provided to support GWOT cover the pay and allowances of mobilized reservists as well as special payments or allowances for all qualifying military personnel, both active and reserve, such as Imminent Danger Pay and Family Separation Allowance. Operation and maintenance funds provided to support GWOT are used for a variety of purposes, including transportation of personnel, goods, and equipment; unit operating support costs; and intelligence, communications, and logistics support. We have reported on several occasions, including in 1999 and 2003, that estimating the cost of ongoing military operations is difficult. This is because operational requirements can differ substantially during the fiscal year from what was assumed in preparing budget estimates. The result can be that operations can cost more or less than originally estimated. If operations cost more than originally estimated, DOD may use a number of authorities provided to it, including transferring and reprogramming funds and reducing or deferring planned spending for peacetime operations, to meet its needs. DOD uses “transfer authority” to shift funds between appropriation accounts, for example, between military personnel and operation and maintenance. Transfer authority is granted by the Congress to DOD usually pursuant to specific provisions in authorization or appropriation acts. The ability to shift funds within a specific appropriation account, like operation and maintenance, is referred to as “reprogramming.” In general, DOD does not need statutory authority to reprogram funds within an account as long as the funds to be spent would be used for the same general purpose of the appropriation and the reprogramming does not violate any other specific statutory requirements or limitations. For example, DOD could reprogram operation and maintenance funds originally appropriated for training to cover increased fuel costs because both uses meet the general purpose of the operation and maintenance account, as long as the shift does not violate any other specific statutory prohibition or limitation. In fiscal years 2004 and 2005, the military services received about $52.4 billion and about $62.1 billion, respectively, in supplemental appropriations for GWOT military personnel and operation and maintenance expenses. The Army, Air Force, and Navy also received funds for GWOT through their annual appropriations. However, DOD and the military services have lost visibility over these funds provided through annual appropriations, including knowing how much, if any, was used to support GWOT in fiscal years 2004 and 2005. As shown in table 1, DOD received funding through supplemental appropriations to support GWOT in both fiscal years 2004 and 2005. To pay for the military personnel and operation and maintenance costs of GWOT in fiscal year 2004, the Congress appropriated about $52.4 billion to DOD. Of the $52.4 billion, the Congress provided the military services about $50.4 billion in the Emergency Supplemental Appropriations Act for Defense and for the Reconstruction of Iraq and Afghanistan, 2004. In addition, the services used $120 million of the funds provided in late fiscal year 2004 through Title IX of the Department of Defense Appropriations Act, 2005. DOD also transferred about $1.9 billion from funds originally appropriated to the Iraqi Freedom Fund. The Iraqi Freedom Fund provides 2-year funds that can be transferred to the services’ accounts for additional expenses for ongoing military operations in Iraq, operations authorized by the Authorization for Use of Military Force, and other operations and related activities in support of GWOT. Of the $1.9 billion, about $860 million was provided through the Emergency Wartime Supplemental Appropriations Act, 2003, while about $1.1 billion was provided through the Emergency Supplemental Appropriations Act for Defense and for the Reconstruction of Iraq and Afghanistan, 2004. For fiscal year 2005, the military services had about $62.1 billion available to pay for the military personnel and operation and maintenance costs of GWOT. Of this, the Congress appropriated about $44.5 billion through the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief, 2005. The military services also had the remaining balance—about $17.3 billion—that was provided through Title IX of the Department of Defense Appropriations Act, 2005, and was available for obligation in fiscal year 2005 to help pay for the military personnel and operation and maintenance costs of GWOT. In addition, as of July 2005, DOD had transferred about $348 million from funds originally appropriated to the Iraqi Freedom Fund. In addition to funds DOD received through supplemental appropriations for GWOT, beginning in fiscal year 2003, the administration increased DOD’s annual appropriation request by more than $10 billion per year. DOD described these funds as being intended to support GWOT. According to a representative from the Office of the Under Secretary of Defense (Comptroller), in December 2001 the President directed that his annual budget submission for DOD be increased by about $10 billion annually to support GWOT. Consequently, Program Budget Decision 736, entitled Continuing the War on Terrorism and dated January 31, 2002, was approved by the Under Secretary of Defense (Comptroller). Program Budget Decision 736 provided for increasing DOD’s annual budget request in the amount of more than $10 billion per year plus inflation in fiscal years 2003 through 2007 to enhance the department’s efforts to respond to, or protect against, acts or threatened acts of terrorism against the United States. According to a DOD representative, unless action is taken to reduce these funds in future budgets, Program Budget Decision 736 provides for a permanent increase of about $10 billion per year plus inflation to DOD’s annual budget request to support military operations in the war on terrorism. As shown in table 2, in fiscal years 2004 and 2005, the Army, Air Force, and Navy received additional funds in their annual appropriations—a total of about $7.9 billion in fiscal year 2004 and about $7.6 billion in fiscal year 2005—which DOD described as for support of military operations in the war on terrorism. According to DOD representatives, the Marine Corps did not receive an increase to its annual appropriation through Program Budget Decision 736. Under Program Budget Decision 736, a number of DOD programs were to receive increases in their proposed annual budgets in both fiscal years 2004 and 2005. For example, in fiscal year 2004, Program Budget Decision 736 indicates that about $2.1 billion was for counterterrorism and force protection efforts, about $1.2 billion for combat air patrols over U.S. cities, and about $600 million for such things as depot maintenance and spare parts. Program Budget Decision 736 indicates funds were to be provided to these programs and others in fiscal years 2005 through 2007 as well. According to representatives of the Office of the Under Secretary of Defense (Comptroller), some of the funds in Program Budget Decision 736 were intended to cover costs associated with Operation Noble Eagle while others were intended to cover costs associated with Operation Enduring Freedom. For fiscal years 2004 and 2005, an Office of the Under Secretary of Defense (Comptroller) representative stated the additional funds provided through Program Budget Decision 736 were in the military services’ various appropriations accounts. However, the Office of the Under Secretary of Defense (Comptroller) has no specific information about which programs or activities actually received the funds or how they were eventually expended, including whether they were used in support of GWOT. Once the services received these additional funds, they allocated them to their appropriations accounts based on their judgment of where the funds were most needed. DOD’s accounting systems do not separately identify which appropriations accounts received these funds, and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated. While the military services also stated they received their share of the Program Budget Decision 736 funds as part of their fiscal year 2004 and fiscal year 2005 annual appropriations and that some of the funds were used for war-related expenses, they too could not identify which programs or activities received the funds and could not document what portion of these funds were used for war-related expenses. As a result, although DOD requested these funds to support GWOT, DOD and the military services cannot be certain that they were actually used to support GWOT-related activities. In developing the fiscal year 2005 request for supplemental appropriations to support GWOT, DOD took steps to adjust the request to reflect the receipt of funds provided through Program Budget Decision 736. In a November 2004 memorandum requesting that all DOD components provide their GWOT supplemental appropriations estimates for fiscal year 2005, the Office of the Under Secretary of Defense (Comptroller) stated the following with respect to funds that had already been provided through Program Budget Decision 736: Funding for GWOT missions previously added to the baseline budget (e.g., Program Budget Decision 736, Continuing the War on Terrorism) should be explicitly identified as a reduction to funding requests in those areas, as appropriate. Component requests must consider that that some funding is already in the baseline accounts. Program Budget Decision 736 provided funds for antiterrorism, continental United States combat air patrols, and force protection. The components’ submissions should show the total requirement and note the level of funding already in the baseline for this purpose. The supplemental request will net out the available funding. In the November 2004 memorandum the Office of the Under Secretary of Defense (Comptroller) further stated that the emergency supplemental appropriations request will address the incremental costs above the baseline funding needed to support specific forces and capabilities required to execute Operation Iraqi Freedom, Operation Enduring Freedom, and portions (to be determined) of Operation Noble Eagle. DOD described Operation Noble Eagle as including defending the United States from airborne attacks and maintaining U.S. air sovereignty. This operation had been included in the supplemental appropriations request for fiscal year 2004. None of the military services provided the information requested in the November 2004 memorandum and instead the services requested funds for Operation Noble Eagle. Service budget representatives told us that Program Budget Decision 736 funds were considered as base program (e.g., annual appropriations) issues and not supplemental candidates. According to service budget representatives, they requested funds for Operation Noble Eagle in fiscal year 2005 that were in addition to the funds provided through Program Budget Decision 736. For example, the Navy requested $53.3 million for incremental requirements above its baseline request. The Army requested more than $1 billion in incremental requirements above its baseline. However, in preparing the fiscal year 2005 supplemental appropriations budget request, the Office of Management and Budget did not include Operation Noble Eagle in the President’s budget request because funds had already been included in DOD’s annual appropriation, as described in Program Budget Decision 736. In fiscal year 2004, the difference between supplemental appropriations available to the military services for GWOT military personnel and operation and maintenance expenses compared to reported obligations varied by service. For military personnel, the Navy and Marine Corps reported more in obligations than they received in supplemental appropriations, while for operation and maintenance each of the military services reported more in obligations than it received in supplemental appropriations. To cover the differences (gaps), DOD and the military services took several actions, including transferring funds and reducing or deferring planned spending for peacetime operations. In the case of the Army and Air Force, which each received supplemental appropriations that exceeded its reported obligations for military personnel, this included transferring $801 million and $113 million, respectively, to cover their GWOT operation and maintenance expenses. In some instances, these actions reduced DOD’s flexibility to cover potential gaps in fiscal year 2005. DOD did not explicitly take into account the GWOT funds provided through its annual appropriation that DOD requested for GWOT to help cover the gaps. If it had taken these funds into account it could have reduced the Army’s GWOT gap, eliminated the GWOT gaps of the Air Force and Navy, and been able to defer fewer activities. Within the military personnel accounts, as shown in table 3, the Navy and Marine Corps reported more obligations in support of GWOT than they received in supplemental appropriations. However, these reported gaps were a relatively small portion of the services’ annual military personnel appropriations. For example, the Navy’s reported gap of $40.4 million represents less than 1 percent of its annual military personnel appropriation. In fiscal year 2004, both the Army and Air Force received supplemental appropriations that exceeded their reported obligations for military personnel. The Army and Air Force used these funds to cover operation and maintenance expenses related to GWOT, as discussed below. Within the operation and maintenance accounts, as shown in table 4, in fiscal year 2004 each of the military services reported more in GWOT obligations than it received in supplemental appropriations. The Army reported the largest gap, about $4.3 billion, while the Air Force and Navy reported gaps of $579 million and about $618 million, respectively. The Marine Corps reported the smallest gap, about $195 million. To cover the military services’ gaps between reported fiscal year 2004 obligations and supplemental appropriations, the Office of the Under Secretary of Defense (Comptroller) and the military services used a number of authorities provided to them, including transferring funds and reducing or deferring planned spending for peacetime operations. While involving hundreds of millions or sometimes billions of dollars, in discussing the actions taken to cover the gaps, some service representatives noted that the gaps represented a small percentage of their annual appropriations. Within the services’ annual operation and maintenance accounts we found that the gaps varied by service, ranging from a low of 1.7 percent of the Air Force’s annual operation and maintenance appropriation to a high of 13.7 percent of the Army’s annual operation and maintenance appropriation. In the services’ annual military personnel accounts, all the gaps were less than 1 percent of their annual military personnel appropriations. However, DOD did not explicitly take into account the funds provided through its annual appropriations that it intended for support of GWOT. As discussed earlier, since DOD’s accounting systems do not separately identify the portion of the department’s annual appropriations that were described as having been requested to support GWOT and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated, the military services have lost visibility over these funds and do not know the extent to which they are being used to support GWOT. Consequently, despite having asked for the increase, DOD is not explicitly counting these additional funds when considering funding for GWOT and alternatively took actions that affected its peacetime operations, which may create spending pressures in fiscal year 2005 and later. Each of the military services projected a gap between reported obligations and supplemental appropriations at its midyear budget review. Service representatives told us these projected gaps were reduced over the course of fiscal year 2004 by reviewing their GWOT requirements and, in some instances, seeking to reduce or defer planned spending. With respect to the GWOT gaps faced by the services in fiscal year 2004, we were told the following: For fiscal year 2004, the Army’s reported obligations in its operation and maintenance account exceeded its supplemental appropriations by about $4.3 billion, substantially less than the $10.9 billion it had projected in the account at its midyear budget review. To cover the $4.3 billion, DOD and the Army took a number of actions, including using internal resources and passing the remaining amount on to the Army’s major commands to be absorbed by reducing or deferring planned peacetime spending to meet its GWOT needs. More specifically, to cover the Army’s gap, the Under Secretary of Defense (Comptroller) transferred about $3 billion from the working capital funds of the Army, Air Force, and Navy—including $1.3 billion from the Army, about $1.5 billion from the Air Force, and $200 million from the Navy. In addition, about $801 million was transferred from the Army’s military personnel account to help cover the gap in the Army’s operation and maintenance account, while about $500 million was transferred from other DOD-wide accounts. The major Army commands absorbed the remainder. For example, to cover its portion of the gap, the Army Materiel Command reprioritized or deferred about $184 million in depot maintenance until fiscal year 2005 for such programs as the Patriot and Hellfire missile systems. It also reduced or deferred the number of available training hours for some of its nondeployed units. However, Army Materiel Command representatives told us that in some instances, the training hours they deferred to help cover the fiscal year 2004 gap were deferred until fiscal year 2006. The Air Force’s gap in its operation and maintenance account of about $579 million was substantially less than the $1.5 billion it had projected in the two accounts at its midyear budget review. To cover the $579 million gap, the Air Force took a number of actions, including transferring $113 million in funds available in its overall military personnel appropriation account, decreasing peacetime flying hours, reducing depot maintenance, and deferring facility sustainment restoration and modernization projects until fiscal year 2005. The Air Force’s major commands also absorbed a portion of the gap. For example, the Air Combat Command absorbed its share of the GWOT gap, about $92 million, by reducing or deferring its fiscal year 2004 peacetime spending. Approximately $46 million, or half of the Air Combat Command’s $92 million share of the gap, was covered by reducing its peacetime flying hour program by about 6,800 hours. While reducing its peacetime flying hours helped the Air Combat Command cover its portion of the gap, Air Combat Command representatives told us the reduced training opportunities created a training backlog, which could affect pilot readiness for future combat missions. The Navy’s combined gap for fiscal year 2004 of about $659 million in its military personnel and operation and maintenance accounts was less than its midyear projection of $931 million. To cover the $659 million gap, the Navy canceled some peacetime spending, including various nonreadiness operation and maintenance spending and various infrastructure projects. Of the Navy’s major commands, the Atlantic Fleet and Pacific Fleet absorbed the largest share of the gap for fiscal year 2004. For example, the Atlantic Fleet absorbed about $110 million by reducing air operations and ship depot maintenance activities. Navy budget representatives noted that the gap represented about 1 percent of the total baseline funding available for aircraft operations and ship depot maintenance for the Navy in that fiscal year. In addition, the Navy canceled or deferred procurement actions for the MH-60R Seahawk helicopter, V-22 Osprey, F/A-18 Hornet, and Joint Tactical Radio System. The Marine Corps’ combined gap in its military personnel and operation and maintenance appropriations accounts of about $225 million for GWOT in fiscal year 2004 was also less than the $446 million projected at its midyear budget review. To cover the $225 million gap, the Marine Corps reduced or deferred spending in noncritical areas, such as facility improvements. The Navy provided the Marine Corps with funds from its base operating support and facilities sustainment restoration and modernization appropriations accounts and with $121 million that was transferred to the Navy from the U.S. Transportation Command’s Working Capital Fund. According to Marine Corps representatives, a portion of the gap was also absorbed by the Marine Corps’ annual military personnel and operation and maintenance appropriations accounts. The Navy provided us a detailed discussion of the process used in addressing gaps. A Navy budget representative said that the Navy analyzed its entire $116.8 billion in baseline funding (which includes both the original $114 billion baseline and the added $2.8 billion for Program Budget Decision 736 initiatives) as potential financing sources for its GWOT needs. According to the Navy representative the Navy’s internal analysis first looked at funding flexibility in baseline programs resulting from changes in current year execution. For example, certain baseline program requirements change from year to year as a result of development issues, schedule and implementation delays, manufacturing problems, changes in requirements or inventory levels, and labor disputes. The accumulated value of those changes in a given execution year, such as fiscal year 2004, may have made any financial resources excess to fiscal year 2004 requirements available to fund GWOT needs. Although their specific identification as such would be lacking, they stated that previously baselined Program Budget Decision 736 requirements could have been included, by implication, as part of those deliberations. For example, by the end of fiscal year 2004, based on delayed execution, about $136 million was reallocated from base infrastructure support, maintenance, and repair to fund Operation Iraqi Freedom costs. If insufficient funding sources were identified as part of an execution analysis, then it would be necessary to make affirmative decisions about reducing baseline programs to fund the balance of the GWOT needs. Those reductions, for the most part, had subsequent programmatic and financial impacts. Those changes required to support the increased GWOT needs were monitored and approved by the Office of the Under Secretary of Defense (Comptroller) staff during their annual budget and execution reviews. Some of the changes were recoverable (such as specific procurement and depot maintenance items considered deferrable and that could be funded with a subsequent year's money) and some changes were nonrecoverable (items considered nondeferrable current expenses, where the performance period has lapsed, but for which a subsequent year's funding is now available to fully meet that year’s requirements). For example, of the Navy and Marine Corps’ approximately $1.6 billion in absorbed costs in all appropriation accounts for the Department of the Navy ($1.4 billion was for Navy items, $200 million was for Marine Corps items), nearly 40 percent of the fiscal year 2004 requirements were considered recoverable with subsequent year’s funding. This included $200 million for drawing down the Navy Working Capital Fund, which was included in the Navy’s fiscal year 2005 supplemental appropriations request. As previously discussed, DOD used the military services’ working capital funds as a source of cash to provide funds for GWOT expenditures in fiscal year 2004. DOD’s working capital funds finance the operations of two fundamentally different types of support organizations: stock fund activities, which provide spare parts and other items to military units and other customers, and industrial activities, which provide depot maintenance, research and development, and other services, such as those provided by the Defense Financial Accounting Service, Defense Information Systems Agency, Defense Commissary Agency, and U.S. Transportation Command. In fiscal year 2004, DOD transferred about $3 billion from the military services’ working capital funds to help cover the Army’s gap between reported obligations and supplemental appropriations. While such transfers from the services’ working capital funds helped DOD cover its fiscal year 2004 gap, the transfers have left few working capital funds available to be used in fiscal year 2005. For example, to help cover the Army’s operation and maintenance gap, about $980 million was transferred from the U.S. Transportation Command’s Transportation Working Capital Fund during fiscal year 2004. This transfer was made possible due to a surplus of transportation charges collected from the military services by the U.S. Transportation Command during the year. However, a U.S. Transportation Command representative told us the transfers have left the fund’s balance below the minimum goal of $517 million. Specifically, with the transfer of almost $1 billion in fiscal year 2004 to help cover the Army’s operation and maintenance gap, as of July 2005, there was only $168 million remaining in the fund, well below the minimum goal for the year. Further, the representative stated that the projected fund balance for the end of fiscal year 2005 is about $231 million, still below the minimum goal. In determining how to cover the gaps between the services’ supplemental appropriations and reported GWOT obligations for military personnel and operation and maintenance expenses, DOD did not explicitly take into account the almost $7.9 billion in funds the Army, Air Force, and Navy received in their annual appropriations through Program Budget Decision 736 to help fund GWOT. This includes $1.3 billion received by the Army, $3.5 billion received by the Air Force, and $3 billion received by the Navy. If counted in fiscal year 2004 and applied to the services’ military personnel and operation and maintenance accounts, these amounts could have reduced the Army’s need to transfer funds from other activities and eliminated the GWOT gaps for the Air Force and the Navy, as shown in table 5. However, the services acknowledge that they have lost visibility over the Program Budget Decision 736 funds after fiscal year 2003 and do not know whether any of the funds were used in support of GWOT. We discussed our analysis with DOD representatives at each of the services’ budget offices, who disagreed with our depiction of Program Budget Decision 736. These representatives believed that our analysis should take into account the fact that the funds provided through Program Budget Decision 736 were included in DOD’s baseline budget and therefore were already taken into account when considering funds available for GWOT. Service budget representatives made the following observations regarding the Program Budget Decision 736 funds: Once merged into those baseline budgets, full justification for funding is provided in the annual President’s budget request. For example, increased funding for additional security personnel and physical security equipment were merged with existing program lines and not subsequently separately identified as to how they were initially funded or sustained over the years. Once the Program Budget Decision 736 funds were in the baseline budget, they were not in support of specific contingency operations, for which the Department of Defense Financial Management Regulation, Volume 12, Chapter 23, Contingency Operations, requires separate documentation and execution tracking, and no such requirement exists for “baselined” funds, other than the annual justification exhibits. That is, Chapter 23 only requires reporting incremental costs (costs not already in the baseline), and not total costs. Subsequent to Program Budget Decision 736 additional requirements were placed on the services fiscal year 2004-2009 spending program without accompanying funds. To meet these requirements service budget representatives said that they looked in part to the funds provided in Program Budget Decision 736. We recognize that DOD’s annual budget submissions include justification for all the department’s activities, including those funded through Program Budget Decision 736. However, the funds provided through Program Budget Decision 736 were identified as being in support of GWOT. While service budget representatives noted that the documentation and tracking requirements contained in the Department of Defense Financial Management Regulation, Volume 12, Chapter 23, Contingency Operations, do not apply to the funds provided through Program Budget Decision 736, we believe that DOD should have been tracking these funds in light of their connection to GWOT. While the services’ budget representatives told us that they took the funds provided through Program Budget Decision 736 into account in addressing GWOT funding needs, we note that once these funds were merged into the services’ baseline budgets visibility was lost so there is no assurance as to how the funds were taken into account or used. Our analysis of the military services’ reported obligations for the first 8 months of fiscal year 2005 and the military services’ forecasts as of June 2005 of full fiscal year 2005 costs suggest the services’ military personnel and operation and maintenance GWOT obligations could exceed available supplemental appropriations for the war in some accounts. Our projections of reported GWOT obligations through May 2005 suggest the services should have sufficient supplemental appropriations for military personnel expenses in fiscal year 2005 but that there could be gaps for operation and maintenance expenses for the Army and the Marine Corps. The services’ more detailed forecasts suggest a gap for military personnel expenses for the Air Force of about $500 million, and gaps for operation and maintenance expenses for the Army and Air Force of about $2.7 billion and about $1 billion, respectively. The Marine Corps expects its supplemental appropriations will be sufficient to cover its GWOT costs. To cover any gaps and meet its GWOT needs, DOD and the services plan to take a variety of actions, including reprogramming funds from annual appropriations and reducing or deferring planned spending for peacetime operations. Our assessment of reported obligations in fiscal year 2005 through May 2005 suggests that the military services should have sufficient supplemental appropriations for military personnel expenses in fiscal year 2005. As figure 1 shows, with 8 months, or about 67 percent, of the fiscal year gone, the Marine Corps has obligated 46 percent of its available supplemental appropriations; the Army 54 percent; and the Air Force and Navy 58 percent each. Our assessment of reported obligations within the military services’ operation and maintenance accounts through May 2005 suggests that the supplemental appropriations provided to the services for GWOT should be sufficient for the Air Force and Navy but not for the Army and Marine Corps. As shown in figure 2, the percentage of available supplemental appropriations obligated in the services’ operation and maintenance accounts as of May 2005, ranged from 49 percent for the Navy and 52 percent for the Air Force to 71 percent for the Army and the Marine Corps. We recognize that funds are not obligated equally each month throughout the fiscal year. However, we believe that the further into the fiscal year the closer to 100 percent obligations should be relative to appropriations if all appropriated funds are likely to be obligated. Consequently, given these obligation rates, we believe that if the Army and Marine Corps continue to obligate funds at the current rate or higher, their reported obligations within the operation and maintenance accounts could exceed available supplemental appropriations in fiscal year 2005, requiring them to use other authorities provided to them to cover the difference. However, as discussed below, the Air Force believes it will have an operation and maintenance gap, while the Marine Corps believes it will have sufficient funds for operation and maintenance. Each of the military services completed a midyear budget review for the Office of the Under Secretary of Defense (Comptroller), including a forecast of its full fiscal year 2005 GWOT needs. The Army concluded that it would not have sufficient supplemental appropriations to cover its projected GWOT operation and maintenance obligations, while the Air Force indicated its combined military personnel and operation and maintenance obligations would exceed available supplemental appropriations. With respect to the Army’s and Air Force’s midyear budget review projections: The Army forecast a GWOT gap of about $2.7 billion in its operation and maintenance account, of which a large component—about $1 billion—is attributed to higher fuel costs due to, among other things, the increase in June 2005 of DOD’s composite fuel rate from $56.28 per barrel to $73.08. Other components of the forecasted gap include support of the Army’s modular force initiative; higher spending in the second half of fiscal year 2005 as compared to the first half, resulting from deferred spending early in the fiscal year; and higher spending on recruiting and retention efforts, primarily for the Army Reserve. According to the Army, the modular force initiative and its reconstitution and reset efforts are being treated as GWOT costs in fiscal year 2005. The Air Force forecast a GWOT gap of about $500 million in its military personnel account and about $1 billion in its operation and maintenance account, for a total gap of about $1.5 billion. Air Force representatives attributed the gap in its military personnel account primarily to having higher-than-anticipated end-strength levels, and stated that the $1 billion gap in its operation and maintenance account is to replenish the Transportation Working Capital Fund, which was drawn down last year to help cover the Army’s fiscal year 2004 GWOT gap. Regarding the projected military personnel gap, Air Force representatives stated that funds were subsequently transferred to pay for prior obligations at higher-than-anticipated end-strength levels. Since then, the Air Force has corrected the end-strength imbalance and expects to be within end strength for GWOT during the remainder of the fiscal year. As a result of these actions, Air Force representatives no longer project a military personnel gap for GWOT in fiscal year 2005. The Navy projected a small gap of about $36 million for GWOT at the time of its midyear budget review, which it has since covered with cost savings from shifting the bulk of its transportation of equipment and supplies from air to sea. The Marine Corps indicated that its supplemental appropriations should be sufficient to cover reported GWOT obligations for fiscal year 2005. In considering the services’ midyear budget reviews, our analysis of the Navy and Marine Corps GWOT obligations indicates substantial under execution in the Navy’s operation and maintenance account and the Marine Corps’s military personnel account. In response, the Navy stated that it expects its rate of obligating GWOT funds to increase toward the end of fiscal year 2005 due to, among other things, providing additional support in theatre and on the ground in Iraq as part of Joint Sourcing. According to a Navy representative, the Navy had about 5,000 personnel stationed on the ground in Kuwait, Iraq, and Afghanistan at the end of fiscal year 2004. By the end of fiscal year 2005, the Navy plans to have about 8,500 personnel in theatre with the additional personnel having begun to deploy in May 2005. The Marine Corps stated it expects to obligate an additional $220 million in military personnel funds due to the new death gratuity benefit, while another $265 million in military personnel funds will be used to replenish the Marine Corps’s annual appropriation for funds reprogrammed earlier in the fiscal year to buy additional body-armor and other equipment to counter the use of improvised explosive devices in Iraq. To cover the forecasted GWOT needs for fiscal year 2005, DOD, the Army, and the Air Force have identified a number of steps they plan to take. These include exercising a number of authorities provided to them, such as transferring and reprogramming funds from annual appropriations and reducing or deferring planned spending for peacetime operations. The Army, the service with the largest forecasted gap in its operation and maintenance account, plans to take a variety of actions to meet its fiscal year 2005 GWOT funding needs. Some actions include taking steps to transfer or reprogram funds. For example, DOD reprogrammed more than $800 million in funds in May 2005 from the military personnel accounts of the Air Force, Navy, Marine Corps, and Army National Guard, and $250 million from the Army’s Working Capital Fund, to the Army to meet urgent GWOT needs. Other actions the Army plans to take to help fund GWOT in fiscal year 2005 involve reducing or deferring current costs. For example, the Army reports that it has been able to reduce its fiscal year 2005 Logistics Civil Augmentation Program (LOGCAP) contract costs by about $890 million by reviewing and reducing current LOGCAP requirements. In discussing its plans to meet its fiscal year 2005 GWOT needs, the Army plans to use any surplus funds in its working capital fund to help cover any fiscal year 2005 GWOT gaps. However, due to the transfers from the services’ working capital funds to cover the fiscal year 2004 gaps, as discussed above, few assets remain elsewhere to cover the Army’s fiscal year 2005 GWOT gap. Should the Army’s GWOT gap be larger than forecasted, the Army may have to absorb the difference in its annual appropriation. The Air Force also plans to take a variety of actions to address the gap between its supplemental appropriations and reported operation and maintenance obligations for GWOT. These include decreasing peacetime flying hours by $700 million, reducing or deferring depot maintenance activities by $400 million, and freezing activities involving facility sustainment and restoration modernization projects. Other areas that could be targeted for cost reductions or deferments include noncritical travel and other supplies and equipment. To meet its GWOT needs in fiscal year 2005, DOD is again not explicitly considering the Program Budget Decision 736 funds to support GWOT that were provided to the military services through their annual appropriations. However, as discussed earlier, unlike in fiscal year 2004, in fiscal year 2005 some of the funds provided in Program Budget Decision 736 are being used to fund Operation Noble Eagle, which had previously been funded as part of GWOT through supplemental appropriations. In fiscal year 2004 DOD had included $2.2 billion in its budget request for Operation Noble Eagle. Adjusting for Operation Noble Eagle at the fiscal year 2004 funding level would result in more than $5.4 billion in funds included in Program Budget Decision 736 in support of GWOT for the military services remaining available in fiscal year 2005. If counted in fiscal year 2005, the amounts potentially could reduce the need for reprogrammings from other activities and could reduce the Army’s and eliminate the Air Force’s GWOT gaps. Instead, as in fiscal year 2004, the Office of the Under Secretary of Defense (Comptroller) and the military services will again meet those needs by taking actions that may affect DOD’s peacetime operations, such as reducing or deferring planned spending. In some instances, these funding reductions and deferments could add to future spending pressures in fiscal year 2006 or potentially in later years and run the risk of producing a large “bow wave” of requirements. This can have both short-term and long-term impacts. In the short term, deferring spending can lead to higher costs than expected later in the current fiscal year, which may need to be covered by additional transfers and reprogrammings. In the long term, continued deferments can lead to higher costs. The extent to which one considers that GWOT funding has been sufficient depends on whether one counts both funding provided through supplemental appropriations and funding included in DOD’s annual appropriation, which DOD requested for GWOT. The administration increased DOD’s annual appropriation request by more than $10 billion annually beginning in fiscal year 2003 to support GWOT, with the military services receiving about $7.9 billion of that amount in fiscal year 2004 and about $7.6 billion in fiscal year 2005. The military services absorbed the increase into their annual appropriations and allocated it based on their judgment of where the funds were most needed. Since DOD’s accounting systems do not separately identify these additional appropriations and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated, the military services have lost visibility over these funds and do not know the extent to which they are being used to support GWOT. Consequently, despite having asked for the increase, DOD is not explicitly counting the more than $10 billion when considering funding for GWOT. In fiscal year 2004, the military services reported obligations in support of GWOT that were above the supplemental funds appropriated by the Congress. In response, DOD used authorities granted to it, including transferring funds and reducing or deferring planned spending for peacetime operations, to cover the gaps. However, if the additional funds that were included in DOD’s annual appropriation to help fund the war are included in the analysis, those funds could potentially have reduced the Army’s gap and eliminated the gap for the Air Force and Navy in fiscal year 2004. In fiscal year 2005, the Army and the Air Force are again projecting obligations for the war above their supplemental appropriations, and DOD is taking steps to cover the gaps. As was the case in fiscal year 2004, the additional funds that were included in DOD’s annual appropriation to help fund the war potentially could reduce or eliminate the projected gaps for the Army and Air Force. With military operations in Iraq and Afghanistan ongoing, and the likely need for DOD to request additional funds to support GWOT, it is important that DOD fulfill its role as a steward of taxpayer funds by taking steps to account for all the funds it receives for the war. To improve the visibility and accountability of DOD’s use of funds for GWOT, we recommend that the Secretary of Defense, in future requests for supplemental appropriations, adjust such requests to reflect the additional funds DOD requested and received in its annual appropriations to support GWOT and provide the Congress with an explanation of these adjustments. We further recommend that in addressing any future GWOT funding needs the Secretary consider the additional GWOT funds provided through the department’s annual appropriation when assessing how to cover expenses for the war and document its decisions. Because DOD did not concur with our recommendation to adjust its future supplemental appropriations requests to reflect the additional funds the department requested and received in its annual appropriations to support GWOT and explain these adjustments to the Congress, we have no confidence that the Congress will receive the information that we believe the Congress needs to properly assess DOD’s requests for supplemental appropriations to support the war. Further, because the amount of funds DOD is receiving to support GWOT through its annual appropriations is substantial—more than $10 billion annually—the Congress should consider directing DOD, when it submits future supplemental appropriations requests, to provide an explanation of how such requests reflect the funds DOD requested and already received in its annual appropriations to support GWOT. DOD provided written comments on a draft of this report. Its comments are discussed below and are reprinted in appendix II. DOD did not concur with our recommendations. DOD further commented that the report confuses a Program Budget Decision, which is an internal document, with the President’s budget, which is the official explanation of DOD’s budget request, and that funds are not appropriated in accordance with a Program Budget Decision. In addition, DOD commented that the report’s focus on the Program Budget Decision results in the inaccurate conclusion that if DOD had considered these funds it could have reduced the Army’s GWOT gap and eliminated the GWOT gaps of the Air Force and Navy. In that regard, DOD stated that the only resources available to the department are those appropriated by the Congress and these funds were considered when determining the needs and expenses of the war. We recognize that a Program Budget Decision is an internal document and that the President’s budget is the official explanation of DOD’s budget request and that funds appropriated are determined by the Congress—not by either a Program Budget Decision or the President’s budget. In our report, we refer to Program Budget Decision 736 and the President’s budget not to establish how much money the Congress appropriated to support GWOT, but to establish how much money DOD intended for GWOT. As stated in our report, according to a representative from the Office of the Under Secretary of Defense (Comptroller), in December 2001 the President directed that his annual budget submission for DOD be increased by about $10 billion annually to support GWOT. Consequently, Program Budget Decision 736, entitled Continuing the War on Terrorism and dated January 31, 2002, was approved by the Under Secretary of Defense (Comptroller). Program Budget Decision 736 provided for increasing DOD’s annual budget request in the amount of more than $10 billion per year plus inflation in fiscal years 2003 through 2007 to enhance the department’s efforts to respond to, or protect against, acts or threatened acts of terrorism against the United States. We therefore believe that since the funds referenced in Program Budget Decision 736 were specifically identified as being requested in support of GWOT, DOD should maintain visibility over how these funds were used to support GWOT. We believe that if DOD asks for a significant increase in appropriations and explains that the increase is needed to support GWOT, DOD should be able to show that it actually used those funds for GWOT. DOD did not concur with our recommendations that the Secretary of Defense (1) adjust future supplemental appropriations requests to reflect the additional funds DOD received in its annual appropriations to support GWOT and explain these adjustments to the Congress and (2) also consider the additional GWOT funds provided through DOD’s annual appropriations in addressing any future GWOT funding needs. In commenting on our first recommendation, DOD stated that the department’s supplemental appropriations request accounts for all relevant adjustments to the annual appropriation bill. DOD also commented that it builds and submits supplemental appropriations requests based on the incremental cost of the operation, which it described as those additional costs to the DOD component conducting the operation that are not covered in their existing budgets and would not have been incurred had they not been supporting the contingency. It is not apparent, however, that DOD’s request for supplemental appropriations for fiscal year 2004 in fact reflected amounts already appropriated. The President’s fiscal year 2005 supplemental appropriations request did reflect amounts already enacted, but only because the Office of Management and Budget, not DOD, made the adjustments. As we discuss in this report, DOD included a $10 billion increase in its fiscal year 2004 annual appropriations in order to support GWOT. In its Program Budget Decision 736, DOD stated that $1.2 billion of that amount would be used for combat air patrols over U.S. cities, which is part of Operation Noble Eagle. At the same time, in its fiscal year 2004 supplemental appropriations request for GWOT, DOD included funding for Operation Noble Eagle, but without explaining why it needed amounts in addition to those that the Congress already provided. In addition, although DOD stated that the department’s supplemental appropriations request accounts for all relevant adjustments to the annual appropriation bill, as stated in our report, in a November 2004 memorandum issued by the Office of the Under Secretary of Defense (Comptroller) the Comptroller’s office sought to adjust DOD’s supplemental appropriations request for fiscal year 2005 to reflect funds already provided. In that memorandum, the Office of the Under Secretary of Defense (Comptroller) stated that funding in fiscal year 2005 for GWOT missions previously added to the baseline budget (e.g., Program Budget Decision 736, Continuing the War on Terrorism) should be explicitly identified as a reduction to funding requests in those areas, as appropriate. The memorandum further requested that the components’ submissions should show the total requirement and note the level of funding already in the baseline for this purpose. The memorandum directed that the services’ supplemental appropriations requests net out the available funding and address the incremental costs above the baseline funding needed to support specific forces and capabilities required to execute Operation Iraqi Freedom, Operation Enduring Freedom, and portions (to be determined) of Operation Noble Eagle. However, as stated in our report, none of the military services provided the information requested in the November 2004 memorandum and instead the military services requested supplemental appropriations for Operation Noble Eagle. Nevertheless, in preparing the fiscal year 2005 supplemental appropriations request, the Office of Management and Budget did not include Operation Noble Eagle in the President’s budget request because funds had already been included in DOD’s annual appropriation, pursuant to DOD’s request, as described in Program Budget Decision 736. We believe that our recommendation has merit and have retained it. In addition, since DOD does not agree with the recommendation and the amount of funds at issue is substantial—more than $10 billion annually— we have added a matter for congressional consideration. Specifically, the Congress should direct DOD, when it submits future supplemental appropriations requests, to provide an explanation of how such requests reflect the additional funds that were addressed in Program Budget Decision 736 and which DOD requested and received in its annual appropriations to support GWOT. With respect to our second recommendation, DOD commented that it considers all funds provided through the department’s annual appropriation when addressing how to cover expenses for the war. We recognize that DOD reviews all funds when determining how to cover its GWOT needs. However, DOD, as it explained in Program Budget Decision 736, intended increased annual appropriations to support GWOT, but then lost visibility of the funds requested. There is no documentation, therefore, regarding how the department took the funds that it requested into account or whether it was applying the entire amount to cover its GWOT needs. We believe that since DOD stated that the additional annual funds were needed to support GWOT, and DOD continues to include this funding in its request for annual appropriations, to fulfill its role as a steward of taxpayer funds DOD should explicitly maintain visibility over how these funds are used to support GWOT and consider the entire amount to be available for GWOT. We therefore continue to believe our recommendation has merit and have retained it, including expanding it to recommend that DOD also document its decisions. We are sending copies of this report to other interested congressional committees; the Secretary of Defense; the Under Secretary of Defense (Comptroller); and the Director, Office of Management and Budget. Copies of this report will also be made available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-9619 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Principal contributors to this report were Steve Sternlieb, Assistant Director; Richard K. Geiger; Wesley A. Johnson; James Nelson; and David Mayfield. To identify funding for the Global War on Terrorism (GWOT), we reviewed applicable annual and supplemental Department of Defense (DOD) appropriations in fiscal years 2004 and 2005. We also reviewed DOD reports on the transfer of funds from the Iraqi Freedom Fund to support GWOT activities, and DOD reports on the transfer or reprogramming of funds among various appropriation accounts or budget activities to support GWOT. In addition, we reviewed material related to the decision to add funds to DOD’s annual appropriation to support GWOT, specifically Program Budget Decision 736, entitled Continuing the War on Terrorism, dated January 31, 2002, and approved by the Under Secretary of Defense (Comptroller). To assess the extent of differences between supplemental appropriations and reported obligations for GWOT, we compared supplemental appropriations provided to the military services to reported obligations in fiscal year 2004 and reported obligations through May 2005 and assessed obligations through May 2005 for fiscal year 2005. Specifically, we identified applicable supplemental appropriations in fiscal years 2004 and 2005 and compared them to the reported amounts obligated by each service in DOD’s Supplemental and Cost of War Execution Reports. We limited our review to the obligation of funds appropriated for military personnel and operation and maintenance for the Army, Air Force, Navy, and Marine Corps, for both active and reserve forces, because they represented the majority of the funds obligated in fiscal years 2004 and 2005, about 90 percent in each year. We excluded classified programs from our review, because obligations for those programs are not reported in DOD’s Supplemental and Cost of War Execution Reports. We did not review the obligation of funds for investment, which are used for procurement; military construction; and research, development, test, and evaluation. In addition, for fiscal year 2005, we reviewed the latest available obligation data and held discussions with the military services on the results of their midyear budget reviews. We compared the services’ reported military personnel and operation and maintenance obligations through May 2005, the latest available obligation data at the time of our review, to the supplemental appropriations provided to calculate the proportion of funds obligated through May. We then compared those proportions to the proportion of the fiscal year that has elapsed through May—which represents 67 percent of the fiscal year—to assess whether based on obligations through May funding is likely to be adequate. We recognize that funds are not obligated equally each month throughout the fiscal year. However, we believe that the further into the fiscal year the closer to 100 percent obligations should be relative to appropriations if all appropriated funds are likely to be obligated. GWOT obligations provided in this report are DOD’s claimed obligations as reported in the Supplemental and Cost of War Execution Reports. In related work, we have reported these data to be of questionable reliability. For example, we found financial management systems with acknowledged weaknesses, a lack of systematic processes to ensure accurate data entry, failure to use actual data when it was available, and improperly categorized costs. Therefore, we are unable to ensure that DOD’s reported obligations for GWOT are complete, reliable, and accurate. Consequently, the gaps we identify between supplemental appropriations and DOD’s reported obligations may not reliably reflect true differences between supplemental appropriations and obligations and therefore should be considered approximations. Despite the uncertainty about the obligation data, we are reporting the information because it is the only data available on overall GWOT costs and the only way to approach an estimate of the costs of the war. Also, despite the uncertainty surrounding the true dollar figure for obligations, these data are used to advise the Congress on the cost of the war. As such, obligation data provided in this report reflect DOD reported obligations, however unreliable those reports may be. To determine actions taken by DOD and the services to cover any identified gaps between reported obligations and supplemental appropriations for GWOT, we held discussions with DOD representatives from the Office of the Under Secretary of Defense (Comptroller) and the Army, Air Force, Navy, and Marine Corps. At the major command level, we discussed with service representatives any actions taken to cover gaps and the impacts of actions taken to cover those gaps on their budgeted peacetime operations. We interviewed DOD representatives regarding GWOT obligations and funding for fiscal years 2004 and 2005 in the following locations: Office of the Under Secretary of Defense (Comptroller), Washington, D.C. Department of the Army, Headquarters, Washington, D.C. Army Forces Command and Headquarters, Third Army, Fort McPherson, Georgia. Army Installation Management Agency, Arlington, Virginia. Army Materiel Command, Fort Belvoir, Virginia. Army Pacific Command, Fort Shafter, Hawaii. Department of the Air Force, Headquarters, Washington, D.C. Air Force Air Combat Command, Langley Air Force Base, Virginia. Air Force Air Mobility Command, and Headquarters, U.S. Transportation Command, Scott Air Force Base, Illinois. Department of the Navy, Headquarters, Washington, D.C. Navy Atlantic Fleet Command, Norfolk Naval Base, Virginia. Navy Pacific Fleet Command, Pearl Harbor, Hawaii. Marine Corps, Headquarters, Washington, D.C. Marine Corps Forces, Pacific, Camp Smith, Hawaii. We performed our work from November 2004 through August 2005 in accordance with generally accepted government auditing standards.

To assist the Congress in its oversight role, GAO is undertaking a series of reviews on the costs of operations in support of the Global War on Terrorism (GWOT). In related work, GAO is raising concerns about the reliability of the Department of Defense's (DOD) reported cost data and therefore is unable to ensure that DOD's reported obligations for GWOT are complete, reliable, and accurate. In this report, GAO (1) identified funding for GWOT in fiscal years 2004 and 2005, (2) compared supplemental appropriations for GWOT in fiscal year 2004 to the military services' reported obligations, and (3) compared supplemental appropriations for GWOT in fiscal year 2005 to the military services' projected obligations. In fiscal years 2004 and 2005, DOD received funding for GWOT through both funds included in its annual appropriation and supplemental appropriations. In fiscal years 2004 and 2005, the military services received about $52.4 billion and $62.1 billion, respectively, in supplemental appropriations for GWOT (1) military personnel and (2) operation and maintenance expenses. The Army, Air Force, and Navy also received in their annual appropriations a combined $7.9 billion in fiscal year 2004 and a combined $7.6 billion in fiscal year 2005, which DOD described as being intended to support GWOT. The military services absorbed the increase into their annual appropriations and allocated it based on their judgment of where the funds were most needed. DOD's accounting systems, however, do not separately identify these additional appropriations, and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated; consequently, the military services have lost visibility over these funds and do not know the extent to which they are being used to support GWOT. Despite having asked for the increase to support GWOT, DOD is not explicitly counting these additional funds when considering the amount of funding available to cover GWOT expenses. For fiscal year 2004, regarding supplemental appropriations for GWOT military personnel expenses, the Navy and Marine Corps reported more in obligations than they received in supplemental appropriations, while the Army and Air Force received more in supplemental appropriations than their reported obligations. Each of the services reported more in GWOT operation and maintenance obligations than it received in supplemental appropriations. To cover the differences (gaps), DOD and the services exercised a number of authorities provided them, including transferring funds and reducing or deferring planned spending for peacetime operations. However, in considering the amount of funding available to cover the gaps, DOD did not explicitly take into account the funds provided through its annual appropriation that as previously noted it described as for the support of GWOT. If DOD had considered these funds, it could have reduced the Army's GWOT gap and eliminated the GWOT gaps of the Air Force and Navy. For fiscal year 2005, the services' forecasts of GWOT obligations for the full fiscal year as of June 2005 suggest a potential gap of $500 million for military personnel for the Air Force and potential gaps of about $2.7 billion and about $1 billion, respectively, for operation and maintenance for the Army and Air Force. To cover expenses, DOD and the services again plan to take a variety of actions, including reprogramming funds and reducing or deferring planned spending. However, DOD is again not explicitly considering the funds provided through its annual appropriation, which it described as for the support of GWOT. If counted in fiscal year 2005, the amounts potentially could reduce the Army's and eliminate the Air Force's GWOT gaps and eliminate the need for reprogramming funds and reducing or deferring planned spending.

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As the economy begins to recover from the financial crisis, the extraordinary government interventions taken to stabilize the financial system will need to be withdrawn. The consequences of financial crises— specifically systemic bank-based crises—on economic activity have been well documented. As a result, governments and monetary authorities typically undertake interventions, even though the resulting actions raise concerns about moral hazard and can come at a significant expense to taxpayers. Given its severity and systemic nature, the recent global financial crisis prompted substantial interventions starting as early as September 2007, after the first signs of serious trouble in the subprime mortgage market surfaced (see app. II). In the early stages of the financial crisis, the observable policy responses were a Department of Housing and Urban Development (HUD)-initiated foreclosure prevention program, a Federal Reserve lending facility for depository institutions, and currency swap arrangements with various foreign central banks. As the crisis intensified, additional lending facilities were created, followed by separate actions by the Federal Reserve, Treasury, and others that dealt with financial sector issues on a case-by-case basis. These actions included facilitating JPMorgan Chase & Co.’s purchase of Bear Stearns Companies, Inc.; addressing problems at Fannie Mae and Freddie Mac by placing them into conservatorship; working with market participants to prepare for the failure of Lehman Brothers; and lending to American International Group (AIG) to allow it to sell some of its assets in an orderly manner. Although Treasury had begun to take a number of broader steps, including establishing a temporary guarantee program for money market funds in the United States, it decided that additional and comprehensive action was needed to address the root causes of the financial system’s stresses. The passage of EESA and authorization of TARP provided Treasury with the framework it needed to begin its more comprehensive and coordinated course of action that ultimately resulted in several programs. Some TARP funds were utilized to launch joint programs or to support efforts principally led by other regulators. Concurrent with the announcement of the first TARP program, the Federal Reserve and FDIC also announced other actions that were intended to stabilize financial markets and increase confidence in the U.S. financial system. This system-wide approach was also coordinated with a number of foreign governments as part of a global effort. The various initiatives under TARP are detailed below. Capital Purchase Program (CPP). CPP was intended to restore confidence in the banking system by increasing the amount of capital in the system. Treasury provided capital to qualifying financial institutions by purchasing preferred shares and warrants or subordinated debentures. Capital Assistance Program (CAP). CAP was designed to further improve confidence in the banking system by helping ensure that the nation’s largest banking institutions had sufficient capital to cushion themselves against larger than expected future losses, as determined by the Supervisory Capital Assessment Program (SCAP)—or “stress test”— conducted by federal regulators. Consumer & Business Lending Initiative (CBLI). CBLI was designed to support new securitizations in consumer and business credit markets, especially for auto, student, and small business loans; credit cards; and new and legacy securitizations of commercial mortgages to increase credit availability in these markets and now includes small business lending programs as well. A portion of the CBLI funds were used to support the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). Under TALF, the Federal Reserve provided loans to private investors who pledged securitizations as collateral and Treasury provided a government backstop against certain losses. Public Private Investment Program (PPIP). PPIP was designed to facilitate the purchase of “legacy assets” as part of Treasury’s efforts to facilitate price discovery in markets for these assets, repair balance sheets throughout the financial system, and increase the availability of credit to households and businesses. The legacy securities program, or “S-PPIP,” partnered Treasury and private sector equity funding leveraged by Treasury loans to purchase and hold legacy residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). In the original plan, PPIP was to also include a partnership between Treasury and FDIC to purchase and hold legacy loans, through the legacy loans program, or “L-PPIP,” but it was never implemented as a joint venture using TARP funds. Making Home Affordable Program (MHA). MHA was launched to offer assistance to homeowners through a loss-sharing arrangement with mortgage investors and an incentive-based system for borrowers and servicers in order to prevent avoidable foreclosures. Under MHA, Treasury developed the Home Affordable Modification Program (HAMP) as its cornerstone effort to meet EESA’s goal of protecting home values and preserving homeownership by helping at-risk homeowners avoid potential foreclosure, primarily by reducing their monthly mortgage payments. Targeted Investment Program (TIP). The stated purpose of TIP was to foster market stability and thereby strengthen the economy by making case-by-case investments in institutions that Treasury deemed critical to the functioning of the financial system. TIP was designed to prevent a loss of confidence in financial institutions that could (1) result in significant market disruptions, (2) threaten the financial strength of similarly situated financial institutions, (3) impair broader financial markets, and (4) undermine the overall economy. The AIG Investment Program. Formerly the Systemically Significant Failing Institutions program, the goal of the AIG Investment Program was to provide stability in financial markets and avoid disruptions to the markets from the failure of a systemically significant institution. Treasury has purchased preferred shares and warrants in AIG and provided a facility for additional investment as needed up to a limit. Asset Guarantee Program (AGP). AGP provided government assurances for certain assets held by financial institutions that are viewed as critical to the functioning of the nation’s financial system. The goal of AGP was to encourage investors to keep funds in the institutions. According to Treasury, placing guarantees, or assurances, against distressed or illiquid assets was viewed as another way to help stabilize the financial system. Automotive Industry Financing Program (AIFP). The goal of AIFP was to help stabilize the American automotive industry and avoid disruptions that would pose systemic risk to the nation’s economy. Under this program, Treasury has authorized TARP funds to help support automakers, automotive suppliers, consumers, and automobile finance companies. A sizeable amount of funding has been to support the restructuring of Chrysler Group LLC (Chrysler) and General Motors Company (GM). Taken together, the concerted actions by Treasury and others have been credited by many market observers with averting a more severe financial crisis, although there are critics who believe that markets would have recovered without government support. Particular programs have been reported to have had the desired effects, especially if stabilizing the financial system and restoring confidence was considered to be the principal goal of the intervention. In our October 2009 and February 2010 reports we noted that some of the anticipated effects on credit markets and the economy had materialized while some securitization markets had experienced a tentative recovery. Yet, experience with past financial crises, coupled with analysis of the specifics of the current situation, has led the Congressional Budget Office to predict a modest recovery that will not be robust enough to appreciably improve weak labor markets through 2011. Full recovery will likely take some time given years of excesses, including imprudent use of leverage at financial institutions, overvalued asset prices, and major imbalances in the fiscal and household sectors. Negative shocks like the recent turmoil in international capital markets stemming from European sovereign debt issues have the potential to delay the recovery as well. Because markets have stabilized, private markets have reopened, and economic growth has resumed, the federal government has begun to move into the exit phase of its financial stabilization initiatives. The winding down of government support is made more pressing by the need to exit market distorting interventions as quickly as possible and to begin shifting focus from the financial crisis to stabilizing the government debt-to-gross domestic product ratio. Crisis-driven interventions are designed to be temporary because they distort the normal functioning of markets and involve public capital when, under normal conditions, private capital is more desirable. Moreover, as we have pointed out in previous reports, the U.S. government faces an unsustainable long-term fiscal path. While these fiscal imbalances predate the financial crisis, the government’s response to the crisis has exacerbated an already challenging fiscal environment. As a result, even as some programs have ramped up to address specific issues, many others have either expired or are already winding down— including those utilizing TARP funds (see app. II). Many programs were designed to wind down naturally, force financial institutions to raise private capital, or become unattractive to participants once markets recovered. Treasury’s authority under EESA to purchase, commit to purchase, or commit to guarantee troubled assets was set to expire on December 31, 2009, unless the Secretary submitted a written certification to Congress extending these authorities. In anticipation of the upcoming decisions on the future of TARP, the need to unwind the extraordinary federa l support across the board, and the fragile state of the economy we made recommendations to Treasury in our October 2009 report. Specifically, we suggested that any decision to extend TARP be made in coordination with relevant policymakers. We also suggested that Treasury make use of quantitative analysis wherever possible to support the rationale and communicate its determinations to Congress and the American peo noted that without a robust analytic framework, Treasury may be challenged in effectively carrying out the next stages of its programs. Treasury responded that in deciding whether to extend TARP auth beyond December 31, 2009, the Secretary would “coordinate with appropriate officials to ensure that the determination is considered in a broad market context that takes account of relevant objectives, cos measures” and would communicate the rationale for the decision. On December 9, 2009, the Secretary announced that he was extending Treasury’s authority under EESA to purchase, commit to purchase, or commit to guarantee troubled assets until October 3, 2010 (TARP expiration date). After the expiration date, no TARP funds can be committed, but there may be expenditures to fund commitments entered into prior to the expiration date. The extension of TARP permits Treasury to reallocate existing commitments and make additional funds available for some programs. As is shown in table 1, according to Treasury, new commitments through October 3, 2010, will be limited to MHA and small business lending programs through CBLI. The funds allocated to MHA have not been increased beyond the initial $50 billion Treasury estimated would be committed under the TARP-funded program. At time of the decision to extend, Treasury had committed $40 billion under existing MHA programs; however, according to Treasury, they had always contemplated additional MHA programs, such as programs to address negative equity. Treasury indicated that the extension of TARP gave them more time and flexibility to build out those programs as well as more time to decide how best to allocate the remaining $10 billion in order to prevent avoidable foreclosures. All other programs, including TIP, have closed or will close by June 30, 2010, and no additional funds will be committed under those programs. However, additional expenditures, which have already been apportioned and accounted for, could occur after the TARP termination date for TALF, PPIP, and the AIG Investment Program to fund commitments made prior to December 2009, and investments acquired through a variety of TARP actions remain under Treasury’s management. Nevertheless, the extension has formally moved TARP from a program with a heavy focus on capitalizing institutions and stabilizing securitization markets to one focused primarily on mitigating preventable foreclosures and improving financial conditions for small banks and small businesses. Treasury estimates that new commitments under MHA and CBLI could increase the costs of TARP by $25 billion. Even with these additional costs, Treasury expects that TARP will ultimately cost taxpayers $105.4 billion, more than $200 billon less than initially estimated. The Secretary also notified Congress that Treasury expected to use no more than $550 billion of the approximately $700 billion authorized by EESA but reserved the authority to use the remaining funds to respond “to an immediate and substantial” threat to the economy “stemming from financial instability.” In the absence of such threats, Treasury indicated that those resources would be used to pay down the federal debt over time. In his letter to Congress communicating the decision, the Secretary also expressed a desire to expedite both the liquidation of the equity investments and the repayment of funds extended to TARP recipients. As of June 7, 2010, total TARP repayments were roughly $195 billion. Pending legislation, if enacted, would require the Secretary to use any amounts repaid by financial institutions for debt reduction. The decision to extend TARP followed months of deliberation and internal discussions that began in August 2009. Treasury officials told us that while the decision to extend TARP could have been made earlier, it was not made until December to be certain that extension was necessary and so that the Secretary would be able to consider what conditions to place on the extension to balance the need to minimize the cost to taxpayers while ensuring that the program met its core objectives. According to Treasury officials, this decision was made at the highest levels within the agency. Discussions centered on how to phase out TARP and other government programs adopted in response to the financial crisis generally, as well as what limits to place on an extension, and what programs would not need to be continued beyond the original expiration date of December 31, 2009. Treasury officials indicated this discussion generally did not take place at the program level, but included a range of officials from various Treasury offices. Internal memos and briefing documents suggest considerable deliberation took place on the effectiveness of existing government actions as well as the likely effectiveness of potential policy options to address remaining threats to financial stability. Other programs operated by Treasury and other government agencies were important parts of these deliberations. According to Treasury, the modest pace of the economic recovery and concern about exiting TARP prematurely meant that the likelihood of not extending was low, but programs that were no longer needed were to be terminated. In addition, Treasury believed that while the decision could have been made at an earlier date, officials decided it was better to wait until closer to the certification deadline in order to have a more targeted response. Treasury also considered not extending TARP and instead making up front commitments to problem areas based on available information, but ultimately decided that the additional flexibility and better information that would come from the extension would be preferable. As part of a robust analytic framework for decision making, we recommended that the Secretary coordinate with the Federal Reserve and FDIC to help ensure that the decision to extend or terminate TARP was considered in a broader market context. Treasury officials said that it had external discussions and consultations in the months prior to the decision to help ensure that the decision-making process incorporated the actions of key financial regulators. Treasury officials also said that the Secretary had discussions with the Chairmen of the Federal Reserve and the FDIC regarding TARP and the status of crisis programs instituted at each respective agency. Treasury officials noted that EESA required additional coordination with the Federal Reserve because it required the Secretary to consult with the Chairman of the Federal Reserve in order to purchase financial instruments other than those related to residential and commercial real estate. This consultation, which included communication among principals and staff of the two agencies, is represented in several letters by the Chairman to the Secretary reflecting the required consultations prior to the initiation of several TARP programs unrelated to residential and commercial real estate. In addition, Federal Reserve officials stated that the Chairman and Vice Chairman of the Federal Reserve were broadly supportive of the decision to extend TARP. The officials said that the Chairman was consulted by the Secretary on multiple occasions. The Federal Reserve noted that there was consistent coordination at the staff level regarding the TALF program, primarily due to the joint nature of the program. Another forum for coordination around the decision to extend TARP was FinSOB. FinSOB meeting minutes detailed discussions of the decision to extend TARP and the general economic situation. While there was discussion of the decision, FinSOB did not, nor was it required to, authorize or approve the Secretary’s action. The Secretary also discussed the extension of TARP with the Chairman of FDIC. In particular, both agencies told us that they discussed the timing of FDIC’s exit from programs designed to support the banking system. According to Treasury officials, Treasury took into consideration the winding down of FDIC’s Temporary Liquidity Guarantee Program (TLGP), which was designed to support bank debt and transaction accounts, in deciding to extend TARP. At the time Treasury made the decision to extend TARP, TLGP was scheduled to end June 30, 2010. FDIC subsequently extended TLGP to December 31, 2010. As Treasury shifts into the exit phase of TARP, it faces upcoming decisions that would benefit from continued collaboration and communication with other agencies including: decisions about allocating any additional funds to MHA and CBLI, decisions about scaling back various programs, and ongoing decisions related to the general exit strategy, including unwinding the equity investments held as a result of actions taken under TARP. Similar to the need for a coordinated course of action to stabilize the financial system and re-establish investor confidence, the general exit from the government interventions will require coordination to develop a unified disengagement strategy. As mentioned previously, TARP is one of many programs and activities the federal government has put in place over the past year to respond to the financial crisis (see also app. II). In general, the extent of coordination with the Federal Reserve was consistent with our recommendation and represented the type of collaboration necessary for the next stage of the government response to the crisis. However, the extent of Treasury’s coordination with FDIC, while sufficient for the decision to extend TARP, should be enhanced and formalized for any upcoming decisions that would benefit from interagency collaboration. FinSOB, which was established to help oversee TARP and other emergency authorities and facilities granted to the Secretary under EESA, is composed of the Secretary, the Chairman of the Board of Governors of the Federal Reserve, the Director of FHFA, the Chairman of the Securities Exchange Commission, and the Secretary of HUD. Therefore many of the regulators who led the federal response to the financial crisis are already part of a collaborative body. As a result, FinSOB has been a vehicle for formal consultations over TARP decisions among the agencies that are represented on FINSOB under EESA. By adding future program decisions to the agenda, including decisions on future TARP commitments, FinSOB can continue to serve a role in the next phase of the TARP program as well as in the consideration of exit strategies. Because FINSOB membership is set by statute, Treasury should seek to conduct similar consultations with other agencies that are not represented on FinSOB, such as the FDIC, or these agencies could be invited occasionally to discuss specific issues. Treasury considered a number of qualitative and quantitative factors for key decisions associated with the TARP extension. Important factors considered for the extension of TARP centered on ongoing weaknesses in key areas of the economy. Treasury officials noted that housing market indicators, despite previously announced initiatives, and financial conditions for small businesses necessitated further commitments under MHA and small business lending programs. Treasury underscored that while analysis was possible on the need for or success of individual programs, the fragile state of the economy and remaining downside risks were an ongoing source of uncertainty. Considering this uncertainty, Treasury wanted to extend TARP through October 2010 in order to retain resources to respond to financial instability. On the other hand, Treasury noted that some programs had accomplished their goals and would be terminated. Treasury cited renewed ability of banks to access capital markets, improvements in securitization markets, and stabilization of certain legacy asset prices as motivating the closing of bank capital programs, TALF, and PPIP, respectively. Treasury could strengthen its analytical framework by identifying clear objectives for small business programs and explaining how relevant indicators motivated TARP program decisions. Treasury officials identified four documents that were central to its efforts to describe and communicate to Congress and the public the framework it used to make decisions related to the extension of TARP, the expansion of some efforts, and the termination of others. Those four documents were (1) the September 2009 report “The Next Phase of Government Financial Stabilization and Rehabilitation Policies”; (2) the December 9, 2009, letter to Congressional leadership certifying the extension of TARP; (3) Secretary Geithner’s December 10, 2009, testimony to the Congressional Oversight Panel; and (4) the “Management Discussion and Analysis” portion of the fiscal year 2009 Office of Financial Stability Agency Financial Report. Based on our analysis of these documents and interviews with Treasury officials, table 2 summarizes the key factors that contributed to Treasury’s program-level decisions associated with the extension of TARP. In addition, we note a number of quantitative indicators identified by Treasury that to some extent measure the key factors that influenced the decisions. We elaborate on the nature of these decisions and the indicators below. AGP, TIP, AIFP, and the AIG Investment Program amounted to exceptional assistance to key institutions on a case-by-case basis, and therefore, the expectation was that these targeted programs would be exited as soon as practical and would not be considered for additional commitments. Housing. Rather than allow the program to expire with $10 billion of the original $50 billion allocated to MHA remaining uncommitted, Treasury extended the program so that those funds could be used to address continued weaknesses in housing markets and roll out several additional programs that Treasury had not yet had the opportunity to design and implement. Treasury officials noted that various metrics they were monitoring indicated that the recovery had not successfully reached particular areas of the economy (see table 3). Specifically, housing market indicators, such as foreclosures and mortgage delinquencies, remained elevated around the time the decision to extend TARP was made, despite initiatives—like MHA—that were designed to preserve homeownership by directly modifying mortgages for qualified homeowners. The percentage of loans in foreclosure (foreclosure inventory) reached 4.58 percent at the end of the fourth quarter of 2009 and continued to increase to an unprecedented high of 4.63 percent in the first quarter of 2010 (see fig. 1). Over the same period the serious delinquency rate—defined as the percentage of mortgages 90 days or more past due plus those in foreclosure—fell only slightly from 9.67 to 9.54 percent. Although not shown, the serious delinquency rate for subprime loans exceeded 30 percent in the most recent two quarters, indicating the large proportion of subprime loans in trouble. Foreclosure starts, which reflect new foreclosures filings, peaked at 1.42 percent in the third quarter of 2009 before declining over the next two periods to roughly 1.2 percent. By any measure however, foreclosure and delinquency statistics for housing remain well above their historical averages. Moreover, although not explicitly mentioned by Treasury, a comparison of trends in delinquent mortgages and new foreclosure starts indicate that more foreclosures are looming. While the foreclosure start rate grew 36 percent from the last quarter of 2007 to the last quarter of 2009, the rate for delinquencies of 90 days or more grew by 222 percent over the same period (see fig. 1). This suggests mortgages are not rolling from delinquency to foreclosure as expected and that lenders are not initiating foreclosures on many loans normally subject to such actions. To the extent that foreclosure mitigation programs are ineffective, or a large number of the trial modifications represent unavoidable foreclosures, the resulting foreclosures will continue to weigh on the housing market. Treasury also noted that extending TARP provides the flexibility to modify MHA to respond to the changing dynamics of the foreclosure crisis. Treasury noted early in the crisis that many foreclosures were the result of subprime, predatory, and fraudulent lending activity; however, as the financial crisis progressed, Treasury has modified and expanded its efforts because unemployment and negative equity have become the primary drivers of foreclosures, calling for a different approach to homeownership preservation. Treasury has modified MHA to deal with these issues by allowing more borrowers to qualify for modification—including borrowers with Federal Housing Administration (FHA) loans, who are currently in bankruptcy proceedings or who owe more than the current value of their home. Moreover, Treasury also plans to increase the incentives provided to servicers for writing down mortgage debt, and has included incentives for writing down second liens. Treasury is also implementing programs in addition to existing MHA programs that will address these issues, such as the HFA Hardest-Hit fund and a refinance program with FHA, and expects to use the full $50 billion for all these combined efforts. Treasury officials acknowledged that the consequences of interventions may prevent the housing market from fully correcting and may also increase moral hazard by writing down mortgages for borrowers with negative equity. However, Treasury officials and others have identified reducing the number of unnecessary foreclosures as critical to the economic recovery. Because not all homeowners are expected to qualify for a HAMP modification or other mortgage relief programs under MHA, enhancements to the program are to include relocation assistance to some borrowers that use foreclosure alternatives such as a short sale or a deed-in-lieu of foreclosure. In addition to continued weakness in the housing markets and the need for flexibility, Treasury noted that when the decision to extend the program was made, HAMP had only recently been implemented and needed time to ramp up to its full potential and build out all program components. In our July 2009 report and March 2010 testimony on HAMP, we noted that the program faced implementation challenges and that Treasury’s projection that three to four million borrowers could be helped by offering loan modifications was based on several uncertain assumptions and might be overly optimistic. Treasury cited the slow pace of conversions of homeowners from trial modifications to permanent modifications as an important reason to extend its ability to have funds available for commitments related to foreclosure mitigation and housing market stabilization. Total trials versus permanent modifications continued to track the initial slow pace (see fig. 2). In October 2009, permanent modifications started totaled an estimated 2 percent of the total cumulative government-sponsored enterprise (GSE) and non-GSE HAMP trials started, before increasing to just 4 percent and 7 percent for November and December 2009, respectively. Treasury believed that the extension would allow the program the necessary time to reach its full potential by providing more time to complete the significant backlog of modifications, as well as giving the servicers the opportunity to build up their capacity, and finally allowing the public and investors time to better understand the requirements and opportunity presented by the HAMP process. The latest trial-to-permanent modification conversion rate has now reached an estimated 28 percent of total cumulative HAMP trials (see fig. 2). It should be noted that there is a 3-month wait time during the trial period. Therefore, contemporaneous comparison of trial versus permanent modifications is not the most meaningful, since trials entered into within the last 3 months are not eligible for conversion into payments. Our June 2010 report on Treasury’s implementation of HAMP is an update of our prior July 2009 report and March 2010 testimony findings. Specifically, it addressed (1) the extent to which HAMP servicers have treated borrowers consistently and (2) the actions that Treasury has taken to address certain challenges, including the conversion of trial modifications, negative equity, redefaults, and program stability. While one of Treasury’s stated goals for HAMP was to standardize the loan modification process across the servicing industry, we found inconsistencies in how servicers were treating borrowers under HAMP that could lead to inequitable treatment. Specifically, the servicers we contacted varied in the timing of HAMP outreach to delinquent borrowers, the criteria used to determine if borrowers were in imminent danger of default, and the tracking of borrower complaints about servicer’s implementation of HAMP. Additionally we found that while Treasury had taken some steps to address the challenges we had previously reported on, it urgently needed to finalize and implement remaining program components and ensure the transparency and accountability of these efforts. In particular, we reported that Treasury had been slow to implement previously announced programs it identified as needed to address the housing problems hindering the current economic recovery, including its second-lien modification and foreclosure alternatives programs. We noted that Treasury recently announced additional HAMP components to help deal with the high number of foreclosures such as programs to help borrowers with high levels of negative equity and unemployed borrowers, which needed to be prudently designed and implemented as expeditiously as possible. Going forward, as Treasury continues to design and implement new HAMP-funded programs, we reported that it will be important that Treasury develop sufficient capacity—including staffing resources—to plan and implement programs, establish meaningful performance measures, and make appropriate risk assessments. Treasury indicated that it plans to track performance measures of the number of HAMP modifications (trial and permanent) entered into, the redefault rate, and the change in average borrower payments to evaluate the program going forward. However, foreclosure and delinquency data used to motivate the decision to allocate the full budgeted resources to MHA and other housing programs, although also influenced by general market forces such as falling housing prices and unemployment, should provide an indication of the effectiveness of these efforts. Small business lending. Treasury decided to allocate new resources to small business lending based on the contraction in bank lending and other indicators of small business credit conditions. However, Treasury has yet to set explicit objectives for its small business lending programs. Treasury wants to support lending to creditworthy small businesses by providing capital to small banks. A drop in the volume of lending could be explained by a combination of reduced demand for loans, higher credit standards, or banks’ lack of capital to make new loans. Demand for business loans, including small business loans, has dropped considerably since 2008, and credit standards have risen, according to Federal Reserve data. At the time of the extension, Treasury set aside $30 billion for programs to support small business lending. Since that time, Treasury has decided to try to create a Small Business Lending Fund through legislation outside of TARP, due to concerns that many banks would not participate in a TARP program. In addition, Treasury expects to make up to $1 billion in new capital investments in community development financial institutions (CDFI) and purchase up to $1 billion in Small Business Administration loan securitizations, to improve access to credit for small businesses. Relative to larger corporations, small businesses generally have difficulty directly accessing capital markets as an alternative source of financing and are therefore largely reliant on bank lending. While Treasury has stated that bank lending has contracted, Treasury refers to data on outstanding bank loans (loan balances) of all sizes that reflect a number of economic conditions that may not be related to new lending and may not capture potentially divergent conditions for large and small firms. We found in previous work that changes in loan balances may not be a good proxy for new lending. In particular, while outstanding commercial and industrial loans and commercial real estate loans have fallen, losses on a loan portfolio and loan repayments may help explain this drop. For firms of all sizes, lack of comprehensive data on new lending makes assessing business credit conditions particularly difficult. For example, interest rates, on their own, may not be a good indicator of the availability of credit. Specifically, financial institutions may ration credit based on the quality of the borrower, rather than continuing to lend, but charging a wider distribution of interest rates to customers of varying credit quality. As a result, the volume of new lending (loan originations) would be a valuable indicator of credit availability; however, only limited data on loan originations exist. For example, origination data exist only for certain kinds of loans (e.g., mortgages) or only for a small subset of banks (e.g., the largest CPP participants). Moreover, there are no consistent historical data on lending to small businesses. Treasury officials and others have acknowledged the limitations of data in this area, which Treasury officials have noted, making determining when enough has been done difficult. While the availability of small business credit is difficult to quantify definitively, Treasury officials noted that a number of indicators of small business lending point to reduced access to credit. Officials identified the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) and the National Federation of Independent Business (NFIB) survey, among other sources. Taken together, these indicators, although imperfect, generally point to a tight credit environment for small firms. SLOOS surveys loan officers on, among other things, lending standards for commercial and industrial loans, and features responses by borrower size (small versus large and medium). The survey responses show significant tightening of lending standards for firms of all sizes, although conditions have tightened more in the last year for small firms than for larger firms. The NFIB Small Business Economic Trends survey contains a number of questions on access to credit. Respondents are NFIB members, with nearly half of all respondents from firms with five or fewer employees. A question on borrowing needs (“During the last three months, was your firm able to satisfy its borrowing needs?”) may be indicative of changes in access to credit for firms of this size. We compared responses to this question to interest rate spreads for loans of less than $1 million (a proxy for loans to small businesses) from the Federal Reserve’s Survey of Terms of Business Lending. These spreads are premiums over the federal funds rate and indicate the risk banks perceive in making small loans. We found that the percentage of respondents reporting that their borrowing needs had not been satisfied showed the same broad pattern as spreads for loans of less than $1 million (see figure 3). In particular, both show a spike in recent years, with increases in risk premiums for small loans and the proportion of small businesses reporting that their borrowing needs had not been met. Because the economy was still fragile and downside risks remained, Treasury identified the need to retain resources to respond to threats to financial stability as an important consideration in deciding to extend TARP. According to Treasury officials, if the economic recovery were in jeopardy, the TARP extension gave Treasury the capability to react should financial markets need further assistance. Treasury noted several continued areas of weakness that supported the need to retain resources, without making them available for commitment under specific programs. Areas of weakness included the elevated pace of bank failures, high unemployment, and commercial real estate losses. Although banks in the United States had made progress in raising capital and recognizing losses on legacy assets and loans, substantial asset deterioration is expected across some loan classes, such as commercial real estate and consumer and corporate loans. Because banks will likely continue to take steps to reduce leverage, credit conditions are expected to remain tight while high unemployment continues to weigh on residential real estate markets and consumer spending. As indicated above, uncommitted funds up to the total amount authorized by EESA could be used to respond to financial instability or growing weakness that would threaten the recovery. As of June 7, 2010, this amount is roughly $163 billion and remains available for commitment, assuming repayments are not deployed in other efforts. Treasury noted that, among other reasons, it extended TARP to maintain the capacity to respond to unforeseen threats or unanticipated shocks. Federal Reserve officials similarly noted that unanticipated events, not foreshadowed by market data, have been the hallmark of the crisis. The failure, or near failure, of a systemically important financial institution would be a critical threat to financial stability. Treasury, FDIC and the Federal Reserve responded to the failure, or near failure, of large financial institutions during the crisis with programs to provide assistance, such as guarantees and capital, to keep institutions solvent, including AGP for Citigroup and AIG Financial Assistance. According to Federal Reserve officials, one of the reasons they supported the extension of TARP was the inadequacy of available statutory tools to deal with threats to financial stability, such as the failure of a large financial institution. One proposed tool is an authority for the orderly resolution of large, nonbank financial institutions. In previous work, we have noted that some interventions to support failing institutions can undermine market discipline and increase moral hazard. For example, in the presence of a government back-stop, firms anticipate government assistance in the future and thus have less incentive to properly manage risk. Regulatory reforms that enhance oversight and capital requirements at large financial institutions—in essence making it more costly to be a large financial institution—would help to counter some erosion of market discipline. Similarly, an effective resolution authority could impose losses on managers, shareholders, and some creditors, but must also properly balance the need to encourage market discipline with the need to maintain financial stability. Treasury officials noted the importance of having financial regulatory reform in place before TARP expires in October 2010. Bank capital programs. Treasury has ended broad programs, such as CPP and CAP, established to improve the solvency of financial institutions to support their ability to lend, based on banks’ renewed ability to access private capital markets and issue new equity. Treasury has stated that by building capital, CPP was expected to increase lending to U.S. businesses and consumers. Treasury has disbursed more than $200 billion for the CPP, and has received $142 billion in repayments as of May 28, 2010. CAP was designed to help ensure that certain large financial institutions had sufficient capital to withstand severe economic challenges. It was supported by SCAP which assessed capital needs at the 19 largest bank holding companies in the United States. Banks that needed additional capital as a result of SCAP raised $80 billion from private sources, while GMAC received additional capital from Treasury under AIFP. No CAP investments were made as a result and the program closed on November 9, 2009. Treasury has indicated that the renewed ability of banks to raise capital on private markets was a key measure of success for CPP and CAP and a key consideration in ending these programs. From 2000 to 2007, banks largely did not need to raise capital by issuing common equity, averaging only $1.3 billion per quarter. Banks and thrifts raised significant amounts of common equity in 2008, averaging $56 billion per quarter, before issuance dropped precipitously in the first quarter of 2009 to $200 million—a 99 percent drop from the previous quarter and a 63 percent drop from the year before. Banks and thrifts raised $63 billion in common equity in the second quarter of 2009, an increase of 28,000 percent from the previous quarter and 236 percent over the year before (see fig. 4). Banks’ renewed ability to raise capital on private markets reflects improvements in perceptions of the financial condition of banks. The 3- month TED spread—the premium of the London interbank offered rate (LIBOR) over the Treasury interest rate of comparable maturity—indicates the perceived risk of lending among banks. The TED spread peaked at more than 450 basis points in October 2008 before falling to less than 15 basis points at the end of the third quarter of 2009 (see fig. 5). In previous work, we found that the decline in perceptions of risk in the interbank market could be attributed in part to several federal programs aimed at stabilizing markets that were announced on October 14, 2008, including CPP. Nevertheless, the associated improvement in the TED spread cannot be attributed solely to TARP because the announcement of CPP was a joint announcement that also introduced the Federal Reserve’s Commercial Paper Funding Facility program and FDIC’s TLGP. Financial stress re-emerged in the interbank market in May 2010, highlighting the fragile nature of the recovery in the financial system. The TED spread has increased moderately from a low of less than 10 basis points in March 2010 to more than 40 basis points as of mid-June 2010, as concerns about sovereign debt in the European Union has increased. U.S. banks’ exposure to credit risk in Europe and the sensitivity to the global economy has heightened risk premiums among banks lending to each other. While fluctuations in perceived risk in the banking system are natural, and necessary, if risk is to be priced and allocated efficiently, this re-emergence of risk offers some support for Treasury’s decision to retain resources to combat financial instability, especially in light of the limitations of the current financial regulatory system. The impact of CPP on lending is difficult to determine because data on loan originations are limited, and how much lending would have occurred in the absence of CPP is not known. We have noted in previous reports that some tension exists between the goals of improving banks’ capital positions and promoting lending—that is, the more capital banks use for lending, the less their overall capital positions will improve. Treasury collects data monthly on new lending from the largest participants in CPP, which included for a time as many as 22 institutions. As a result, more is known about recent loan originations by large banks than small banks. Ten institutions that repaid CPP in June 2009 stopped submitting data after November 2009. New lending by the largest CPP recipients was $244 billion in November 2009, up 2 percent from the prior month and 17 percent from the year before. However, lending in the third quarter of 2009 quarter of 2009 was down 12 percent from the second quarter (see fig. 6). was down 12 percent from the second quarter (see fig. 6). Support to securitization markets through TALF. With underwriters finding increasing success in bringing issuances to the ABS market and decreasing their utilization of TALF, Federal Reserve and Treasury decided not to extend TALF further. TALF expired on March 31, 2010, for loans backed by ABS and legacy CMBS, and is scheduled to terminate at the end of June 2010 for loans backed by newly-issued CMBS. The program was designed to increase liquidity and reopen the asset-backed securitization markets in an effort to improve access to credit for consumers and small businesses after the decrease in issuances and the refusal of market participants to purchase potential offerings at rates that were acceptable to issuers. TALF-assisted issuances began in March 2009 after an initial announcement in late 2008. Officials from the Federal Reserve and Treasury highlighted that TALF was designed to attract investors when market conditions were stressful, but lose its appeal as conditions improved and spreads tightened to the point that the rate on ABS bonds were lower than the cost of borrowing from the program. Federal Reserve and Treasury officials have also cited declining asset spreads in the ABS market as justification for not making new commitments under TALF (see fig. 7). While not at precrisis levels, spreads have tightened significantly from their heights at the beginning of 2009. Considering the excesses during the recent credit expansion, the desirability of a return to precrisis levels in many areas of the securitization markets is debatable. However, for most TALF-eligible assets, spreads have tightened significantly. For instance, average auto ABS spreads peaked at more than 400 basis points over the benchmark in late 2009, but have since returned to less than 100 basis points over the benchmark in early 2010. Private student loans ABS, however, have maintained spreads above precrisis levels. According to Federal Reserve officials this is partly due to the performance of the underlying student loans and because some of the securities were not structured well. Nevertheless, the contraction in spreads for most TALF-eligible ABS can be seen as normalization of the securitization markets as participants view new and existing issuances as less risky. Some of the decline in spreads and the perceptions of risk in recent securitizations may be attributable to the products themselves. Since the crisis, new securitizations have generally been structured with more credit protections through enhancements such as greater levels of subordination and overcollateralization. The Federal Reserve structured TALF to reduce the rate of utilization of the facility as the market returned to normalcy through relatively high pricing of TALF loans. As we noted in a previous GAO report, during 2009, returns generally decreased for select classes of TALF-eligible collateral between the first TALF operation in March 2009 and the latter part of the year, with limited exceptions. The report notes that as these returns generally became increasingly negative through the year, participants would have essentially locked in losses with certain issuances. To avoid this, many participants instead chose to forego TALF financing for these issuances and instead finance their own investments. ABS markets began to show signs of health as 2009 quarterly issuances were above their lows in 2008 and utilization of TALF began decreasing in mid-2009. ABS issuances experienced a significant decline in 2008, but stabilized in 2009 (see fig. 8). TALF issuance dollar volume peaked in the third quarter of 2009, but by the fourth quarter TALF volume decreased significantly and at a faster rate than the total decrease in ABS volume. Further, there has been one CMBS new issuance that utilized TALF financing although the commercial real estate market continues to experience stresses and there has been little activity in the sector as a whole. Partly as a result of the continuing difficulties in this market, TALF loans backed by newly issued CMBS will be allowed through June 2010 even though the rest of the program closed at the end of March. Addressing “troubled” (legacy) securities through PPIP. Initially announced at up to $100 billion, Treasury reduced the amount available for commitment under PPIP based on improvements in the prices for certain legacy assets. Announced in March 2009, Treasury offered equity and debt financing to nine private fund managers, however, no further commitments to new funds are planned. The Legacy Securities Public- Private Investment Program (S-PPIP) is a program whereby Treasury and private sector fund managers and investors partnered to purchase eligible securities from banks, insurance companies, mutual funds, pension funds, and other sellers defined as eligible under EESA. Treasury indicated that this process was designed to allow financial institutions to repair their balance sheets by removing troubled assets and allow for renewed lending to households. Treasury participates by providing matching equity financing and debt financing up to 100 percent of the total equity of the fund. A related program, L-PPIP, was also announced at the same time by Treasury and FDIC but never operated as a TARP program. This program, however, suspended its planned sale of legacy assets held by banks in order to focus its use in the sale of receivership assets in bank failures. Treasury did not include PPIP in its plans for new commitments in 2010, but has tracked the performance of each individual fund since inception. Treasury stated that a recovery in asset prices in the RMBS and CMBS markets was one indicator that PPIP was effective and achieved its stated purpose. The return of market confidence can be seen in the general recovery or stabilization of asset prices. PPIP and the TARP programs to support bank capital were both intended to improve bank balance sheets. As we noted previously, banks have already been able to raise large amounts of private capital and perceptions of risk in the banking system have declined markedly since the onset of the crisis. PPIP and various other programs and initiatives may have to some extent addressed concerns about bank balance sheets. An indication of the reduction in perceptions of risk is the general recovery in prices of legacy securities is the pricing of Jumbo and Alt-A RMBS securities (see fig. 9). Highly-rated CMBS prices also confirm that parts of the ABS and MBS markets have stabilized since PPIP was announced. Specifically, highly- rated CMBS prices have rebounded from their lows in late-2008, and we note that average spreads have also tightened in the same time period (see fig. 10). This, however, does not reflect the continuing troubles in the broader commercial real estate market as delinquencies have continued to increase. Treasury could strengthen its analytical framework by identifying clear objectives for small business programs and explaining how relevant indicators motivated TARP program decisions. As noted above, Treasury identified four public documents that represented its rationale and decision-making process for the decision to extend TARP. Our understanding of Treasury’s decision-making process was also informed by reading FinSOB quarterly reports and through our interviews with Treasury and other officials. Treasury often directly or indirectly linked program decisions to a variety of quantitative indicators, including surveys, financial market prices and quantities, and measures of program utilization, among others. As discussed previously, all of these factors played an important role in the decision to extend TARP, expand some programs, and end others. As noted in our October 2009 report, indicators are an important step toward providing a credible foundation for TARP decision making. However, how the performance of an indicator affected a program decision, or if and when that indicator would signal a program had or had not met its goals was not always clear. Balancing the costs and benefits of TARP programs effectively will require making objectives explicit, assessing the impact of any commitments under TARP programs, and accounting for the fiscal and other costs of continuing to support markets. Again, a set of indicators, although imperfect, might inform the proper timing for winding down the remaining programs and liquidating of investments. Treasury has yet to identify clear program objectives for small business lending, which raises questions about when Treasury will know that government assistance can be removed. Without a strong analytic framework that includes clear objectives and meaningful measures, Treasury will be challenged in determining whether the program is achieving its desired goals. Given the scale of TARP and importance of the government’s entry and exit from financial market interventions, decisions to allocate remaining resources should be subject to rigorous analysis. Because Treasury may decide to commit additional resources to problem areas before the expiration of TARP, or scale back commitments in others, it needs to be able to estimate the effect of program resources on meeting its objectives. Wherever possible Treasury should use quantitative factors in its decision making, but we recognize that qualitative factors are also important. While HAMP continues to face implementation challenges, the small business initiatives are challenged by a lack of data needed to clarify the root of the problem which may limit Treasury’s ability to effectively address it. For example, without data and analysis to determine the extent to which access to small business credit is being restricted by limited capital at institutions engaged in small business lending, Treasury will not have a sufficient basis to address the underlying issues that may be affecting small business lending. With a better understanding of the problem, Treasury can set clear, achievable goals to address it. The crisis and consequent interventions temporarily changed the U.S. financial system from one primarily reliant on markets and market discipline to one more reliant on government assistance and public capital. With the recovery underway, financial regulators in the United States have begun to shift focus from stabilizing the economy to exiting from crisis- driven interventions and transferring risk back into the hands of the private sector. Many TARP recipients have repaid loans and repurchased shares and warrants. A recent Federal Open Market Committee meeting focused on how the Federal Reserve should sell off assets acquired during the financial crisis. However, weaknesses in residential housing, commercial real estate, and labor markets, as well as risk from more global economic forces, limit the ability to withdraw rapidly and completely. For example, the Federal Reserve dollar liquidity swap lines were re-established with some central banks in response to the re- emergence of strains in short-term U.S. dollar funding markets as a result of European debt and currency issues. While the Secretary, in consultation with the Federal Reserve and FDIC, elected to extend TARP to address perceived weaknesses in the economy and respond to unanticipated shocks, Treasury still faces remaining decisions about allocating any additional funds to MHA and CBLI before its ability to take actions authorized by EESA expires on October 3, 2010. Moreover, ongoing decisions will need to be made related to the general exit strategy, including unwinding the equity investments and scaling back commitments in an environment where (1) other regulators are unwinding their programs, (2) the economy is still coping with the legacy of the crisis, (3) market distortion and moral hazard concerns are pressing, and (4) the long-term fiscal challenges facing the United States have become more urgent. While the level of consultation with the Federal Reserve was generally robust, broad coordination could be enhanced and formalized for future judgments. Similarly, decisions to allocate remaining resources and the timing of exits should be subject to rigorous analysis. By strengthening its framework for decision making, Treasury can better ensure that competing priorities are properly weighed and the next phase of the program is effectively executed. Although the economy is still fragile, a key priority will be to develop, coordinate, and communicate exit strategies to unwind the remaining programs and investments resulting from the extraordinary crisis-driven interventions. Because TARP will be unwinding concurrently with other important interventions by federal regulators, decisions about the sequencing of the exits from various federal programs will require bringing a larger body of regulators to the table to plan and sequence the continued unwinding of federal support. Similar to the need for a coordinated course of action to stabilize the financial system and re-establish investor confidence, the general exit from the government interventions will require careful coordination to avoid upsetting the recovery and help ensure the proper sequencing of the exits. Beyond the immediate costs of financial crises, these episodes can have longer term consequences for fiscal balances and government debt especially if the policy responses exacerbate the situation, lack coherency and effectiveness, or the exit strategy undermines the recovery because it occurs too soon or not soon enough. Moreover, as we discussed earlier in this report, the financial crisis and response has contributed to an already challenging fiscal legacy. As a result, the administration and Congress will need to apply the same level of intensity to the nation’s long-term fiscal challenge as they have to the recent economic and financial market issues. Coherent and effectively carried out exit strategies are the first step in beginning to address these challenges. We are making two recommendations to the Secretary of the Treasury: 1. To effectively conduct a coordinated exit from TARP and other government financial assistance, we recommend that the Secretary of Treasury formalize and document coordination with the Chairman of the FDIC for decisions associated with the expiration of TARP (1) by including the Chairman at relevant FinSOB meetings, (2) through formal bilateral meetings, or (3) by utilizing other forums that accommodate more structured dialogue. 2. To improve the transparency and analytical basis for program decisions made before TARP’s expiration, we recommend that the Secretary of the Treasury publicly identify clear program objectives, the expected impact of programs, and the level of additional resources needed to meet those objectives. In particular, Treasury should set quantitative program objectives for its small business lending programs and identify any additional data needed to make program decisions. We provided a draft of this report to Treasury for its review and comment. We also provided the draft report to the Federal Reserve and FDIC for their review. Treasury provided written comments that we have reprinted in appendix III. Treasury, the Federal Reserve, and the FDIC also provided technical comments that have been incorporated as appropriate. In its comments, Treasury generally agreed with our recommendations and noted that it would continue to consult extensively with the Federal Reserve and FDIC. Treasury agreed that publicly identifying clear program objectives was important and pledged to continue its efforts to do so. In commenting, the Federal Reserve questioned the use of FinSOB as a coordination mechanism for the next phase of the TARP program. We have amended our recommendation to clarify that we are not advocating an expansion of FinSOB membership or to otherwise change its structure or purpose. We continue to believe FinSOB is a potential forum for more formal interaction between agencies by including nonmembers at relevant meetings, not by expanding membership. Moreover, leveraging FinSOB is just one option for formalizing and documenting coordination between Treasury and FDIC. Bilateral meetings or using other forums that accommodate structured dialogue would be consistent with our recommendation. We are sending copies of this report to the Congressional Oversight Panel, Financial Stability Oversight Board, Special Inspector General for TARP, interested congressional committees and members, Treasury, the federal banking regulators, and others. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Richard J. Hillman at (202) 512-8678 or [email protected]; Thomas J. McCool at (202) 512-2642 or [email protected]; or Orice Williams Brown at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. The objectives of this report are to determine (1) the process the Department of the Treasury (Treasury) used to decide to extend the Troubled Asset Relief Program (TARP) and the extent of coordination with relevant agencies and (2) the analytical framework and quantitative indicators Treasury used to decide to extend TARP. To determine the process Treasury used to decide to extend TARP and the extent of coordination with relevant agencies, we interviewed officials from Treasury and the Board of Governors of the Federal Reserve System (Federal Reserve), and received official responses to our questions from the Federal Deposit Insurance Corporation (FDIC). In addition, we reviewed Treasury documents and analyses, Financial Stability Oversight Board (FinSOB) reports, and previous GAO reports. In particular, we reviewed four public documents Treasury identified as central to its efforts to describe and communicate the framework it used to make decisions related to the extension of TARP to Congress and the public (1) the September 2009 report “The Next Phase of Government Financial Stabilization and Rehabilitation Policies”; (2) the December 9, 2009, letter to Congressional leadership certifying the extension of TARP; (3) Secretary Geithner’s December 10 testimony to the Congressional Oversight Panel; and (4) the “Management Discussion and Analysis” portion of the fiscal year 2009 Office Financial Stability Agency Financial Report. To determine the analytical framework and quantitative indicators Treasury used to decide to extend TARP, we similarly interviewed Treasury and the Federal Reserve and received official responses to our questions from FDIC. We also reviewed Treasury documents and analyses, FinSOB reports, and previous GAO reports. Based on the four key documents that Treasury identified and interviews with Treasury officials, we determined the key factors that motivated Treasury’s program-specific decisions associated with the extension of TARP and quantitative indicators that to some extent captured those factors. We furthermore analyzed data from Thomson Reuters, Treasury, the Federal Reserve, the National Federation of Independent Businesses, SNL Financial, and a broker-dealer to assess the state of the economy and financial markets. These data may also be suggestive of the performance and effectiveness of TARP. We believe that these data, considered as a whole, are sufficiently reliable for the purpose of summarizing TARP activity and Treasury’s decision-making process, and presenting and analyzing trends in the economy and financial markets. We identified some limitations of the data on credit conditions for small businesses, including the fact that the National Federation of Independent Business survey over- represents certain industries, and therefore may not represent the credit experiences of all small firms. Moreover, there are no consistent historical data on lending to small businesses. In addition, the data from Treasury’s survey of lending by the largest Capital Purchase Program (CPP) recipients (as of November 30, 2009, the last month in which all of the largest CPP recipients participated) are based on internal reporting from participating institutions, and the definitions of loan categories may vary across banks. Because these data are unique, we are not able to benchmark the origination levels against historical lending or seasonal patterns at the institutions. We conducted our audit from March 2010 through June 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The financial crisis prompted an extraordinary response from financial regulators in the United States. As table 3 shows, the crisis-driven interventions—both within and outside of TARP—can be roughly categorized into programs that: 1) provided capital directly to financial institutions, 2) enhanced financial institution’s access to liquid assets through collateralized lending or other credit facilities to 3) purchased nonperforming or illiquid assets, 4) guaranteed liabilities, 5) intervened in specific financial markets, and 6) mitigated home foreclosures. Some programs involved exceptional assistance to particular institutions, such as American International Group (AIG), because of its systemic importance or supported particular markets while others involved assistance to individuals through refinance or loan modification programs. Table 3 does not include interventions or programs that existed prior to the financial crisis, such as the Federal Reserve’s loan program through the discount window, FDIC receivership of failed banks, or interventions that did not expose the intervening bodies to risks or involve federal outlays such as the Securities and Exchange Commission’s temporary ban on short selling in financial stocks. In addition to the contacts named above, Lawrance Evans Jr. (lead Assistant Director), Benjamin Bolitzer, Timothy Carr, Emily Chalmers, William Chatlos, Rachel DeMarcus, Michael Hoffman, Steven Koons, Matthew Keeler, Robert Lee, Matt McDonald, Sarah McGrath, Harry Medina, Marc Molino, Joseph O’Neill, Jose Oyola, Rhiannon Patterson, Omyra Ramsingh, Matt Scire, Karen Tremba, and Winnie Tsen have made significant contributions to this report.

The Department of the Treasury's (Treasury) authority to purchase, commit to purchase, or commit to guarantee troubled assets was set to expire on December 31, 2009. This important authority has allowed Treasury to undertake a number of programs to help stabilize the financial system. In December 2009, the Secretary of the Treasury extended the authority to October 3, 2010. In our October 2009 report on the Troubled Asset Relief Program (TARP), GAO suggested as part of a framework for decision making that Treasury should coordinate with relevant federal agencies, communicate with Congress and the public, and link the decisions related to the next phase of the TARP program to quantitative analysis. This report discusses (1) the process Treasury used to decide to extend TARP and the extent of coordination with relevant agencies and (2) the analytical framework and quantitative indicators Treasury used to decide to extend TARP. To meet the report objectives, GAO reviewed key documents related to the decision to extend TARP, interviewed agency officials and analyzed financial data. The extension of TARP involved winding down programs while extending others, transforming the program to one focused primarily on preserving homeownership, and improving financial conditions for small banks and businesses. While the extension of TARP was solely the Treasury's decision, it was taken after significant deliberation and involved interagency coordination. Although sufficient for the decision to extend, the extent of coordination could be enhanced and formalized for any upcoming decisions that would benefit from interagency collaboration, especially with the Federal Deposit Insurance Corporation (FDIC). Treasury considered a number qualitative and quantitative factors for key decisions associated with the TARP extension. Important factors considered for the extension of new commitments centered on ongoing weaknesses in key areas of the economy. Treasury underscored that while analysis was possible on the needs or success of individual programs, the fragile state of the economy and remaining downside risks were difficult to know with certainty. Considering this uncertainty, Treasury wanted to extend TARP through October 2010 in order to retain resources to respond to financial instability. Going forward, Treasury could strengthen its current analytical framework by identifying clear objectives for small business programs and providing explicit linkages between TARP program decisions and the quantitative analysis or indicators used to motivate those decisions. GAO recommends that the Secretary of the Treasury (1) formalize coordination with FDIC for future TARP decisions and (2) improve the transparency and analytical basis for TARP program decisions. Treasury generally agreed with our recommendations.

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Under the Federal Meat Inspection Act, the Poultry Products Inspection Act, and the Egg Products Inspection Act, USDA, through FSIS, is responsible for ensuring the safety of meat, poultry, and certain egg products. Under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act, FDA is responsible for all other foods, including fruits and vegetables; dairy products; seafood; and certain canned, frozen, and packaged foods. The food-processing sector is generally described as the middle segment of the farm-to-table continuum—it extends from the time livestock and crops leave the farm for slaughter and processing into food until it reaches retail establishments. FDA and FSIS work to ensure the safety of food products processed in the United States through a regulatory system of preventive controls that identifies hazards early in the production process to minimize the risk of contamination. Known as the Hazard Analysis and Critical Control Point (HACCP) system, it makes food-processing facilities responsible for developing a plan that identifies harmful microbiological, chemical, and physical hazards that are reasonably likely to occur and establishes critical control points to prevent or reduce contamination. Through their inspection programs, FDA and FSIS verify that food processors are implementing their HACCP plans. FDA inspects over 57,000 food facilities every 5 years on average, and USDA inspects over 6,000 meat and poultry slaughter and processing facilities daily. Individual states also conduct yearly inspections of about 300,000 food-processing facilities, including small firms with fewer than 10 employees and large corporations with thousands of employees and multiple processing plants located in many states. Both FDA and FSIS have the authority to take enforcement actions as necessary to ensure that facilities meet the agencies’ safety and sanitation regulatory requirements. As we reported in 2001, in fiscal year 1999, the latest year for which such information was available, FDA, FSIS, and the states spent a total of about $1.3 billion on food safety activities. Following the events of September 11, 2001, the federal government intensified its efforts to address the potential for deliberate contamination of agriculture and food products. On October 8, 2001, the President issued an executive order establishing the Office of Homeland Security, which added the agriculture and food industries to the list of critical infrastructure systems needing protection from terrorist attack. In addition, the Congress provided FDA and USDA with emergency funding to prevent, prepare for, and respond to potential bioterrorist attacks through the Department of Defense Appropriation Act of 2002: $97 million for FDA and $15 million for FSIS. For the most part, FDA has used the emergency funds to enhance the security of imported food by hiring new inspectors and increasing inspections at U.S. ports of entry. FSIS has used its emergency funds to support its food security activities, which include, among other things, providing educational and specialized training. FDA’s fiscal year 2003 budget builds upon funding received from the fiscal year 2002 appropriation plus the fiscal year 2002 emergency supplemental funding of $97 million to counter terrorism. FDA plans to seek additional funding in the future for food safety activities and security activities related to terrorism. FSIS is asking for an additional $28 million. The Congress also enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which contains numerous provisions designed to enhance the safety and security of the food, drug, and water industries. In addition, both FDA and USDA have taken many actions to better protect the food supply against deliberate contamination. For example, FDA has hired 655 new food safety investigators and laboratory personnel in the field. In addition, it has participated in several exercises at the federal and state levels to enhance emergency response procedures. Furthermore, FDA is working with CDC to initiate and implement a nationwide Laboratory Response Network for foods to identify laboratory capacity for testing agents that could be used to deliberately contaminate food. It has also provided additional laboratory training for food safety personnel and sought stakeholders’ input to develop regulations that are required by the new bioterrorism legislation. Moreover, FDA worked with the Office of the Surgeon General, U.S. Air Force, to adapt a version of the Operational Risk Management approach to examine the relative risks of intentional contamination during various stages of food production and distribution. Within the Department of Health and Human Services, both FDA and CDC have worked closely with federal, state, and local agencies to enhance their surveillance of diseases caused by foodborne pathogens. FDA’s efforts to reduce food security risks also include working with other federal agencies, trade associations, and the Alliance for Food Security. USDA has formed a Homeland Security Council to develop a Department- wide plan to coordinate efforts between all USDA agencies and offices. The Department has also established the FSIS Office of Food Security and Emergency Preparedness to centralize the Department’s work on security matters. USDA has also coordinated with other government agencies, such as the Office of Homeland Security, the Federal Bureau of Investigation (FBI), and FDA, to develop prevention, detection, and response procedures to better protect the nation’s food supply. USDA will be increasing the number of import inspectors by 20. These inspectors will place special emphasis on food security in addition to their traditional food safety role. In addition, USDA has participated in several exercises at the federal and state levels to enhance response procedures and has conducted risk assessments for domestic and imported food. Since this review began, USDA has conducted three simulation exercises at the Department and agency level to test the Department’s response to a terrorist attack and is planning three additional simulations for the spring of 2003. USDA has also conducted preparedness-training sessions for veterinarians and circuit supervisors. (Circuit supervisors supervise the work of in-plant inspection personnel and discuss the security guidelines with them.) Experts from government and academia generally agree that terrorists could use food products as a vehicle for introducing harmful agents into the food supply. Just recently, the National Academies reported that terrorists could use toxic chemicals or infectious agents to contaminate food production facilities and that, although much attention has been paid to ensuring safety and purity throughout the various stages of processing and distribution, protecting the food supply from intentional contamination has not been a major focus of federal agencies. Among other things, the report says that FDA should act promptly to extend its HACCP methodology so that it could be used to deal effectively with the deliberate contamination of the food supply. In February 2002, CDC reported that although the food and water systems in the United States are among the safest in the world, the nationwide outbreaks due to unintentional food or water contamination demonstrate the ongoing need for vigilance in protecting food and water supplies. All of the bioterrorism experts whom we consulted from academia agreed that the food supply is at risk. The food safety statutes do not specifically authorize FDA or USDA to require food processors to implement any type of security measures designed to prevent the intentional contamination of the foods they produce. While these agencies’ food safety statutes can be interpreted to provide authority to impose certain security requirements, as opposed to food safety requirements, neither agency believes it has the authority to regulate all aspects of security. Counsel in the Department of Health and Human Service’s Office of the Assistant Secretary for Legislation advised that FDA’s authorities under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act provide FDA with tools to adopt measures to control insanitary preparation, packing, and holding conditions that could lead to unsafe food; detect contamination of food; and control contaminated food. However, Counsel also advised that FDA’s food safety authorities do not extend to the regulation of physical facility security measures. FDA’s counsel provided a similar assessment, telling us that, to the extent that food safety and security overlap, FDA might be able to require the industry to take precautionary steps to improve security but observed that there is little overlap between safety and security. One area where safety and security do overlap is in the handling of hazardous materials. FDA’s existing safety regulations specify that hazardous chemicals should be stored so that they cannot contaminate food products. This requirement overlaps with FDA’s food security guidelines advising that hazardous chemicals be stored in a secure area and that access to them be limited. USDA, on the other hand, has a somewhat more expansive view of the extent to which its statutory authority allows it to require food processors to adopt certain security measures. USDA’s general counsel concluded that to the extent that security precautions pertain to activities closely related to sanitary conditions in the food preparation process, FSIS has the authority to require food processors to implement certain security measures. The general counsel concluded that FSIS could require facilities to develop and maintain a food security management plan concerning their response to an actual threat involving product tampering, since this is directly related to food adulteration. Such a plan could be added to a current HACCP plan or it could be entirely separate. USDA also believes that FSIS has authority to mandate its “inside security” guidelines, such as controlling or restricting access to certain areas, monitoring the operation of equipment to prevent tampering, and keeping accurate inventories of restricted ingredients and hazardous chemicals. Similarly, USDA believes that many of its security measures that address shipping and receiving food products or protecting water and ice used in processing products also could be made mandatory. These measures include putting tamper-proof seals on incoming and outgoing shipments and controlling access to water lines and ice storage. On the other hand, USDA believes that the “outside security” measures included in its guidelines, such as securing plant boundaries and providing guards, alarms, and outside lighting, have little to do with sanitation in the facility or the immediate food-processing environment and, therefore, could not be made mandatory under existing authorities. With respect to the guidelines’ personnel security measures, USDA noted that FSIS has limited authority over personnel matters at food-processing facilities and could not require facilities to perform personnel background checks before hiring. In response to the nation’s growing concerns regarding the potential for deliberate contamination of the food supply, FDA and USDA issued guidelines to the food-processing industry suggesting measures to enhance security at their facilities. Among other things, the guidelines suggests conducting a risk assessment, developing a plan to address security risks at plants, and adopting a wide range of security measures inside and outside the premises. Food-processing facilities are not required to adopt any of the security measures but are encouraged to adopt those that they feel are best suited for their operations. Although both agencies have alerted their field inspection personnel to be vigilant about security issues, they have also told the inspectors that they are not authorized to enforce these measures and have instructed them not to document their observations regarding security because of the possible release of this information under the Freedom of Information Act and the potential for the misuse of this information. As a result, FDA and USDA currently do not know the extent to which food security measures are being implemented at food-processing facilities. In contrast, the Congress directed medium-size and large-size community water systems, which are privately or publicly owned, to assess their vulnerability to terrorist attacks and to develop an emergency response plan to prepare for such an event. The act also authorized funding to be used for basic security enhancements, such as the installation of fencing, gating, lighting, or security cameras. This approach enables the Environmental Protection Agency (EPA) to monitor the water industry’s security efforts and could be a possible model for the food safety agencies. In 2002, FDA and FSIS each issued voluntary security guidelines to the food-processing industry to help federal- and state-inspected plants identify ways to enhance their security. The agencies encouraged food processors, among others, to review their current operations and adopt those security measures suggested in the guidelines that they believed would be best suited for their facilities. Officials from both FDA and FSIS told us that there was little or no coordination between the two agencies in developing these guidelines. The FDA guidance contains over 100 recommended security measures covering seven areas of plant operation, such as managing food security, physical (outside) security, and computer security. FSIS’s guidelines contain 68 security measures and cover seven areas of plant operation. Figure 1 summarizes key aspects of both agencies’ voluntary security guidelines for industry. FDA and FSIS have made the guidelines available on the Internet. These guidelines are very similar—one difference is that FSIS’s contain security measures for slaughter facilities. Some state governments have also acted to protect food products from deliberate contamination. We learned from 11 state auditing offices that food safety regulatory officials from most of these states are providing industry or state inspectors with guidelines, either in the form of the FDA and FSIS guidelines or guidelines developed by the state officials themselves. In addition, three states have enacted new legislation or regulations addressing the security of food products. Although FDA and FSIS do not assess the extent to which food processors are implementing security measures, the agencies have asked their field inspection personnel to be on heightened alert and to discuss, but not interpret, the security guidance with facility officials during their routine food safety inspections. However, both FDA and USDA have instructed their field inspection personnel to refrain from enforcing any aspects of the security guidelines because the agencies generally believe that they lack such authority. They have also instructed their field personnel not to document plants’ security measures because they are concerned that such information would be subject to Freedom of Information Act requests. More specifically, FDA’s instructions to its field personnel specify that they should neither perform a comprehensive food security audit of the establishment nor conduct extensive interviews to determine the extent to which preventive measures suggested in the guidelines have been adopted. The goals, according to FDA, are to heighten industry’s awareness of food security practices, facilitate an exchange of information between FDA and industry on the subject of food security, and encourage plant management to voluntarily implement those preventive measures that they believe are most appropriate for their operation. In short, FDA inspectors are encouraged to discuss food security concerns with plant management and to provide them with copies of the guidelines. Although the exact details of such discussions are not to be recorded, inspectors are required to document in their inspection reports that such discussions took place and that they gave a copy of the guidelines to facility management. Similarly, FSIS has informed its field inspectors that they have no regulatory duties regarding the enforcement of the guidelines. Initially, the agency instructed its inspectors to refer any questions from facility managers to USDA’s Technical Service Center in Omaha, Nebraska. Recently the agency modified its position regarding direct discussions of food security and now allows inspectors to discuss, but not interpret, security with facility management. Inspectors are still instructed not to document these conversations or enforce the adoption of any security measure. Officials from both agencies expressed concerns about gathering security information from facilities because it could be subject to public disclosure through Freedom of Information Act requests. If terrorists gained access to this information, it could give them a road map to target the most vulnerable areas in a food-processing plant. Recent congressional efforts to better protect the nation’s drinking water from terrorist acts may offer a model for FDA and USDA to help monitor security measures adopted at food-processing facilities as well as to identify any security gaps that may exist at these facilities. Although there are differences in how the government regulates drinking water and food, food and water are essential daily consumption elements, and both are regulated to ensure their safety. In June 2002, the Congress enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which, among other things, amended the Safe Drinking Water Act. The Bioterrorism Act requires medium-size and large-size community water systems (those serving over 3,300 people), which are privately and publicly owned, to certify to EPA that they have assessed their vulnerability to a terrorist attack and developed emergency plans to prepare for and respond to such an attack. These water systems serve 91 percent of the United States’ population. Each community’s water system is required to conduct a vulnerability assessment and submit a copy of the assessment to EPA. The act specifies that the vulnerability assessment is exempt from disclosure under the Freedom of Information Act, except for the identity of the community water system and the date on which it certifies compliance. Community water systems are also required to prepare an emergency response plan that incorporates the results of their vulnerability assessments. In addition, the act authorizes funding for financial assistance to community water systems to support the purchasing of security equipment, such as fencing, gating, lighting, or security cameras. FDA and FSIS lack comprehensive information on the extent to which food-processing companies are adopting security measures. However, officials from the majority of the food trade associations that we contacted believe that their members are implementing a range of measures to enhance security at their facilities. We found that the five food-processing facilities we visited in various geographic regions around the country are also implementing an array of security measures that range from developing risk assessment plans to hiring security contractors. Furthermore, our survey of FDA and FSIS inspectors indicates that, generally, food-processing facilities are implementing a range of security measures. The survey responses indicate, however, that the inspectors were more aware of those security measures that were the most visible to them during the course of their regular food safety inspections. According to trade association officials, food processors are voluntarily taking steps to prevent the deliberate contamination of their products, including adopting many of the measures suggested by FDA and FSIS, such as installing fences, requiring that employees wear identification, and restricting access to certain plant areas. Association officials told us that most large food-processing facilities already have ample security plans that include many of the recommendations made by FDA and FSIS. One trade association recently conducted a survey of its members and asked for their opinions about FSIS’s Guidelines. Most of the respondents indicated that they were aware of the guidelines; they believed the guidelines were for the most part practical and workable; and they used them in their security plans. However, these officials were unable to provide data on the extent to which the food-processing industry is implementing security measures to prevent or mitigate the potential deliberate contamination of food products. Trade association officials also said that they provided FDA and FSIS with comments on the voluntary guidelines and, in some cases, have also issued their own food security guidelines to their members. Although the officials generally believe that the agencies’ guidelines are reasonable, they do not want the government to regulate food security. They also feel that some companies, especially small facilities with limited resources, are unable to implement all the measures in the guidelines. Therefore, these officials believe it is important for the guidelines to remain voluntary. The industry is involved in improving food security in other ways as well. For example, the food industry associations formed the Alliance for Food Security to facilitate the exchange of information about food security issues. The Alliance is composed of trade associations representing the food chain, from commodity production through processing, packaging, distribution, and retail sale, as well as government agencies responsible for food and water safety, public health, and law enforcement. Similarly, led by the Food Marketing Institute, the food industry and FBI established the Information Sharing and Analysis Center (ISAC), which serves as a contact point for gathering, analyzing, and disseminating information among companies and the multiagency National Infrastructure Protection Center based at FBI headquarters. Through ISAC, FBI officials have notified food manufacturers of warnings and threats that the Center deems to be credible. ISAC also provides a voluntary mechanism for reporting suspicious activity in a confidential manner and for developing solutions. We visited five food-processing facilities, including a slaughter plant and facilities that produce beverages and ready-to-eat products. Although these facilities are not in any way representative of all food-processing plants nationwide, they provide some information about the types of security measures that some facilities are implementing. All five facilities had conducted risk analyses and, on the basis of the results, had implemented a number of security measures similar to those suggested in the FDA and FSIS guidelines. For example, all five facilities limited access to the facility through such means as requiring visitors to enter through a guard shack and to provide identification. In addition, employees at three of the facilities could enter the facility only by using magnetic cards. However, managers at the five facilities offered differing opinions about personnel security. Although all of the facilities we visited performed background checks on their employees that included verification of social security numbers, only some verified prior work experience, criminal history, and level of education. One company also required that its contractors, such as construction companies working in the facility, perform employment, education, and criminal checks of their own employees. The facilities also used different protocols for employee access to different areas within the plant. For example, at four of the facilities, employees were limited to those areas of the plant in which they worked. While the managers at these facilities generally complimented FDA’s and USDA’s security guidelines, they said that they do not want the agencies to regulate security. Rather, they believe that the agencies should develop a nonprescriptive framework or strategy for industry and then leave them to decide how to meet their individual requirements. One manager believes that food security responsibilities should be moved to the Department of Homeland Security. Finally, our discussions with trade association officials and food- processing industry officials revealed that the industry is very concerned about sharing security information with federal agencies because of the possibility that it could provide a road map for terrorist groups if it were released under the Freedom of Information Act. Although the act exempts from public release certain national security, trade secret, and commercial or financial information, industry officials are generally skeptical about the government’s ability to prevent the release of sensitive security information at food-processing facilities. FBI officials told us that they have cited these exemptions when assuring ISAC members that security information shared with them will be protected from public release. These officials explained that the courts have generally ruled that the commercial information exemption protects those who voluntarily provide the government with information if the information is of a kind that the provider would not ordinarily release to the public. However, the FBI officials we interviewed believe that the government should find some way of assuring industry that sensitive security information is protected from public release. FDA and FSIS survey respondents observed a range of security measures being implemented at food-processing facilities, although both FDA and FSIS respondents were able to provide more information about those security measures that were most visible during the course of their normal inspection duties. Figure 2 shows selected categories of security measures recommended in the FDA and FSIS security guidelines that were most visible to inspectors. The majority of the FDA survey respondents said they were able to observe security measures, such as fencing around the plants’ perimeter, limiting access to restricted areas, securing hazardous materials, and providing adequate interior and exterior lighting. Likewise, most of FSIS’s circuit supervisors were able to observe outside security measures including alarmed emergency exits, plant perimeter protection, positive employee identification, and the inspection of incoming and outgoing vehicles. Survey respondents provided fewer observations regarding other types of security measures included in the FDA and FSIS guidelines—in some instances because these measures were less visible to them. For example, FDA respondents were less able to comment on whether they noticed or knew of the presence of security measures designed to account for missing stock or for other finished product irregularities. (See fig. 3.) Similarly, FSIS respondents were less unable to comment on the extent to which facilities were performing background checks on new employees or implementing proper mail-handling practices. More than half of FSIS’s survey respondents stated that large plants— those with at least 500 employees—had implemented a range of security measures, including the areas of outside security, storage, slaughter and processing, and personnel security. Fewer of these respondents observed these security measures at smaller plants. Some FDA and FSIS respondents provided additional comments that the very small firms typically lack the financial resources to implement many of the security measures suggested in the government guidelines. Similarly, some respondents commented that many of the security measures might not be necessary at smaller establishments. Additionally, most of the FDA respondents reported that they had not received training on food security; while nearly all of the FSIS respondents reported that they had recently received such training. Some of the FSIS respondents further stated that although they had received food security training, further training was greatly needed in the field. Such training would be beneficial because field personnel are encouraged to discuss security measures with managers at the facilities they inspect. Finally, responses to our survey showed that FDA and FSIS respondents have different levels of “satisfaction” with or “confidence” in the efforts of the processing facilities they inspect to ensure the protection of food from acts of deliberate contamination. While nearly half of the FSIS respondents said they were somewhat or very confident of the efforts made by the food processors they inspect, slightly over one-fourth of the FDA respondents were satisfied or very satisfied with the efforts made by the food processors they inspect. Thirty-seven food regulatory officials interviewed by state auditors in 11 states provided opinions on their overall level of satisfaction with federal, state, and industry efforts to protect food from intentional contamination. Table 1 shows that nearly half of the state regulatory officials interviewed expressed satisfaction with the efforts made by federal, state, and industry to safeguard food products—though these results cannot be generalized to all state regulatory officials. Finally, most of the state officials interviewed by state auditors believed it was either “important” or “very important” for states to monitor whether companies have adopted security measures to prevent acts of deliberate contamination; 3 of the 11 states are already requiring their inspectors to do so. The vulnerability of the food supply to potential acts of deliberate contamination is a national concern. The President addressed this concern in the October 8, 2001, executive order establishing the Office of Homeland Security and adding the agriculture and food industries to the list of critical infrastructure systems needing protection from terrorist attack. The National Academies have also concluded in a recently released report that infectious agents and toxic chemicals could be used by terrorists to contaminate food-processing facilities. Among other things, the report says that FDA should act promptly to extend its Hazard Analysis and Critical Control Point methodology so it might be used to deal effectively with deliberate contamination of the food supply. The Centers for Disease Control and Prevention also reported recently on the need to better protect our nation’s food and water supplies. These assessments underscore the need to enhance security at food- processing facilities. Although FDA and FSIS recognize that need and have taken action to encourage food processors to voluntarily adopt security measures, these actions may be insufficient. Because the agencies believe that they generally lack authority to mandate security measures and are concerned that such information would be subject to Freedom of Information Act requests, they do not collect information on industry’s voluntary implementation of security measures. The agencies are, therefore, unable to determine the extent to which food processors have voluntarily implemented such measures. Both FDA and USDA have completed risk assessments. However, without the ability to require food- processing facilities to provide information on their security measures, these federal agencies cannot fully assess industry’s efforts to prevent or reduce the vulnerability of the nation’s food supply to deliberate contamination. Similarly, they cannot advise processors on needed security enhancements. Furthermore, lacking baseline information on the facilities’ security condition, the agencies would be unprepared to advise food-processing facilities on any additional actions needed if the federal government were to go to a higher threat alert. Finally, the lack of security training for FDA food inspectors on the voluntary security guidelines issued for food processors and the limited number of FSIS inspectors that have so far received training on the voluntary security guidelines hamper the inspectors’ ability to conduct informed discussions regarding security measures with facility personnel as they are currently instructed to do. In order to reduce the risk of deliberate contamination of food products, we are recommending that the Secretary of Health and Human Services and the Secretary of Agriculture study their agencies’ existing statutes and identify what additional authorities they may need relating to security measures at food-processing facilities. On the basis of the results of these studies, the agencies should seek additional authority from the Congress, as needed. To increase field inspectors’ knowledge and understanding of food security issues and facilitate their discussions about the voluntary security guidelines with plant personnel, we are also recommending that the Secretary of Health and Human Services and the Secretary of Agriculture provide training for their agencies’ field staff on the security measures discussed in the voluntary guidelines. We provided FDA and USDA with a draft of this report for their review and comment. We received written and clarifying oral comments from each agency. The agencies also provided technical comments, which we incorporated into the report as appropriate. FDA agreed with our recommendation that it provide all food inspection personnel with training on security measures. Subsequently, FDA officials told us that the agency did not have an opinion on our recommendation that it study what additional authorities it may need relating to security measures at food- processing facilities. In its written comments, FDA stated that the report is factual and describes accurately the events and actions that FDA has taken on food security. FDA also commented that one of the goals of its voluntary guidance to industry is to heighten awareness of food security practices and that the role of its investigators is first and foremost food safety. FDA also said that it does not have sufficient security expertise to provide industry with consultation in this area. FDA further commented that although HACCP and other preventive controls are appropriate measures to enhance food safety, HACCP does not afford similar advantages for addressing deliberate contamination, tampering, and/or terrorist actions related to the food supply. Our report underscores that the role of FDA’s investigators is primarily one of food safety. Nevertheless, we believe that it is also crucial for cognizant agencies to have information about industry’s security efforts so that they can assess the extent to which the risk of deliberate contamination is being mitigated. We also believe that possessing such information is important if it becomes necessary to advise food processors on needed security enhancements. With regard to HACCP, our report does not take a position on the feasibility of using HACCP as a means to control deliberate contamination; instead, we report on the opinion of the National Academies. FDA’s comments are presented in appendix V. In its written comments, USDA agreed with the contents of our report. Subsequently, USDA’s food safety officials confirmed that the agency also agrees with the report’s recommendations. In its letter, USDA commented that it has already conducted a comprehensive risk assessment of the food supply without plant security information and that knowing whether a plant employed one or several security measures was not needed to assess the risk. Our report acknowledges that USDA has conducted a comprehensive risk assessment, but we believe that it is crucial for cognizant agencies to have information about industry’s security efforts so that they can assess the extent to which the risk of deliberate contamination is being mitigated. USDA’s comments are presented in appendix IV. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Agriculture and Health and Human Services; the Director of the Federal Bureau of Investigation; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact Maria Cristina Gobin or me at (202) 512-3841. Key contributors to this report are listed in appendix VI. To determine the extent to which the current federal food safety statutes can be effectively used to regulate security at food-processing facilities, we analyzed the Food and Drug Administration’s (FDA) and the U.S. Department of Agriculture’s (USDA) existing statutory authorities. We discussed these authorities with FDA and USDA counsel and requested a legal opinion to determine the extent to which each agency believes its existing authorities allow it to regulate food security. We then independently reviewed these authorities to draw our own conclusions. To describe the actions that FDA and USDA have taken to help food processors prevent or reduce the risk of deliberate food contamination, we met with staff from FDA and FSIS to review the voluntary guidelines issued by each agency. To better understand the provisions of the guidelines, we met with agency program staff responsible for issuing the guidelines and for receiving industry comments on it. To learn how the guidelines would be implemented, we met with FDA and USDA’s Food Safety and Inspection Service (FSIS) officials responsible for field operations and with staff from field offices in Atlanta, Georgia, and Beltsville, Maryland. Finally, to gather additional information about the vulnerability of the food supply to acts of deliberate contamination, we contacted nine experts from academia, including experts in food safety and in bioterrorism. To describe how the government is determining the extent to which food- processing companies are implementing security procedures, we asked FDA and FSIS program officials about the nature of the information they are collecting about industry security measures. We also conducted surveys of agency field personnel to obtain their observations about and knowledge of food security measures taken at facilities they regularly inspect for food safety. Our FDA survey, which was Web-based, was administered to all 150 field investigators who recorded 465 or more hours for domestic food inspection from June 1, 2001 to May 31, 2002. Our survey of FSIS staff was a telephone survey of a randomly selected stratified sample of 50 circuit supervisors. Our response rate for these surveys was higher than 85 percent for FDA and 90 percent for FSIS, and respondents included participants from all the agencies’ geographic regions. Before administering the surveys, we discussed with and obtained input from FDA and FSIS program officials. We also pretested the surveys at field locations to ensure that our questions were valid, clear, and precise and that responding to the survey did not place an undue burden on the respondents. In addition, we contacted state audit offices in all 50 states to collect information about state government actions designed to prevent the deliberate contamination of food products. Of the 50 state audit offices we contacted, only 11 agreed to help us collect this information: Arizona, Florida, Maryland, Michigan, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Tennessee, and Texas. To determine the extent to which the food-processing industry is implementing security measures to better protect its products against deliberate contamination, we contacted officials from 13 trade associations representing, among others, the meat and poultry, dairy, egg, and fruits and vegetables industries and the food-processing industry. We discussed the guidelines that their organizations have issued, and they described what actions their constituents are taking to protect their products. We also visited five food-processing facilities in various geographic regions to ask corporate and plant officials about the actions they have taken to protect their products and facilities against intentional contamination. These facilities included a slaughter plant as well as facilities that produce beverages and ready-to-eat products. We recognize that the efforts of these five facilities are not necessarily representative of the whole food-processing industry. To identify the concerns that the industry has about sharing sensitive information with federal agencies, we spoke with industry representatives as well as officials from the Federal Bureau of Investigation’s National Infrastructure Protection Center. We conducted our review from February through December 2002 in accordance with generally accepted government auditing standards. In addition to those named above, John Johnson, John Nicholson, Jr., Stuart Ryba, and Margaret Skiba made key contributions to this report. Nancy Crothers, Doreen S. Feldman, Oliver Easterwood, Evan Gilman, and Ronald La Due Lake also made important contributions.

The events of September 11, 2001, have placed added emphasis on ensuring the security of the nation's food supply. GAO examined (1) whether FDA and USDA have sufficient authority under current statutes to require that food processors adopt security measures, (2) what security guidelines FDA and USDA have provided to industry, and (3) what security measures food processors have adopted. Federal food safety statutes give the Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) broad authority to regulate the safety of the U.S. food supply but do not specifically authorize them to impose security requirements at food-processing facilities. However, these agencies' food safety statutes can be interpreted to provide authority to impose certain security measures. FDA believes that its statutes authorize it to regulate food security to the extent that food security and safety overlap but observes that there is little overlap between security and safety. USDA believes that it could require food processors to adopt certain security measures that are closely related to sanitary conditions inside the facility. USDA also believes that the statutes, however, cannot be interpreted to authorize the regulation of security measures that are not associated with the immediate food-processing environment, such as requiring fences, alarms, and outside lighting. Neither agency believes that it has the authority to regulate all aspects of security at food-processing facilities. Both FDA and USDA issued voluntary security guidelines to help food processors identify measures to prevent or mitigate the risk of deliberate contamination. Because these guidelines are voluntary, neither agency enforces, monitors, or documents their implementation. Both FDA and USDA have asked their inspectors to be vigilant and to discuss security with managers at food-processing facilities, but the agencies have stressed that inspectors should not enforce the implementation of security measures or document any observations because of the possible release of this information under the Freedom of Information Act and the potential for the misuse of this information. Since FDA and USDA do not monitor and document food processors' implementation of security guidelines, the extent of the industry's adoption of security measures is unknown. According to officials of trade associations and the five facilities we visited, however, food processors are implementing a range of security measures. In addition, the FDA and USDA field inspectors we surveyed indicated that most facilities have implemented some security measures, such as installing fences. However, the inspectors were less able to comment on security measures that were not as obvious, such as accounting for missing stock and implementing proper mail-handling practices. The inspectors also noted that while USDA has provided some of its field supervisory personnel with security training on the voluntary security guidelines it issued, it has not provided most of its inspectors with such training. FDA has not provided its staff with any training on the security guidelines. Without training on the security guidelines, inspectors are limited in their ability to conduct informed discussions regarding security with managers at food-processing facilities.

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The largest of the interagency contracting vehicles is the MAS program (also known as the Federal Supply Schedule or the schedules program). GSA directs and manages the MAS program. MACs and GWACs are also interagency contracts. Government buyers usually pay a fee for using other agencies’ GWACs, MACs, and schedule contracts. These fees are usually a percentage of the value of the procurement, which are paid to the sponsoring agency and are expected to cover the costs of administering the contract. Along with using interagency contracts to leverage their buying power, a number of large departments—DOD and DHS in particular—are turning to enterprisewide contracts as well to acquire goods and services. Enterprisewide contracts are similar to interagency contracts in that they can leverage the purchasing power of the federal agency but generally do not allow purchases from the contract outside of the original acquiring activity. Enterprisewide contracting programs can be used to reduce contracting administrative overhead, provide information on agency spending, support strategic sourcing initiatives, and avoid the fees charged for using interagency contracts. All of these contracts are indefinite delivery/indefinite quantity (ID/IQ) contracts. ID/IQ contracts are established to buy goods and services when the exact times and exact quantities of future deliveries are not known at the time of award. Once the times and quantities are known, agencies place task and delivery orders against the contracts for goods and services. In fiscal year 2008, federal agencies spent at least $60 billion through GWACs, MACs, the MAS program, and enterprisewide contracts to buy goods and services to support their operations: about $46.8 billion was spent on the MAS program; about $5.3 billion was spent on GWACs; at least $2.5 billion was spent on MACs although the actual amount could be much higher; and at least $4.8 billion was spent on the three enterprisewide contracts we reviewed, although, like MACs, the actual amount spent on all enterprisewide contracts could be higher. Sales under the MAS program have been relatively flat in recent years, and obligations under GWACs have declined slightly in recent years. However, the total amount of money spent in fiscal year 2008 using the three enterprisewide contracting programs included in our review is approaching the amount spent for GWACs during the same period. In addition, as OMB recently reported, numerous agencies are planning to increase their use of enterprisewide contracts as a means of addressing the administration’s goal of reducing the amount agencies spend on contracting by 7 percent through fiscal year 2011. Nevertheless, GSA’s MAS program is still the primary governmentwide buying program aimed at helping the federal government leverage its significant buying power when buying commercial goods and services. As the largest interagency contracting program, the MAS program provides advantages to both federal agencies and vendors. Agencies, using the simplified methods of procurement of the schedules, can avoid the time, expenditures, and administrative costs of other methods. And vendors receive wider exposure for their commercial products and expend less effort in selling these products. Interagency and enterprisewide contracts should provide an advantage to government agencies when buying billions of dollars worth of goods and services, yet OMB and agencies lack reliable and comprehensive data to effectively leverage, manage, and oversee these contracts. More specifically, The total number of MACs and enterprisewide contracts currently approved and in use by agencies is unknown because the federal government’s official procurement database is not sufficient or reliable for identifying these contracts, Departments and agencies cite a variety of reasons to establish, justify, and use their own MACs and enterprisewide contracts rather than use other established interagency contracts—reasons that include avoiding fees paid for the use of other agencies’ contracts, gaining more control over procurements made by organizational components, and allowing for the use of cost reimbursement contracts, Concerns remain about contract duplication—vendors and agency officials expressed concerns about duplication of effort among these contracts, and in our review we found many of the same vendors provided similar products and services on many different contract vehicles. This could be resulting in duplication of products and services being offered, increased costs to both the vendor and the government, and missed opportunities to leverage the government’s buying power, Limited governmentwide policy is in place for establishing and overseeing MACs and enterprisewide contracts. Recent legislation and OFPP initiatives are expected to strengthen oversight and management of MACs, but no similar initiatives are underway to strengthen oversight of enterprisewide contracts. In April 2010, we made five recommendations to OMB to improve data, strengthen policy, and better coordinate agencies’ awards of MACs and enterprisewide contracts, and OMB concurred with all of our recommendations. Prior attempts by the acquisition community to identify interagency and enterprisewide contracts have not resulted in a reliable database useful for identifying or providing governmentwide oversight on those contracts. In 2006, OFPP started the Interagency Contracting Data Collection Initiative to identify and list the available GWACs, MACs, and enterprisewide contracts. However, the initiative was a one-time effort and has not been updated since. In conducting our review, we were not able to identify the universe of MACs and enterprisewide contracts because the data available in the official government contracting data system, the Federal Procurement Data System-Next Generation (FPDS-NG), were insufficient and unreliable. For instance, FPDS-NG includes a data field that is intended to identify GWACs but we found a number of instances where known GWACs were coded incorrectly. We also searched the system by contract number for MACs that we were aware of and found similar issues, with some contracts coded properly as MACs and some not. Despite its critical role, we have consistently reported on problems with FPDS-NG data quality over a number of years. Most of the senior procurement executives, acquisition officials, and vendors we spoke with as part of our review believed a publicly available source of information on these contracts is necessary. For example, senior procurement executives from DHS and DOD stressed the usefulness of a governmentwide clearinghouse of information on existing contracts. Agency officials we spoke with said that if agencies could easily find an existing contract, which they cannot do, they would avoid unnecessary administrative time to enter into a new contract, which they said could be significant. The report of the Acquisition Advisory Panel—often referred to as the SARA panel— previously noted some of these concerns, stating that too many choices without information related to the performance and management of these contracts make the cost-benefit analysis and market research needed to select an appropriate acquisition vehicle impossible. To improve the transparency of and data available on these contracts, we made three recommendations to OFPP: 1. Survey departments and agencies to update its 2006 data collection initiative to identify the universe of MACs and enterprisewide contracts in use and assess their utility for maximizing procurement resources across agencies. 2. Ensure that departments and agencies use the survey data to accurately record these contracts in FPDS-NG. 3. Assess the feasibility of establishing and maintaining a centralized database to provide sufficient information on GWACs, MACs, and enterprisewide contracts for contracting officers to use to conduct market research and make informed decisions on the availability of using existing contracts to meet agencies’ requirements. Agencies cited several reasons for establishing their own MACs and enterprisewide contracts including cost avoidance through lower prices, fewer fees compared to other vehicles, mission specific requirements, and better control over the management of contracts. For example: The Army cited several reasons for establishing their MACs for information technology hardware and services in 2005 and 2006. The Army wanted to standardize its information technology contracts so each contract would include the required Army and DOD security parameters. According to the Army, GSA contracts do not automatically include these security requirements and using a GSA contract would require adding these terms to every order. The Army also cited timeliness concerns with GSA contracts and GSA fees as reasons for establishing their own contracting vehicles. In 2005, DHS established the EAGLE and FirstSource contracting programs. Both involve enterprisewide contracts used for information technology products and services. Officials stated the main reason these programs were established was to avoid the fees associated with using other contract vehicles and save money through volume pricing. In addition, the programs centralized procurements for a wide array of mission needs among DHS’ many agencies. Furthermore, DHS officials stated they wanted to be able to coordinate the people managing the contracts, which did not happen when using GSA contracts. We found the same vendors on many different contract vehicles providing information technology goods or services, which may be resulting in duplication of goods and services being offered. Table 1 below shows that the top 10 GWAC vendors, based on sales to the government, offer their goods and services on a variety of government contracts that all provide information technology goods and services. For example, of the 13 different contract vehicles listed in Table 1, 5 of the 10 vendors were on 10 or more of these. Vendors and agency officials we met with expressed concerns about duplication of effort among the MACs, GWACs, and enterprisewide contracts across government. A number of vendors we spoke with told us they offer similar products and services on multiple contract vehicles and that the effort required to be on multiple contracts results in extra costs to the vendor, which they pass to the government through the prices they offer. The vendors stated that the additional cost of being on multiple contract vehicles ranged from $10,000 to $1,000,000 due to increased bid and proposal and administrative costs. Interestingly, we found one vendor offering the exact same goods and services on both their GSA schedule and the NASA’s GWAC and offering lower prices on the GWAC. Another vendor stated that getting on multiple contract vehicles can be cost-prohibitive for small businesses and forces them to not bid on a proposal or to collaborate with a larger business in order to be on a contract vehicle. Government procurement officials expressed additional concerns. For example, an official from OFPP has stated that such duplication of effort only complicates the problem of an already strained acquisition workforce. The GSA Federal Acquisition Service Deputy Commissioner stated that while the agencies cite GSA fees as a reason for creating their own vehicles, agencies fail to consider the duplication of effort and cost of doing these procurements. Federal agencies operate with limited governmentwide policy that addresses the establishment and use of MACs and enterprisewide contracts. Federal regulations generally provide that an agency should consider existing contracts to determine if they might meet its needs. The six federal agencies and the three military departments we reviewed have policies that require approval and review for acquisition planning involving large dollar amount contracts which would generally include the establishment of MACs and enterprisewide contracts. The review process varies from agency to agency. For example, an official from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics told us that any new DOD contract estimated at over $100 million would be required to go through a review process to ensure that no other contract exists that could fulfill the new requirement. As another example, DHS requires that the senior procurement executive approve the establishment of each enterprisewide contract. In contrast, GWAC creation and management have governmentwide oversight, as OFPP exercises statutory approval authority regarding establishment of a GWAC. The senior procurement executives we spoke with had mixed views on the proper role of OFPP in providing clarification and oversight to agencies establishing their own contract vehicles. For example, Army senior acquisition officials representing the senior procurement official told us that the policy on interagency contracting is not cohesive. In their view, OFPP should provide policy and guidance that agencies would be required to follow. In contrast, the Senior Procurement Executive for the Department of the Navy pointed to agency-specific circumstances or requirements that create uncertainty about the utility of broad OFPP guidance. Furthermore, agencies have issued guidance encouraging the use of enterprisewide contracts rather than using interagency contracts. For example, DOD guidance advises that contracting officers consider the use of internal DOD contract vehicles to satisfy requirements for services prior to placing an order against another agency’s contract vehicle. Moreover, OMB recently reported that 20 of the 24 largest procuring activities are planning on reducing procurement spending by using enterprise contracting to leverage their buying power, as part of the administration’s goal of reducing contract spending by 7 percent over the next 2 years. To provide a more coordinated approach in awarding MACs and enterprisewide contracts, we recommended that OFPP take steps to establish a policy and procedural framework in conjunction with agencies for establishing, approving, and reporting on new MACs and enterprisewide contracts on an ongoing basis. The framework should stress the need for a consistent approach to leveraging governmentwide buying power while allowing agencies to continue to use their statutory authorities for buying goods and services. Recent legislation and OFPP initiatives are expected to strengthen oversight and management of MACs, but these initiatives do not address enterprisewide contracts. The 2009 National Defense Authorization Act required, 1 year after its enactment, that the FAR be amended to require that any MAC entered into by an executive agency after the amendment’s effective date be supported by a business case analysis. The business case is to include an analysis of all direct and indirect costs to the federal government of awarding and administering a contract and the impact it would have on the ability of the federal government to leverage its buying power. However, the Act is silent on what steps an agency should take to examine the effect a new contract will have on the ability of the government to leverage its buying power. Additionally, the Act does not address similar requirements for enterprisewide contracts. Under the Act, the pending FAR rule relating to this legislation was required to be issued by October 15, 2009; however, the rule was still in progress as of June 11, 2010. A business case analysis approach for MACs has the potential to provide a consistent governmentwide approach to awarding MACs as was pointed out by the SARA panel. The panel noted that the OFPP review and approval process for GWACs could serve as a good business model for approving MACs. Using the GWAC process as a model, the full business case analysis as described by the SARA panel would need to include measures to track direct and indirect costs associated with operating a MAC. It would also include a discussion about the purpose and scope, and the amount and source of demand. Further, the business case would need to identify the benefit to the government along with metrics to measure this benefit. We recommended that as OFPP develops the pending FAR rule to implement the business case analysis requirement above, it ensures that departments and agencies complete a comprehensive business case analysis as described by the SARA panel, and include a requirement to address potential duplication with existing contracts, before new MACs and enterprisewide contracts are established. Our work identified a number of challenges GSA faces in effectively managing the MAS program, the federal government’s largest interagency contracting program. More specifically, GSA Lacks transactional data about its customers’ use of MAS contracts, which would provide GSA insight to facilitate more effective management of the program; Makes limited use of selected pricing tools that make it difficult for GSA to determine whether the program achieves its goal of obtaining the best prices for customers and taxpayers; Uses a decentralized management structure for the MAS program in conjunction with deficient program assessment tools, which create obstacles for effective program management. In April 2010, we made a number of recommendations to GSA to improve MAS program management and pricing, with which GSA concurred. GSA lacks data about the use of the MAS program by customer agencies that it could use to determine how well the MAS program meets its customers’ needs and to help its customers obtain the best prices in using MAS contracts. GSA officials told us that because agency customers generally bypass GSA and place their orders directly with MAS vendors, they lack data on the orders placed under MAS contracts; as a result, GSA also lacks data on the actual prices paid relative to the MAS contract prices. While GSA does have a spend analysis reporting tool through its GSA Advantage system that provides agencies with sales and statistical data on their orders, it accounts for a very small percentage of overall MAS program sales, thus restricting the amount of data available. There are two drawbacks to the lack of available transactional data on the goods and services ordered under the MAS program and the prices paid: The lack of data hinders GSA’s ability to evaluate program performance and manage the program strategically. Several GSA officials acknowledged that it is difficult for GSA to know whether the MAS program meets their customers’ needs without data on who uses MAS contracts and what they are buying. The GSA Inspector General has recommended that GSA take steps to collect these data to use in evaluating customer buying patterns and competition at the order level in order to adopt a more strategic management approach. We have made similar observations in prior reports going back several decades. The lack of data could limit the ability of GSA and its customers to achieve the best prices through the MAS program. Some GSA officials informed us that they could possibly use transactional data to negotiate better prices on MAS contracts. Several agency contracting officers we spoke with cited benefits of having additional transactional data on MAS orders to improve their negotiating position when buying goods and services, and increasing visibility over the purchases their respective agency makes. In addition, a number of the senior acquisition officials at agencies in our review said that they considered the prices on MAS contracts to be too high, and without additional data from GSA, it was difficult to see the value in the MAS program and the prices that GSA negotiates. GSA officials told us that they have initiated a process improvement initiative to collect more transactional data in the future, as they make improvements to information systems that support the MAS program. However, this initiative is currently in its early stages. We recommended that GSA take steps to collect transactional data on MAS orders and prices paid and provide this information to contract negotiators and customer agencies, potentially through the expanded use of existing electronic tools or through a pilot data collection initiative for selected schedules. GSA uses several tools and controls in the contract award and administration process to obtain and maintain best prices for its contracts. These tools include: pre-award audits of MAS contracts by the GSA Inspector General, clearance panel reviews of contract negotiation objectives, and Procurement Management Reviews. However, it applies these tools to a small number of contracts, which hinders GSA’s ability to determine whether it achieves the program’s goal of obtaining best prices. For example, the GSA Inspector General performs pre-award audits of MAS contracts, which enable contract negotiators to verify that vendor- supplied pricing information is accurate, complete, and current before contract award. These audits can also result in lower prices for MAS customers by identifying opportunities for GSA to negotiate more favorable price discounts prior to award. From fiscal year 2004 through 2008, the GSA Inspector General identified almost $4 billion in potential cost avoidance through pre-award audits. However, we found that GSA could be missing additional opportunities for cost savings on MAS contracts by not targeting for review more contracts that are eligible for audit. While GSA guidance instructs contract negotiators to request audit assistance for new contract offers and extensions as appropriate when a contract’s estimated sales exceed $25 million for the 5-year contract period, more than 250 contracts that exceeded this threshold were not selected for audit for the 2-year period of 2009 through 2011 due to resource constraints. In addition, the 145 contracts that were selected for audit represent only 2 percent of the total award dollars for all MAS contracts. GSA uses other tools to improve the quality of contract negotiations, but we found that their effectiveness was limited by incomplete implementation and a narrow scope. GSA established a prenegotiation clearance panel process to ensure the quality of GSA’s most significant contract negotiations by reviewing the contract’s negotiation objectives with an emphasis on pricing, prior to contract award for contracts that meet certain defined dollar thresholds. However, we found several instances where clearance panel reviews were not held for contracts that met these thresholds, and GSA officials said that they do not check whether contracts that met the appropriate threshold received a panel review, thus limiting the effectiveness of this tool. GSA has begun the process of updating its prenegotiation clearance panel guidance to address this issue. GSA also conducts Procurement Management Reviews to assess contracts’ compliance with statutory requirements and internal policy and guidance. However, GSA only selects a small number of contracts for review and at the time of our fieldwork did not use a risk-based selection methodology, which does not permit GSA to derive any trends based on the review findings. A subsequent update to GSA’s PMR methodology to focus on attempting to select a statistical sample of contracts for review could address this issue. We recommended that GSA, in coordination with its Inspector General, target the use of pre-award audits to cover more contracts that meet the audit threshold. In addition, we recommended that GSA fully implement the process that has been initiated to ensure that vendors who require a prenegotiation clearance panel receive a panel review. The decentralized management structure for the MAS program and shortcomings in assessment tools also create MAS program management challenges. GSA established the MAS Program Office in July 2008 to provide a structure for consistent implementation of the MAS program. The program office’s charter provides it broad responsibility for MAS program policies and strategy. Responsibility, however, for managing the operation of individual schedules resides with nine different acquisition centers under three business portfolios. None of these business portfolios or the MAS acquisition centers that award and manage MAS contracts are under the direct management of the MAS Program Office. In addition, the program office’s charter does not specifically provide it with direct oversight of the business portfolios’ and acquisition centers’ implementation of the MAS program. GSA officials and program stakeholders we spoke with had varying opinions about this management structure, with some noting that the program is still not managed in a coordinated way and that there is a lack of communication and consistency among MAS acquisition centers which impairs the consistent implementation of policies across the program and the sharing of information between business portfolios. The GSA Inspector General has expressed similar concerns, noting in a recent report that a lack of clearly defined responsibilities within the new FAS organization has harmed national oversight of the MAS program and may have affected the sharing of best practices between acquisition centers. We also found that performance measures were inconsistent across the GSA organizations that manage MAS contracts, including inconsistent emphasis on competitiveness of pricing, making it difficult to have a programwide perspective of MAS program performance. Finally, GSA’s MAS customer satisfaction survey has had a response rate of one percent or less in recent years that limits its utility as a means for evaluating program performance. We recommended that GSA clarify and strengthen the MAS Program Office’s charter and authority so that it has clear roles and responsibilities to consistently implement guidance, policies, and best practices across GSA’s acquisition centers , establish more consistent performance measures across the MAS program to include measures for pricing, and take steps to increase the MAS customer survey response rate. Billions of taxpayer dollars flow through interagency and enterprisewide contracts; however, the federal government does not have a clear and comprehensive view of who is using these contracts and if they are being used in an efficient and effective manner—one that minimizes duplication and advantages the government’s buying power by taking a more strategic approach to buying goods and services. Long-standing problems with the quality of FPDS-NG data on these contracts and the lack of consistent governmentwide policy on the creation, use, and costs of awarding and administering some of these contracts are hampering the government’s ability to realize the strategic value of using these contracts. Furthermore, departments and agencies may be unknowingly contracting for the same goods and services across a myriad of contracts—MACs, GWACs, the MAS program, and enterprisewide contracts. In addition, GSA’s shortcomings in data, program assessment tools, and use of pricing tools create oversight challenges that prevent GSA from managing the MAS program more strategically and knowing whether the MAS program provides best prices. In agreeing with our recommendations, OMB and GSA recognize the importance of addressing these problems, but until they are resolved, we believe the government will continue to miss opportunities to minimize duplication and take advantage of the government’s buying power through more efficient and more strategic contracting. Madam Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or the other members of the subcommittee may have at this time. For further information regarding this testimony, please contact John Needham at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this product. Individuals making key contributions to this statement were James Fuquay (Assistant Director); Marie Ahearn; Lauren Heft; and Russ Reiter. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Agencies can use several different types of contracts to leverage the government's buying power for goods and services. These include interagency contracts--where one agency uses another's contract for its own needs--such as the General Services Administration (GSA) and the Department of Veterans Affairs multiple award schedule (MAS) contracts, multiagency contracts (MAC) for a wide range of goods and services, and governmentwide acquisition contracts (GWAC) for information technology. Agencies spent at least $60 billion in fiscal year 2008 through these contracts and similar single-agency enterprisewide contracts. GAO was asked to testify on the management and oversight of interagency contracts, and how the government can ensure that interagency contracting is efficient and transparent. GAO's testimony is based on its recent report, Contracting Strategies: Data and Oversight Problems Hamper Opportunities to Leverage Value of Interagency and Enterprisewide Contracts ( GAO-10-367 , April 2010). In that report, GAO made recommendations to the Office of Management and Budget (OMB) to strengthen policy, improve data, and better coordinate agencies' awards of MACs and enterprisewide contracts, and to GSA to improve MAS program pricing and management. Both agencies concurred with GAO's recommendations. Interagency and enterprisewide contracts should provide an advantage to government agencies when buying billions of dollars worth of goods and services, yet OMB and agencies lack reliable and comprehensive data to effectively leverage, manage, and oversee these contracts. More specifically, the total number of MACs and enterprisewide contracts currently approved and in use by agencies is unknown because the federal government's official procurement database is not sufficient or reliable for identifying these contracts. Departments and agencies cite a variety of reasons to establish, justify, and use their own MACs and enterprisewide contracts rather than use other established interagency contracts--reasons that include avoiding fees paid for the use of other agencies' contracts, gaining more control over procurements made by organizational components, and allowing for the use of cost reimbursement contracts. However, concerns remain about contract duplication--under these conditions, many of the same vendors provided similar products and services on multiple contracts, which increases costs to both the vendor and the government and can result in missed opportunities to leverage the government's buying power. Furthermore, limited governmentwide policy is in place for establishing and overseeing MACs and enterprisewide contracts. Recent legislation and OMB's Office of Federal Procurement Policy initiatives are expected to strengthen oversight and management of MACs, but no initiatives are underway to strengthen approval and oversight of enterprisewide contracts. GSA faces a number of challenges in effectively managing the MAS program, the federal government's largest interagency contracting program. GSA lacks data on orders placed under MAS contracts that it could use to help determine how well the MAS program meets its customers' needs and help its customers obtain the best prices in using MAS contracts. In addition, GSA makes limited use of selected pricing tools, such as pre-award audits of MAS contracts, which make it difficult for GSA to determine whether the program achieves its goal of obtaining the best prices for customers and taxpayers. In 2008, GSA established a program office with broad responsibility for MAS program policy and strategy, but the program continues to operate under a decentralized management structure that some program stakeholders are concerned has impaired the consistent implementation of policies across the program and the sharing of information among the business portfolios. In addition, performance measures were inconsistent across the GSA organizations that manage MAS contracts, including inconsistent emphasis on pricing, making it difficult to have a programwide perspective of MAS program performance. Finally, GSA's MAS customer satisfaction survey has had a response rate of 1 percent or less in recent years that limits its utility as a means for evaluating program performance.

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Investments in IT can enrich people’s lives and improve organizational performance. During the last two decades the Internet has matured from being a means for academics and scientists to communicate with each other to a national resource where citizens can interact with their government in many ways, such as by receiving services, supplying and obtaining information, asking questions, and providing comments on proposed rules. However, while these investments have the potential to improve lives and organizations, some federally funded IT projects can—and have— become risky, costly, unproductive mistakes. We have previously testified that the federal government has spent billions of dollars on failed and troubled IT investments, such as the Office of Personnel Management’s Retirement Systems Modernization program, which was canceled in February 2011, after spending approximately $231 million on the agency’s third attempt to automate the processing of federal employee retirement claims; the tri-agency National Polar-orbiting Operational Environmental Satellite System, which was stopped in February 2010 by the White House’s Office of Science and Technology Policy after the program spent 16 years and almost $5 billion; the Department of Veterans Affairs’ Scheduling Replacement Project, which was terminated in September 2009 after spending an estimated $127 million over 9 years; and the Department of Health and Human Services’ (HHS) Healthcare.gov website and its supporting systems, which were to facilitate the establishment of a health insurance marketplace by January 2014, encountered significant cost increases, schedule slips, and delayed functionality. In a series of reports we identified numerous planning, oversight, security, and system development challenges faced by this program and made recommendations to address them. In light of these failures and other challenges, last year we introduced a new government-wide high-risk area, Improving the Management of IT Acquisitions and Operations. 18F and USDS were formed in 2014 to help address the federal government’s troubled IT efforts. Both programs have similar missions of improving public-facing federal digital services. 18F was created in March 2014 by GSA with the mission of transforming the way the federal government builds and buys digital services. Agencies across the federal government have access to 18F services. Work is largely initiated by agencies seeking assistance from 18F and then the program decides how and if it will provide assistance. According to GSA, 18F seeks to accomplish its mission by providing a team of expert designers, developers, technologists, researchers, and product specialists to help rapidly deploy tools and online services that are reusable, less costly, and easier for people and businesses to use. In addition, 18F has several guiding principles, to include the use of open source development, user-centered design, and agile software development. 18F is an office within the Technology Transformation Service within GSA that was recently formed in May 2016. 18F is led by the Deputy Commissioner for the Technology Transformation Service, who reports to the service’s Commissioner. Prior to May 2016, 18F was located within the Office of Citizen Services and Innovative Technologies and reported to the Associate Administrator for Citizen Services and Innovative Technologies. In March 2016 GSA created a new organizational structure for 18F that centers around five business units. Custom Partner Solutions. Provides agencies with custom application solutions. Products and Platforms. Provides agencies with access to tools that address common government-wide needs. Transformation Services. Aims to improve how agencies acquire and manage IT by providing them with consulting services, to include new management models, modern software development practices, and hiring processes. Acquisition Services. Provides acquisition services and solutions to support digital service delivery, including access to vendors specializing in agile software development, and request for proposal development consultation. Learn. Provides agencies with education, workshops, outreach, and communication tools on developing and managing digital services. To provide the products and services offered by each business unit, 18F relied on 173 staff to carry out its mission, as of March 2016. The staff are assigned to different projects that are managed by the business units. According to18F officials, the program used special hiring authorities for the vast majority of its staff: Schedule A excepted service authorities were used to hire 162 staff. These authorities permit the appointment of qualified personnel without the use of a competitive examination process. GSA has appointed its staff to terms that are not to exceed 2 years. According to the Director of the 18F Talent division, after the initial appointment has ended, GSA has the option of appointing staff to an additional term not to exceed 2 years. GSA funds 18F through the Acquisition Services Fund—a revolving fund, which operates on the revenue generated from its business units rather than an appropriation received from Congress. The Federal Acquisition Service is responsible for managing this fund and uses it to invest in the development of 18F products and services that will be used by other organizations. 18F is to recover costs through the Acquisition Services Fund reimbursement authority for work related to acquisitions and the Economy Act reimbursement authority for all other projects. According to the memorandum of agreement between 18F and the Federal Acquisition Service, 18F, like all programs funded by the Acquisition Services Fund, is required to have a plan to achieve full cost recovery. In order to recover its costs, 18F is to establish interagency agreements with partner agencies and charges them for actual time and material costs, as well as a fixed overhead amount. Table 1 describes 18F’s revenue, expenses, and net revenue for fiscal years 2014 and 2015. Table 2 describes 18F’s projected revenue, expenses, and net revenue for fiscal years 2016 through 2019. As shown in table 2, according to its projections, 18F plans to generate revenue that meets or exceeds operating expenses and cost of goods sold beginning in fiscal year 2019. In May 2016, the GSA Inspector General reported on an information security weakness pertaining to 18F. Specifically, according to the report, 18F misconfigured a messaging and collaboration application, which resulted in the potential exposure of personally identifiable information (PII). 18F officials told us that, based on the preliminary results of their ongoing review, information such as individual’s first names, last names, e-mail addresses, and phone numbers were made available on the messaging and collaboration platform’s databases, which are managed by that application’s vendor. Those officials also stated that based on the preliminary results of their ongoing review, more sensitive PII, such as Social Security numbers and protected health information, were not exposed. They added that they are continuing a detailed review, in coordination with the GSA IT organization, to confirm that more sensitive PII were not made available. According to the Administration, in 2013 it initiated an effort that brought together a group of digital and technology experts from the private sector that helped fix Healthcare.gov. In an effort to apply similar resources to additional projects, in August 2014 the Administration announced the launch of USDS, to be led by an Administrator and Deputy Federal CIO who reports to the Federal CIO. According to OMB, USDS’s mission is to transform the most important digital services for citizens. USDS selects which projects it will apply resources to and generally initiates its effort with agencies. To accomplish its mission, USDS aims to recruit private sector experts (e.g., IT engineers and designers) and partner them with government agencies. With the help of these experts, OMB states that USDS applies best practices in product design and engineering to improve the usefulness, user experience, and reliability of the most important public- facing federal digital services. As of November 2015, USDS staff totaled about 98 individuals. Similar to 18F, USDS assigns individuals directly to projects aimed at achieving its mission. USDS has used special hiring authorities for the vast majority of it staff. Specifically: Schedule A excepted service. According to USDS, as of November 2015, 52 USDS staff members were hired using the schedule A excepted service hiring authority. According to the USDS Administrator, appointments made using this authority are not to exceed 2 years. At the end of that period, staff can be appointed for an additional term of no more than 2 years. Intermittent consultants. According to USDS, as of November 2015, 39 USDS staff members were intermittent consultants—that is, individuals hired through a noncompetitive process to serve as consultants on an intermittent basis or without a regular tour of duty. The USDS Administrator explained that some of these staff are eventually converted to temporary appointments under the Schedule A authority. According to its Administrator, USDS does not generally make permanent appointments for its staff because it allows the program to continuously bring in new staff and ensure that its ideas are continually evolving. USDS reported spending $318,778 during fiscal year 2014 and approximately $4.7 million during fiscal year 2015. For fiscal year 2016, USDS plans to spend approximately $14 million, and the President’s fiscal year 2017 budget estimated obligations of $18 million for USDS. In an effort to make improvements to critical IT services throughout the federal government, the Presidents’ Budget for fiscal year 2016 proposed funding for the 24 Chief Financial Officers Act agencies, as well as the National Archives and Records Administration, to establish digital services teams. USDS policy calls for these agencies to, among other things, hire or designate an executive for managing their digital services teams. According to USDS policy, the digital service team leader is to report directly to the head of the agency or the deputy. Additionally, USDS has established a hiring pipeline for digital service experts—that is, a unified process managed by USDS for accepting and reviewing applications, performing initial interviews, and providing agencies with candidates for their digital service teams. According to OMB, before using this service, agencies must agree to a charter with the USDS Administrator. Over the last three decades, several laws have been enacted to assist federal agencies in managing IT investments. For example, the Paperwork Reduction Act of 1995 requires that OMB develop and oversee policies, principles, standards, and guidelines for federal agency IT functions, including periodic evaluations of major information systems. In addition, the Clinger-Cohen Act of 1996, among other things, requires agency heads to appoint CIOs and specifies many of their responsibilities. With regard to IT management, CIOs are responsible for implementing and enforcing applicable government-wide and agency IT management principles, standards, and guidelines; assuming responsibility and accountability for IT investments; and monitoring the performance of IT programs and advising the agency head whether to continue, modify, or terminate such programs. Most recently, in December 2014, IT reform legislation (commonly referred to as Federal Information Technology Acquisition Reform Act or FITARA) was enacted, which required most major executive branch agencies to ensure that the CIO had a significant role in the decision process for IT budgeting, as well as the management, governance, and oversight processes related to IT. The law also required that CIOs review and approve (1) all contracts for IT services prior to executing them and (2) the appointment of any other employee with the title of CIO, or who functions in the capacity of a CIO, for any component organization within the agency. OMB also released guidance in June 2015 that reinforces the importance of agency CIOs and describes how agencies are to implement the law. OMB plays a key role in helping federal agencies address these laws and manage their investments by working with them to better plan, justify, and determine how much they need to spend on projects and how to manage approved projects. Within OMB, the Office of E-Government and Information Technology, headed by the Federal CIO, directs the policy and strategic planning of federal IT investments and is responsible for oversight of federal technology spending. As part of our ongoing work, we determined that 18F and USDS have provided a variety of development and consulting services to agencies to support their technology efforts. Specifically, between March 2014 and August 2015, 18F staff helped 18 agencies with 32 projects and generally provided six types of services to the agencies, the majority of which related to development work. In addition, between August 2014 and August 2015, USDS provided assistance on 13 projects at 11 agencies and provided seven types of consulting services. Further, agencies were generally satisfied with the services they received from 18F and USDS. Specifically, of the 26 18F survey respondents, 23 were very satisfied or moderately satisfied and 3 were moderately dissatisfied. For USDS, all 9 survey respondents were very satisfied or moderately satisfied. Between March 2014 and August 2015, GSA’s 18F staff helped 18 agencies with 32 projects, and generally provided services relating to its five business units: Custom Partner Solutions, Products and Platforms, Transformation Services, Acquisition Services, and Learn. In addition, 18F also provided agency digital service team candidate qualification reviews in support of USDS. Custom Partner Solutions. 18F helped 11 agencies with a total of 19 projects relating to developing custom software solutions. Out of the 19 projects, 12 were related to website design and development. For example, regarding GSA’s Pulse project—a website that displays data about the extent to which federal websites are adopting best practices, such as hypertext transfer protocol over Secure Sockets Layer (SSL)/ Transport Layer Security (TLS) (HTTPS)—18F designed, developed, and delivered the first iteration of Pulse within 6 weeks of the project kick-off. According to the GSA office responsible for managing the project, the first iteration has led to positive outcomes for government-wide adoption of best practices; for example, between June 2015 and January 2016, the percentage of federal websites using https increased from 27 percent to 38 percent. As another example, officials from the Department of Education’s college choice project stated that 18F helped develop the College Scorecard website, which the public can use to search among colleges to find schools that meet their needs (e.g., degrees offered, location, size, graduation rate, average salary after graduation).44 18F also helped two agencies, HHS and the Department of Defense, on two projects to develop application programming interfaces—sets of routines, protocols, and tools for building software applications that specify how software components should interact. https://collegescorecard.ed.gov/. Acquisition Services. 18F helped seven agencies on seven projects relating to acquisition services consulting. For example, 18F provided the Department of State’s Bureau of International Information Programs with cloud computing services offered under a GSA blanket purchase agreement (BPA)—specifically, cloud management services (e.g., developers, testing and quality assurance, cloud architect) and infrastructure-as-a-service. According to the Department of State, the department was able to deploy its instance of the infrastructure service only 1 month after it executed an interagency agreement with 18F. According to Social Security Administration officials, 18F helped the agency to incorporate agile software development practices into their requests for proposals for their Disability Case Processing System. Learn. 18F provided services to four agencies on four projects regarding training, such as educating agency officials on agile software development. For example, 18F conducted training workshops on agile software development techniques with the Social Security Administration and Small Business Administration. In addition, according to the Department of Labor’s Wage and Hour Division officials, 18F conducted a 3-day workshop on IT modernization. Transformation Services. 18F assisted two agencies on two projects to help acquire the people, processes, and technology needed to successfully deliver digital services. For example, 18F assisted the Environmental Protection Agency on an agency-wide technology transformation. According to an official within the office of the CIO, 18F assisted the agency with e-Manifest—a system used to track toxic waste shipments. The official noted that 18F provided user-centered design, agile coaching, prototype development services, and agile and modular acquisition services. Further, the official stated that 18F helped turn around the project and significantly decreased the time of delivery for e-Manifest. Products and Platforms. 18F helped two agencies on two projects related to developing software solutions that can potentially be reused at other federal agencies. For example, according to GSA officials responsible for managing GSA’s Communicart project, 18F provided the agency with an e-mail-based tool for approving office supply purchases. Agency digital service team candidate qualification review. 18F worked with USDS to recruit and hire team members for agency digital service teams. According to 18F officials, it provided USDS with subject matter experts to review qualifications of candidates for agency digital service teams. Of the 32 projects, 6 are associated with major IT investments. Cumulatively, the federal government plans to spend $853 million on these investments in fiscal year 2016. Additionally, risk evaluations performed by CIOs that were obtained from the IT Dashboard showed that three of these investments were rated as low or moderately low risk and three investments were rated medium risk. Table 3 describes the associated investments, including their primary functional areas, planned fiscal year 2016 spending, and CIO rating as of May 2016. 18F is also developing products and services—including an agile delivery service blanket purchase agreement (BPA), cloud.gov, and a shared authentication platform: Agile delivery service BPA. 18F established this project in order to support its need for agile delivery services, including agile software development. In August and September 2015, GSA awarded BPAs to 17 vendors. The BPAs are for 5 years and allow GSA to place orders against them for up to 13 specific labor categories relating to agile software development (e.g., product manager, backend web developer, agile coach) at fixed unit prices. The BPAs do not obligate any funds; rather, they enable participating vendors to compete for follow-on task orders from GSA. In cases where 18F determines that it should use the agile BPA to provide services to partner agencies, GSA anticipates that 18F will work with that agency to develop a request for quotations and the other documents needed for a competition with agile BPA vendors. In March 2016 18F released its first request for quotations under the agile BPA for a task order relating to building a web-based dashboard that would describe the status of vendors in the certification process for FedRAMP—a government-wide program, managed by GSA, to provide joint authorizations and continuous security monitoring services for cloud computing services for all federal agencies. GSA anticipates that the time required to complete the process from releasing a request for quotations to task order issuance will typically take between 4 to 8 weeks. The initial BPAs were established under the first of three anticipated award pools—all of which are part of the “alpha” component of the Agile BPA project. 18F officials stated that they planned to establish BPAs for the other two pools in June 2016. They also anticipate a future beta version of the project that could potentially allow federal agencies beyond 18F to issue task orders directly to vendors. Officials stated that they expect to have a plan for the next steps of the beta version of this project by December of 2017. 18F officials have also expressed interest in creating additional marketplaces, such as those relating to data management, developer productivity tools, cybersecurity, and health IT. As of March 2016, 18F did not have time frames for when it planned to develop these additional marketplaces. Cloud.gov.18F also developed cloud.gov service, which is an open source platform-as-a-service that agencies can use to manage and deploy applications. 18F initially built cloud.gov in order to enable the group to use applications it developed for partner agencies. In creating the service, 18F decided to offer the service to other agencies because, according to 18F officials, cloud.gov offers a developer-friendly, secure platform, with tools that agencies can use to accelerate the process of assessing information security controls and authorizing systems to operate. According to 18F, the goal of cloud.gov is to provide government developers and their contractor partners the ability to easily deploy systems to a cloud infrastructure with better efficiency, effectiveness, and security than current alternatives. According to a roadmap for cloud.gov, 18F plans to receive full FedRAMP Joint Authorization Board approval for this service by August 2016. Once available, the group anticipates requiring agencies to pay for this service through an interagency agreement with 18F. Shared authentication platform. In May 2016, 18F announced that it was initiating an effort to create a platform for users who need to log into federal websites for government services. According to 18F, this system is designed to be each citizen’s “one account” with the government and allow the public to verify an identity, log into government websites, and if necessary, recover an account. As of May 2016, 18F plans to conduct prototyping activities through September 2016 and did not have plans beyond that time frame. In addition to developing future products and services, 18F created a variety of guides and standards for use internally as well by agency digital service teams. These guides address topics such as accessibility, application programming interfaces, and agile software development. From August 2014 through August 2015, USDS provided assistance on 13 projects across 11 agencies. The group generally provided seven types of consulting services: quality assurance, problem identification and recommendations, website consultation, system stabilization, information security assessment, software engineering, and data management. Quality assurance. Three of the 13 projects related to providing quality assurance services. For example, regarding the Social Security Administration’s Disability Case Processing System, USDS reviewed the quality of the software and made recommendations that, according to the agency, resulted in costs savings. Additionally, for the Departments of Veterans Affairs and Defense Service Treatment Record project, USDS provided engineers who identified and resolved errors in the process of exchanging records between the two departments, according to the Department of Veterans Affairs. Further, for the HHS Healthcare.gov system, the group performed services aimed at optimizing the reliability of the system, according to HHS. Problem identification and recommendations. USDS identified problems and made recommendations for three projects. For all three projects, it performed a discovery sprint—a quick (typically 2 week) review of an agency’s challenges, which is to culminate in a clear understanding of the problems and recommendations for how to address the issues. For example, it performed a discovery sprint for the Department of the Treasury Internal Revenue Service that focused on three areas: authentication of taxpayers, modernizing systems through event-driven architecture, and redesigning the agency’s website. USDS delivered a report to the Internal Revenue Service with recommendations and also suggested that work initially focus on taxpayer authentication. Consistent with these recommendations, the group and the agency decided to initially focus on authentication, to include re-opening of the online application GetTranscript. For the Department of Justice Federal Bureau of Investigation’s National Incident Based Reporting System, according to USDS, the program performed a discovery sprint and made several recommendations for accelerating deployment of the system. Website consultation. USDS provided consultation services for three agency website projects. For example, for the Office of the U.S. Trade Representative’s Trans-Pacific Partnership Trade Agreements website, USDS provided website design advice and confirmed that the agency had the necessary scalability to support the number of anticipated visitors. Additionally, it consulted with the Office of Personnel and Management (OPM) on the design, implementation, and development of a website for providing information on reported data breaches. System stabilization. For the Department of State’s Consular Consolidated Database, according to USDS, it helped stabilize the system and return it to operational service after a multi-week outage in June 2015. Information security assessment. USDS helped with an information security assessment regarding Electronic Questionnaires for Investigations Processing, which encompasses the electronic applications used to process federal background check investigations. Software engineering. For the Department of Homeland Security U.S. Citizenship and Immigration Services Transformation project, USDS’s software engineering advisors provided guidance on private sector best practices in delivering modern digital services. According to the department, the group’s work has supported accomplishments such as increasing the frequency of software releases and improving adoption of agile development best practices. Data management. For the Department of Homeland Security Office of Immigration Statistics, USDS helped to develop monthly reports on immigration enforcement priority statistics. According to the department, USDS supported the development of processes for obtaining data from other offices within the department and generating the monthly reports. According to the department, after 7 weeks of working with USDS, it was able to develop a proof of concept that reduced the report generating process from a month to 1 day. Seven of the 13 projects are associated with major IT investments. Cumulatively, the federal government plans to spend over $1.24 billion on these investments in fiscal year 2016. Three investments were rated by their CIOs as low or moderately low risk and four investments were rated as being medium risk. Table 4 describes the associated investments, including their primary functional areas planned fiscal year 2016 spending, and CIO rating as of May 2016. In addition to helping agencies improve IT services, USDS has developed guidance for agencies. For example, it developed the Digital Services Playbook to provide government-wide recommendations on practices for building digital services. The group also created the TechFAR Handbook to explain how agencies can use the Digital Services Playbook in ways that are consistent with the Federal Acquisition Regulation. Further, USDS, in collaboration with 18F, developed the draft version of U.S. Web Design Standards, which includes a visual style guide and a collection of common user interface components. With this guide, USDS aims to improve government website consistency and accessibility. In addition to developing guidance, USDS, in collaboration with OMB’s Office of Federal Procurement Policy, used challenge.gov to incentivize the public to create a digital service training program for federal contract professionals. The challenge winner received $250,000 to develop and pilot a training program. Additionally, the Deputy Administrator for USDS stated that 30 federal contract professionals from more than 10 agencies completed this pilot program in March 2016. According to OMB, the program is being revised and transitioned to the Federal Acquisition Institute, where it will be included as part of a certification for digital service contracting officers. In response to a satisfaction survey we administered to agency managers of selected 18F and USDS projects, a majority of managers were satisfied with the services they received from the groups. Specifically, the average score for services provided by 18F was 4.38 (on a 5-point satisfaction scale, where 1 is very dissatisfied and 5 is very satisfied) and the average score for the services provided by USDS was 4.67. Table 5 describes the survey results for 18F and USDS. In addition to providing scores, the survey respondents also provided written comments. Regarding 18F, five factors were cited by two or more respondents as contributing to their satisfaction with the services the program provided: delivering quality products and services, providing good customer service, completing tasks in a timely manner, employing staff with valuable knowledge and skills, and providing valuable education to agencies. For example, one respondent stated that 18F has an expert staff that helped the team understand agile software development and incorporate user-centered design into the agency’s development process. With respect to USDS, four factors were cited by two or more respondents as contributing to their satisfaction with its services: delivering quality services, providing good customer service, completing tasks in a timely manner, and employing staff with valuable knowledge and skills. For instance, one respondent stated that USDS responded to the agency’s request in a matter of hours, quickly developed an understanding of the agency’s IT system, and pushed to improve the system, even in areas beyond the scope of USDS’s responsibility. Although the majority of agencies were satisfied, a minority of respondents provided written comments describing their dissatisfaction with services provided by 18F. For example, six respondents cited poor customer service, four respondents cited higher than expected costs, and one respondent stated that 18F’s use of open source code may not meet the agency’s information security requirements. In a written response to these comments, 18F stated that it has received a variety of feedback from its partners and had modified and updated its processes continuously over the past 2 years. For example, with respect to higher than expected costs, 18F stated that project costs sometimes needed to be adjusted mid-project to address, among other things, higher than expected infrastructure usage or unexpected delays. To address this issue, 18F stated that it uses the assistance of subject matter experts to estimate project costs, and wrote a guide to assist with, among other things, better managing the budgets of ongoing projects. Regarding 18F’s use of open source code, it stated that it has worked with its partners to discuss the use of open source software and information security practices. To assess actual results, prioritize limited resources, and ensure that the most critical projects receive attention, entities that provide IT services, such as USDS and 18F, should establish and implement the following key practices. Define outcome-oriented goals and measure performance. Our previous work and federal law stress the importance of focusing on outcome-oriented goals and performance measures to assess the actual results, effects, or impact of a program or activity compared to its intended purpose. Goals should be used to elaborate on a program’s mission statement and should be aligned with performance measures. In turn, performance measures should be tied to program goals and demonstrate the degree to which the desired results were achieved. To do so, performance measures should have targets to help assess whether goals were achieved by comparing projected performance and actual results. Finally, goals and performance measures should be outcome-oriented—that is, they should address the results of products and services. Establish and implement procedures for prioritizing IT projects. We have reported that establishing and implementing procedures, to include criteria, for prioritizing projects can help organizations consistently select projects based on their contributions to the strategic goals of the organization. Doing so will better position agencies to effectively prioritize projects and use the best mix of limited resources to move toward its goals. In our draft report, we determined that 18F has developed several outcome-orientated goals, performance measures, and procedures for prioritizing projects, which it has largely implemented. However, not all of its goals are outcome-oriented and it has not yet measured program performance. Define Outcome-Oriented Goals and Measure Performance At the conclusion of our review in May 2016, 18F provided 5 goals and 17 associated performance measures that the organization aims to achieve by September 2016 (see table 6). To 18F’s credit, several of its goals and performance measures appear to be outcome-oriented. For example, the goal of delivering two government-wide platform services and the associated performance measures are outcome-oriented in that they address results—that is, delivering services to partner agencies. However, not all of the goals and performance measures appear to be outcome-oriented. For example, the goal of growing 18F to 215 staff while sustaining a healthy culture and its associated measure of hiring 47 staff do not focus on results of products or services. Further, not all of the performance measures have targets. For example, seven of the performance measures state that 18F will establish performance indicators, but 18F has yet to do so. Moreover, 18F does not have goals and associated measures that describe how it plans to achieve its mission after September 2016. In addition, although 18F is required to have a plan to achieve full cost recovery, it has yet to recover costs and its projections for when this will occur have slipped over time. Specifically, in June 2015, 18F projected that it would fully recover its costs for an entire fiscal year beginning in 2016; however, in May 2016, 18F provided revised projections indicating that it would recover costs beginning in fiscal year 2019. Those projections also indicated that, in the worst case, it would not do so through 2022, the final year of its projections. Establishing performance measures and targets that are tied to achieving full cost recovery would help management gauge whether the program is on track to meet its projections. However, 18F has not established such performance measures and targets. Finally, 18F has yet to fully assess the actual results of its activities. Specifically, the group has not assessed its performance in accordance with the 17 performance measures it developed. 18F’s then-parent organization assessed its own performance quarterly beginning in the 4th quarter of fiscal year 2015, including for measures that 18F was responsible for. However, this review process did not include or make reference to the 17 measures developed to gauge 18F’s performance, and thus do not provide insight into how well it is achieving its own mission. In a written response, GSA stated that 18F performance is measured as part of the Technology Transformation Service’s goals and measures and that these goals and measures should form the basis for our review. However, the Technology Transformation Service’s goals and measures do not describe how GSA aims to achieve the specific mission of 18F. Until it establishes goals and performance measures beyond September 2016, ensures that all of its goals and performance measures are outcome-oriented, and that its performance measures have targets, 18F will not have clear definition of what it wants to accomplish. Additionally, without developing performance measures and targets tied to achieving full cost recovery, GSA will lack a fully defined approach to begin recovering all costs in fiscal year 2019. Further, until 18F fully measures actual results, it will not be positioned to assess the status of its activities and determine the areas that need improvement. Establish and Implement Procedures for Prioritizing IT Projects 18F has developed procedures, including criteria, for prioritizing projects and largely implemented its procedures. Specifically, according to the Director of Business Strategy, potential projects are discussed during weekly intake meetings. As part of these meetings, 18F discusses project decision documents, which outline the business, technical and design elements, as well as the schedule, scope, and resources needed to fulfill the client’s needs. Using these documents, 18F determines whether proposed projects meet, among other things, the following criteria: (1) the project is aligned with the products and services offered by 18F, (2) it can be completed in a time frame that meets the agency’s needs and at a cost that fits the agency’s budget, and (3) the project’s government transformation potential (e.g., impact on the public, cost savings). These documents are used by the business unit leads to make a final decision about whether to accept the projects. 18F has largely implemented its procedures. To its credit, with respect to the 14 projects that 18F selected since establishing its prioritization and selection process, 18F developed a decision document for 12 of the 14 projects. However, 18F did not develop a decision document for the 2 remaining projects—the Nuclear Regulatory Commission Master Data Management project and GSA’s labs.usa.gov project. With respect to the Nuclear Regulatory Commission Master Data Management project, 18F officials explained that this project only required staff from one division; as such, that division was able to independently prioritize and select this project. Additionally, regarding the GSA labs.usa.gov project, 18F officials said the Associate Administrator for Office of Citizen Services and Innovative Technologies directed 18F to provide assistance. If 18F consistently follows its process for prioritizing projects, it will be better positioned to apply resources to IT projects with the greatest need of improvement. As part of our ongoing work, we determined that while USDS has developed a process for prioritizing projects and program goals, it has not fully implemented important program management practices. Define Outcome-Oriented Goals and Measure Performance In response to our inquiry, in November 2015 USDS developed four goals to be achieved by December 2017: (1) recruit and place over 200 digital service experts in strategic roles at agencies and cultivate a continually growing pipeline of quality technical talent through USDS, (2) measurably improve five to eight of the government’s most important services, (3) begin the implementation of at least one outstanding common platform, and (4) increase the quality and quantity of technical vendors working with government and cultivate better buyers within government. Additionally, USDS established a performance measure with a target for one of its goals. Specifically, it has a measure for its first goal as it plans to measure the extent to which it will hire 200 digital service experts by December 2017. To its credit, several of the goals appear to be outcome-oriented. For example, improving five to eight services is outcome-oriented in that it addresses results. However, USDS has not established performance measures or targets for its other goals. In addition, the program’s first goal—recruit and place over 200 digital service experts in strategic roles at agencies and cultivate a continually growing pipeline of quality technical talent through USDS—does not appear to be outcome-oriented. Further, USDS has only measured actual results for one of its goals. Specifically, for the goal of placing digital service experts at agencies, as of May 2016, USDS officials stated that they had 152 digital service experts. However, USDS has not measured actual results for the other three goals. USDS officials provided examples of how they informally measure performance for the other three goals. For example, for the goal of measurably improving five to eight of the government’s most important services, the USDS Administrator stated that approximately 1 million visitors viewed the Department of Education’s College Scorecard website in the initial days after it was deployed. However, USDS has not documented these measures or the associated results to date. Until USDS ensures that all of its goals are outcome- oriented and establishes performance measures and targets for each goal, it will be difficult to hold the program accountable for results. Additionally, without an assessment of actual results, it is unclear what impact USDS’s actions are having relative to its mission and whether investments in agency digital service teams are justified. Establish and Implement Procedures for Prioritizing Projects USDS has developed procedures and criteria for prioritizing projects. To identify projects to be considered, USDS is to use, among other sources, a June 2015 OMB report to Congress that identifies the 10 highest-priority federal IT projects in development. To prioritize projects USDS has the following three criteria, which are listed in their order of importance (1) What will do the greatest good for the greatest number of people in the greatest need? (2) How cost-efficient will the USDS investment be? and (3) What potential exists to use or reuse a technological solution across the government? Using these criteria, USDS intends to create a list of all potential projects, to include their descriptions and information on resources needs. This list is to be used by USDS leadership to make decisions about which projects to pursue. To its credit, USDS created a list of all potential, ongoing, and completed projects, which included project descriptions and resource needs. Additionally, USDS has engaged with 6 of the 10 priority IT projects identified in the June 2015 report, including the Department of Health and Human Services’ healthcare.gov project and the Department of Homeland Security’s U.S. Citizenship and Immigration Services Transformation. Additionally, according to a USDS staff member, USDS considered the remaining 4 projects and decided not to engage with them to date. However, USDS has yet to develop a quarterly report on the 10 high priority programs, which it was directed by Congress to develop. Specifically, in December 2015, Congress modified its direction for the Executive Office of the President to develop the reports regarding the top 10 high priority programs and specifically called for USDS to do so on a quarterly basis. According to a USDS staff member, a second top 10 high priority investment report has been drafted and will be finalized prior to the issuance of our report. However, the second top 10 report will address the former congressional direction for the Executive Office of the President to develop reports and OMB did not have a time frame for when USDS would begin to develop reports that address the modified congressional direction. Until USDS develops a time frame for the report on the top 10 programs, develops the report within that time frame and on a quarterly basis thereafter, and considers the programs identified in these reports as part of its prioritization process, USDS has less assurance that it will apply resources to the IT projects with the greatest need of improvement. To help agencies effectively deliver digital services, the President’s Budget for fiscal year 2016 proposed funding for digital service teams at 25 agencies—the 24 Chief Financial Officers Act agencies, as well as the National Archives and Records Administration. According to USDS policy, agencies are to, among other things, hire or designate an executive for managing their digital services teams. In addition, USDS has called for the deputy head of these agencies (or equivalent) to, among other things, agree to a charter with the USDS Administrator. After agreeing to a charter, according to USDS, agencies can use USDS’s hiring pipeline for digital service experts. Of the 25 agencies that requested funding to establish teams, OMB has established charters with 6 agencies for their digital service teams—the Departments of Defense, Health and Human Services, Homeland Security, the Treasury, State, and Veterans Affairs. The charters establish the executives for managing digital service teams and describe the reporting relationships between the team leaders and agency leadership. In addition, according to the Deputy USDS Administrator, USDS plans to establish charters with an additional 3 agencies by the end of the fiscal year—the Department of Education, the Social Security Administration, and Small Business Administration. For the remaining 16 agencies, as of April 2016, 8 agencies reported that they plan to establish digital service teams but have yet to establish charters with USDS—the Department of Housing and Urban Development, Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, National Archives and Records Administration, National Science Foundation, Nuclear Regulatory Commission, and Office of Personnel Management. The other 8 agencies reported that they do not plan to establish digital service teams by September 2016 because they did not receive requested funding—the Departments of Agriculture, Commerce, Energy, the Interior, Justice, Labor, and Transportation; and the U.S. Agency for International Development. Table 7 summarizes agency and OMB efforts to establish digital service teams. Congress has recognized the importance of having a strong agency CIO. In 1996, the Clinger-Cohen Act established the position of agency CIO and, among other things, gave these officials responsibility for IT investments, including IT acquisitions, monitoring the performance of IT programs, and advising the agency head whether to continue, modify, or terminate such programs. More recently, in December 2014, FITARA was enacted into law. It required most major executive branch agencies to ensure that the CIO has a significant role in the decision process for IT budgeting, as well as the management, governance, and oversight processes related to IT. The law also required that CIOs review and approve (1) all contracts for IT services associated with major IT investments prior to executing them and (2) the appointment of CIOs for any component within the agency. OMB also released guidance in June 2015 that reinforces the importance of agency CIOs and describes how agencies are to implement FITARA. Further, according to our prior work, leading organizations clearly define responsibilities and authorities governing the relationships between the CIO and other agency components that use IT. Only one of the four agencies we selected for review—the Department of Homeland Security—defined the relationship between the executive for managing the digital services team and the agency CIO. Specifically, the Department of Homeland Security established a charter for its digital services team, signed by both the Administrator of USDS and the Deputy Secretary, which outlines the reporting structure and authorities for the digital services executive, including the relationship with the CIO. For example, according to the charter, the digital services executive will report on a day-to-day basis to the CIO, but will also report directly to the Deputy Secretary. However, the other three agencies we reviewed—the Departments of Defense, State, and Veterans Affairs—have not defined the role of agency CIOs with regard to these teams. Although they have established charters for these teams, which describe the reporting structure between the digital services executive and senior agency leadership, the charters do not describe the role of the agencies’ CIOs and they have not documented this information elsewhere. The Department of Defense CIO and the Department of Veterans Affairs Principal Deputy Assistant Secretary for the Office of Information and Technology told us that they work closely with their agency digital service team. However, while these officials have coordinated with the agency digital service teams, the roles and responsibilities governing these relationships should be described to ensure that CIOs can carry out their statutory responsibilities. In contrast to the Departments of Defense and Veterans Affairs, the State CIO told us that he has had limited involvement in the department’s digital services team. He added that he believes it will be important for CIOs to be involved in agency digital services teams in order to sustain their efforts. In written comments, OMB acknowledged that the Department of State’s charter does not describe the role of the CIO, but stated that the Departments of Defense and Veterans Affairs digital service team charters at least partially address the relationship between digital service teams and agency CIOs. Specifically, with respect to the Department of Defense, OMB stated that the charter calls for senior leadership, including the department’s CIO, to ensure that digital service team projects proceed without delay. Additionally, according to OMB, the charter for the Veterans Affairs digital service team calls for the team to be located in and supported by VA’s CIO organization. However, these requirements do not address the specific responsibilities or authorities of the Veterans Affairs’ CIO with regard to the digital service team. The lack of defined relationships is due, in large part, to the fact that USDS policy on digital service teams does not describe the expected relationship between agency CIOs and these teams. As previously mentioned, USDS policy calls for the digital service team leader to report directly to the head of the agency or its deputy; however, it does not describe the expected responsibilities and authorities governing the relationship of the CIO. Until OMB updates the USDS policy to clearly define the responsibilities and authorities governing the relationships between CIOs and digital services teams and ensures that existing agency digital service team charters or other documentation reflect this policy, agency CIOs may not be effectively involved in the digital service teams. This is inconsistent with long-standing law, as well as the recently enacted FITARA, and OMB’s guidance on CIO responsibilities, and may hinder the ability for CIOs to carry out their responsibilities for IT management of the projects undertaken by the digital service teams. In summary, by hiring technology and software development experts and using leading software development practices, both 18F and USDS have provided a variety of useful services to federal agencies. Most surveyed agency project managers that partnered with 18F and USDS were satisfied with the services provided. It is important for USDS and 18F to establish outcome-oriented goals, measure performance, and prioritize projects, particularly since these are valuable management tools that could aid in the transfer of knowledge when critical temporary staff leave these organizations and are replaced. To their credit, both 18F and USDS have developed several outcome- orientated goals and procedures for prioritizing projects. However, the goals and associated performance measures and targets were not always outcome-oriented. Additionally, they have not fully measured program performance. As a result, it will be difficult to hold the programs accountable for results. Moreover, without documented measures and results for USDS, it is unclear whether investments in agency digital service teams are justified. Further, by delaying the date for when it projects to fully recover its costs and not having associated performance measures, 18F is at risk of not having the information necessary for GSA leadership to determine whether to continue using the Acquisition Services Fund for 18F operations. Finally, USDS has yet to develop a quarterly report on the 10 high priority programs, meaning that it may be applying resources to investments that are not in the most need of their assistance. Although OMB has called for agencies to establish digital service teams, USDS policy does not require agencies to define the expected responsibilities and authorities governing the relationships between CIOs and digital service teams. To fulfill their statutory responsibilities, including as most recently enacted in FITARA and reinforced in OMB guidance, and ensure that CIOs have a significant role in the decision making process for projects undertaken by the digital service teams, such defined relationships are essential. Accordingly, our draft report contains two planned recommendations to GSA and four to OMB. Specifically, the report recommends that GSA: ensure that goals and associated performance measures are outcome-oriented and that performance measures have targets, including performance measures and targets tied to fully recovering goals, performance measures, and targets for how the program will achieve its mission after September 2016; and assess actual results for each performance measure. The draft report also includes recommendations for OMB to: ensure that all goals and associated performance measures are outcome-oriented and that performance measures have targets; assess actual results for each performance measure; establish a time frame for developing the report identifying the highest priority projects, develop the report within that established time frame and on a quarterly basis thereafter, and consider the highest priority IT projects as part of the established process for prioritizing projects; and update USDS policy to clearly define the responsibilities and authorities governing the relationships between CIOs and the digital services teams and require existing agency digital service teams to address this policy. In doing so, the Federal Chief Information Officer should ensure that this policy is aligned with relevant federal law and OMB guidance on CIO responsibilities and authorities. If GSA implements our recommendations, it will be better positioned to effectively measure performance. Additionally, OMB’s implementation of our recommendations will position it to effectively measure performance, prioritize USDS resources, and ensure that CIOs play an integral role in agency digital service teams. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Committees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or at [email protected]. Other key contributors include Nick Marinos (Assistant Director), Kavita Daitnarayan, Rebecca Eyler, Kaelin Kuhn, Jamelyn Payan, and Tina Torabi. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In an effort to improve IT across the federal government, in March 2014 GSA established a team, known as 18F that provides IT services to agencies. In addition, in August 2014 the Administration established USDS, which aims to improve the federal IT services provided to citizens. OMB also required agencies to establish their own digital service teams. GAO was asked to summarize its draft report that (1) describes 18F and USDS efforts to address problems with IT projects and agencies' views of services provided, (2) assesses these programs' efforts against practices for performance measurement and project prioritization, and (3) assesses agency plans to establish their own digital service teams. In preparing the draft report on which this testimony is based, GAO reviewed 32 18F projects and 13 USDS projects that were underway or completed as of August 2015 and surveyed agencies about these projects; reviewed 18F and USDS in key performance measurement and project prioritization practices; reviewed 25 agencies' efforts to establish digital service teams; and reviewed documentation from four agencies, which were chosen based on their progress made in establishing digital service teams. In a draft report, GAO determined that the General Service Administration's (GSA) 18F and Office of Management and Budget's (OMB) U.S. Digital Service (USDS) have provided a variety of services to agencies supporting their information technology (IT) efforts. Specifically, 18F staff helped 18 agencies with 32 projects and generally provided development and consulting services, including software development solutions and acquisition consulting. In addition, USDS provided assistance on 13 projects across 11 agencies and generally provided consulting services, including quality assurance, problem identification and recommendations, and software engineering. Further, according to GAO's survey, managers were generally satisfied with the services they received from 18F and USDS on these projects (see table). Both 18F and USDS have partially implemented practices to identify and help agencies address problems with IT projects. Specifically, 18F has developed several outcome-oriented goals and related performance measures, as well as procedures for prioritizing projects; however, not all of its goals are outcome-oriented and it has not yet fully measured program performance. Similarly, USDS has developed goals, but they are not all outcome-oriented and it has established performance measures for only one of its goals. USDS has also measured progress for just one goal. Further, it has not fully implemented its procedures for prioritizing projects. Until 18F and USDS fully implement these practices, it will be difficult to hold the programs accountable for results. Agencies are beginning to establish digital service teams. Of the 25 agencies that requested funding for these teams, OMB has established charters with 6 agencies for their digital service teams. In addition, according to the USDS Deputy Administrator, USDS plans to establish charters with an additional 3 agencies by the end of the fiscal year—the Department of Education, as well as the Social Security Administration and Small Business Administration. For the remaining 16 agencies, as of April 2016, 8 agencies reported that they plan to establish digital service teams but have yet to establish charters with USDS. The other 8 agencies reported that they do not plan to establish digital service teams by September 2016 because they did not receive requested funding. Further, of the four agencies GAO selected to review, only one has defined the relationship between its digital service team and the agency Chief Information Officer (CIO). This is due, in part, to the fact that USDS policy does not describe the expected relationship between CIOs and these teams. Until OMB updates its policy and ensures that the responsibilities between the CIOs and digital services teams are clearly defined, it is unclear whether CIOs will be able to fulfill their statutory responsibilities with respect to IT management of the projects undertaken by the digital service teams. GAO's draft report includes two recommendations to GSA and three recommendations to OMB to improve goals and performance measurement. In addition, GAO's draft report is recommending that OMB update USDS policy to define the relationships between CIOs and digital services teams.

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The maturation of the baby boom generation (persons born between 1946 and 1964) has progressed to the point where boomers will soon begin moving from the traditional working ages to the ages when many people start to retire. The first wave of the baby boom generation will start to turn age 65 in 2011 and the last of the boomers will be 65 in 2029. This development will lead to significant changes in the ratio of the working age population (defined as age 20 to 64) to the population age 65 or older. This ratio, called the “aged dependency ratio” because it provides an estimate of how many workers will be available to support each retiree, was 21 percent in 2000, or 5 working-age individuals for every person over age 65. As the baby boom generation ages, the aged dependency ratio will rise. By 2030, it will reach 35 percent, meaning that there will be fewer than three persons of traditional working age for every person age 65 or over. The increase in the aged dependency ratio is not only occurring because of the growing numbers of older persons. It is also due to the slowing growth of the labor force of younger workers over the last decade, a trend that is expected to continue. From 1950 to 1990, the labor force under 55 grew at an average annual rate of 1.9 percent. From 1990 to 2000, the average annual growth rate for this group was 1.0 percent, and BLS projects that from 2000 to 2025 labor force growth will slow to an annual rate of 0.3 percent. Several recent changes in Social Security retirement policy could strengthen incentives to work longer. Social Security provides monthly benefits to qualified retired and disabled workers and their dependents, and to survivors of insured workers. These benefits are the primary source of income (more than 50 percent) for nearly 57 percent of the population age 65 and older. In April 2000, the practice of reducing Social Security benefits when a beneficiary has earnings and has reached the normal retirement age (currently 65 years and 4 months) was eliminated, at least in part to remove the disincentive to work. Also, the delayed retirement credit for persons who first claim benefits after the normal retirement age is steadily being increased until it reaches 8 percent per year in 2008. Prior to these increases, those who chose to work beyond normal retirement age might receive less Social Security over their lifetime because the start of their benefit receipt was delayed. Some members of Congress have also put forward proposals that would raise normal retirement age for benefits beyond the current schedule of increases, as well as proposals that increase the early retirement age of 62. Other federal laws also attempt to make work and the workplace more hospitable for older individuals. The Age Discrimination in Employment Act of 1967 (ADEA) promotes the employment of older persons based upon their ability rather than age and prohibits age discrimination in employment. The Equal Employment Opportunity Commission (EEOC) enforces ADEA as well other federal statutes prohibiting employment discrimination. ADEA applies only to firms with 20 or more employees, thus excluding a not insignificant segment of the labor force. While some states have their own laws protecting older workers in small businesses, these laws still may exclude some small businesses. As pension benefits are a key source of retirement income for many workers, they can also influence the work decisions of older individuals. To encourage employers to establish and maintain pension plans for their employees, the federal government provides preferential tax treatment under the Internal Revenue Code (IRC) for plans that meet certain requirements. In exchange for preferential tax treatment, an employer is required to design the pension plan within legal limits that are intended to improve the equitable distribution and security of pension benefits. The Internal Revenue Service (IRS) administers policies on pension distributions that are set by the Congress in the IRC to ensure that the benefits of all tax-qualified plans are apportioned in a nondiscriminatory manner. Many pension plans have features that encourage employees to retire at or before age 65. Pension laws relating to defined benefit plans allow benefits earned after the normal retirement age (generally, age 65) to accrue at a lower rate. Furthermore, many defined benefit plans subsidize early retirement benefits which tends to discourage employment after becoming eligible for these benefits. ERISA establishes certain minimum standards for private employee pension plans. This law also created the ERISA Advisory Council to advise the Secretary of Labor with respect to carrying out responsibilities under ERISA. The Advisory Council has made recommendations to the Secretary of Labor to consult and work with appropriate government agencies on pension and welfare plan reforms that could help employers establish phased retirement programs. The number of older workers will grow substantially over the next two decades and they will become an increasingly significant proportion of all workers. This expected increase is a result of the aging of the baby boom generation and a general trend in greater labor force participation among older persons. Older workers are employed in a diverse group of occupations but are a growing proportion of the workers in white-collar occupations. In addition, our projections show that older workers may make relatively greater gains in earnings than their younger counterparts between 2000 and 2008. The number of older workers will grow rapidly over the next two decades. According to the BLS, in 2000, 18.4 million persons over age 55, or about one-third of the over-55 population, were in the labor force. (See Fig. 2.) BLS estimates that there will be 31.8 million older labor force participants in 2015, an average annual increase of 4.0 percent from 2000. However, this rapid growth is expected to level off by the mid-2020s. BLS estimates that 33.3 million older persons will be in the labor force in 2025, an average annual increase of only 0.5 percent from 2015. This expected increase is a result of the aging of the baby boom generation and a general trend in greater labor force participation among older persons. The oldest baby boomers are currently 55 years old, and the youngest will turn 55 in 2019. The percentage of older persons who participate in the labor force has been growing, especially among females age 55-64, a trend that is expected to continue. (See Fig. 3.) Currently, 30 percent of all persons 55 and older participate in the labor force, a number that is expected to grow to 37 percent by 2015, according to projections by BLS. This increase in labor force participation among older workers is primarily driven by the growth in the number of older women and their labor force participation rates. Labor force participation rates of women between the ages of 55 and 64 have been steadily increasing from 42 percent in the mid- 1980s to 52 percent in 2000. A further increase in the participation rate to 61 percent is expected to occur by 2015, according to BLS. The labor force participation rate of women age 65 and older is currently 9 percent. This is up from the low point of slightly more than 7 percent in the mid-1980s but is lower than the 10 percent levels of the 1950s. BLS projects the growth in the participation rate in this age group to grow to 10 percent by 2015. The labor force participation rates of males over age 55 have been stable for several years and are projected to increase in the future. Older male labor force participation hit a low point in the mid-1990s that was part of a downward trend that had been occurring for several decades. Since then, the labor force participation rates of males between the ages of 55 and 64 have held steady at approximately 67 percent; BLS projects an increase to 69 percent in 2015. Labor force participation rates of males 65 and older also held steady at about 17 percent during the 1990s and are projected to rise to nearly 20 percent by 2015. As the number of older workers grows, older workers will also become a larger percentage of all workers. In 1950 and 1960, older workers comprised 17 percent and 18 percent of the labor force, respectively. (See Fig. 1.) As the relatively large baby boom generation entered the workforce between 1960 and 1990, the proportion of older workers fell to 12 percent of the total as the number of workers under age 55 swelled. Older workers now represent 13 percent of the total workforce, and BLS estimates that by 2015 they will be about 20 percent of the total workforce. Older workers hold jobs in a wide range of occupations that are somewhat reflective of the occupations occupied by younger workers. (see table 1.) Nearly the same percentage of workers in the age categories of 40 to 54, 55 to 64, and 65 to 74 are employed in white collar occupations (approximately 62 percent). The slight difference in the employment distribution among these age groups is found in blue-collar and service occupations. Nearly 15 percent of workers age 65 to 74 are employed in service occupations compared with 11 percent of workers age 40 to 54. Blue-collar work accounts for 26 percent of employment among workers age 40 to 54 and 23 percent for workers age 65 to 74. The general shift in the economy away from physically demanding jobs is present among workers of all ages, but is far more pronounced among older workers as they age. Workers age 55 to 64 constitute a significant proportion of many occupations as they are nearly 13.9 million members (11 percent) of the total workforce. (See table 2.) The highest absolute numbers of older workers age 55 to 64 are in executive/manager occupations (2.4 million or 12 percent of the total occupation) and professional occupations (2.3 million or 11 percent of the total occupation). Workers age 65 to 74 comprise much smaller percentages of occupations since most persons in this age group have exited the labor force. Workers age 65 to 74 constitute less than 4 percent of the all major occupational categories with the exception of farming, fishing, and forestry. Between 2000 and 2008, the number and percentage of workers over age 55 will increase in all major occupational categories, according to our projections. (See Figs. 4 and 5.) The largest change should occur in white- collar occupations. Among executives/managers, the percentage of workers in this occupation who are over 55 is projected to grow from 15 percent to 23 percent. The percentage of the workforce that is over age 55 in professional occupations should also grow substantially from 14 percent to 19 percent. The smallest change should occur in employment in service occupations as the percentage of the workforce older than age 55 employed in the service sector grows from 13 percent to 14 percent. In line with these major occupational changes, certain specific occupations will increasingly rely on older workers. For example, from 2000 to 2008, the percent of teachers older than age 55 will increase from 13 percent to 19 percent, and the percent of nurses and related occupations older than age 55 will increase from 12 percent to 18 percent. (See app. I.) As workers age, their occupational composition moves towards white- collar and service occupations and away from physically demanding occupations. According to our projections, the composition of the older workforce will shift further from blue-collar to white-collar occupations in the near future. Between 2000 and 2008, the proportion of workers age 55 to 74 in managerial/administrative and professional/technical occupations will increase by 2.9 percent and 1.6 percent, respectively, while the proportion in blue collar and service occupations will decrease. (see app. I.) The change in the occupational composition of older workers into less physically demanding occupations is supported by an analysis of changes in occupations of related age groups, as shown in table 3. Group I consists of individuals age 45 to 54 in 1990 and individuals age 55 to 64 in 2000. Group II consists of individuals of age 55 to 64 in 1990 and 65 to 74 in 2000. In 2000, both groups I and II had fewer individuals in the more physically demanding occupations of production, craft and repair, machine operation, and assembly; they also had a greater number of older workers in the white-collar and service occupations in 2000. Part of this shift likely occurred because as workers age they can experience health problems that make their jobs more difficult to perform and, therefore, they choose to move into less physically demanding jobs. Also, the composition of the labor force changes because of differential retirement rates and those who continue to work to older ages are more likely to be white-collar workers. The shift toward white-collar occupations is also partially explained by differences in educational attainment among the baby boom generation and the cohort proceeding them. (See Fig. 6.) Fifty-seven percent of persons who are age 40 to 54 have at least some college education (29 percent have a college degree) compared with 42 percent of individuals age 55 to 74 (21 percent have a college degree). Moreover, only 11 percent of individuals age 40 to 54 lack a high school diploma compared with 22 percent of persons age 55 to 74. The greater level of educational attainment among the baby boomers may lead to more employment opportunities as they age. They may have a broader diversification of jobs available to them compared to the current generation of older workers. Between 1989 and 1999, older workers experienced larger percentage gains in median earnings than younger workers. (See Fig. 7.) Adjusted for inflation, workers between the ages of 55 and 64 and workers between 65 and 74 had median earnings increases of 9 percent and 19 percent, respectively, for the 10-year period—compared with increases of 2 percent and 4 percent for workers age 40 to 54 and 30 to 39, respectively. These earnings increases were primarily driven by a greater number of older workers working full-time instead of part-time (57 percent in 1989 versus 63 percent in 1999) and a movement in the occupational composition toward higher paying white-collar jobs (See tables 3 and app. I). Improvements in the economy during the last 15 years likely offered older workers the opportunity to move into full-time employment as labor shortages increased the demand for their services. During the economic expansion of the mid- to late-1980s, the unemployment rate declined from 7 percent in 1985 to 5 percent in 1989; by comparison, in the mid- to late- 1990s the unemployment rate declined from 6 percent to 4 percent. According to our projections, workers between the ages of 55 and 74 will continue to make gains in their earnings that exceed those of their counterparts who fall between the ages of 40 and 54. Currently, workers age 55 to 64 and workers age 65 to 74 earn 93 percent and 46 percent, respectively, of what workers age 40 to 54 earn. We project these numbers to rise to 111 percent and 67 percent, respectively, by 2008. These relative gains are tied to the change in the composition of the older workforce to higher paid white-collar occupations, while younger workers’ occupational composition is projected to change to more blue-collar and service occupations. While older workers are less likely than younger workers to lose a job, older workers who do lose a job are somewhat less likely than younger workers to return to work. Older workers and younger workers tend to lose their jobs for similar reasons. However, many older workers who lose their jobs choose to retire following the job loss. Some older workers who have not yet fully retired do seek transitional or “bridge” employment. But once fully retired, relatively few are interested in returning to work. The desire to return to work among fully retired older persons who have lost a job varies according to education and race. Although small in percentage terms (1.3 percent), it is fairly large numerically. In 2000, there were more than three-quarters of a million persons age 55 to 74 who were either unemployed and looking for work or fully retired and wanting a job. According to data from the Displaced Workers Supplement (DWS) to the CPS, older workers were somewhat less likely than younger workers to lose their jobs between 1997 and 1999. (See table 4.) However, older workers who did lose their jobs were significantly less likely than younger workers to be re-employed. Thirty-nine percent of persons age 55 to 74 who lost their jobs were not re-employed as of February 2000, compared with 19 percent of persons between age 40 and 54. Those who did seek re- employment and found jobs reported job search times that were somewhat comparable to their younger counterparts. The median job search times for workers age 40 to 54 and 55 to 74 was four weeks. However, the average 12 weeks time workers age 55 to 74 needed to search for new employment was 3.6 weeks longer than for workers age 19 to 39 and 1.3 weeks longer than for workers age 40 to 54. This indicates that there is a segment of the older workforce that incurs more prolonged job searches relative to younger persons. Older workers and younger workers tend to lose their jobs for similar reasons. According to data from the DWS, older workers are somewhat more likely than younger workers to lose their jobs due to plant closures or plant relocation (31 percent compared with 24 percent, respectively) and somewhat less likely to lose their jobs due to insufficient work (17 percent compared with 22 percent). (See Fig. 8.) The DWS asks respondents whether they lost their jobs due to their position or shift being abolished, completion of a seasonal job, failure of a self-operating business, or another reason. The responses of older and younger workers were not significantly different. Though older workers are not more likely to lose a job, a job loss potentially has more severe consequences for older workers. Older workers tend to have greater tenures in their jobs and may experience a larger loss in earnings upon re-employment, compared with younger workers. Moreover, the potential loss of health care benefits following a job loss could be more problematic for older workers because of the positive correlation between greater health problems and aging. For older workers, the likelihood of being hired by a new employer varies according to several factors—the compensation level, mix of wages and benefits, skill requirements, working conditions, and hours of work— associated with the new employer and job. For example, a firm whose wages are highly correlated with firm-specific experience will hire fewer older workers. Firms with these types of compensation structures usually require that skills be developed internally on the job. Moreover, these types of firms tend to encourage earlier exits of older workers through their payments of pension benefits. Occupations that require extensive computer use also tend to hire fewer older workers possibly due to perceptions that older persons have difficulty adapting to new technologies. Finally, jobs that require night and evening shifts hire fewer older workers. According to the March 2000 CPS, 768,000 persons age 55 to 74 were either unemployed and seeking a job (520,000 persons), or fully retired and said they wanted a job (248,000 persons). Unemployment rates for most groups of older workers are low and vary somewhat by educational level and by race. In 2000, the unemployment rate for all workers over age 55 was 2.8 percent. However, non-high school graduates had an unemployment rate of 5 percent, which was more than three times as high as college graduates. (See table 5.) The unemployment rate for blacks was 4.1 percent and for Hispanics and other ethnic groups 5.3 percent, compared with an unemployment rate of 2.5 percent among whites. Furthermore, once older Americans fully retire, most do not want to return to work. About 45 percent (or 18.4 million persons) of all persons between age 55 to 74 were fully retired. These individuals are not doing any work for pay and have categorized themselves as “retired.” When questioned about whether they wanted a full-time or part-time job, only 1.3 percent responded “yes.” Public and private employers are using an array of arrangements— including rehiring retirees, reduced work schedules, and allowing job- sharing—to retain and extend the careers of older workers. However, survey data and interviews with employers suggest that few of these arrangements are widespread among private employers or involve large numbers of workers at individual firms even though the majority of older workers are interested in them. Employers cite several reasons for not implementing programs, but the most prevalent is that they simply have not considered doing so. While acknowledging the importance of the issue, union officials we spoke with said that they have not addressed these issues broadly in collective bargaining agreements due to a lack of interest on the part of employers generally and difficulties in establishing flexible schedules in many manufacturing settings. Public employers appear to be experimenting more with these programs than private employers. For example, large efforts to retain older workers are being made in some states in response to teacher shortages. These efforts primarily involve pension incentives that make work financially attractive for older employees. Some employers and employees are experimenting with flexible employment arrangements that would allow older workers to continue to work. We found that flexible employment arrangements come in many different forms, including part-time work, seasonal or part-year work, consulting or contracting for limited periods of time, or a reduction of job responsibilities. (See table 6.) For example, a large retail drug store chain accommodates older workers by offering them part-time or part- year schedules and allows them to work in multiple locations throughout the country. Under this approach, an older worker can work in New York during the spring and summer and in Florida during the fall and winter. A large chemical manufacturer has established an in-house Retiree Resource Corps that serves as a clearinghouse for matching retirees’ skills and the company’s employment needs for retirees who wish to work on a temporary basis. Retirees must separate from the company for 6 months prior to entry into the program and are limited to less than 1,000 hours of work per year. Employees who work more than the maximum have their pension benefits ceased and must terminate from the program to have their benefits reinstated. A large fruit canning employer hires older workers on a part-year basis to work in their canning factory that operates from July to mid-September. The employer says that older workers are more likely to be available for the part-year work than younger workers who are more interested in full-time jobs. A needle manufacturer has been successful in recruiting older workers by allowing them to choose the days they want to work. Though they exist, flexible employment arrangements are not yet widespread in the private sector. According to our interviews with experts, consultants, and employers, in many instances these arrangements or programs are provided on only an ad hoc basis and to limited groups of employees. The employees involved in these arrangements tend to be skilled workers with an expertise for which an employer has a special need. While these programs can be expensive, some firms have shown they are willing to pay to retain the more highly skilled employees who are hardest to replace. Survey data on the extent and nature of flexible employment arrangements -- at least in large private sector firms -- also supports our finding that such programs are often limited in scope and not widespread. According to a study by Watson Wyatt, a large human capital consulting services firm, 16 percent of employers participating in their survey offer some type of flexible employment arrangement. However, they defined such an arrangement as any type of accommodation that was being made to an older worker either on a programmatic or individual basis. The American Association of Retired Persons (AARP) and the Society for Human Resource Management (SHRM) also conducted a study of flexible employment programs and estimated that about 2 percent of employers offer such arrangements to older workers. Neither of these studies is nationally representative. While acknowledging the importance of the issue, unions we spoke with have not yet addressed flexible employment programs broadly in collective bargaining agreements due to a lack of interest on the part of employers generally and difficulties in establishing flexible schedules in many manufacturing settings. We spoke with officials from unions representing workers in the telecommunications industry and manufacturing industries like automobiles and aerospace, who said that flexible employment programs for older workers are not yet a major issue for many unions. A union official in the manufacturing industry said flexible employment programs may be difficult to establish because for many production processes, the work environment tends to require team production from employees on full-time schedules. A union official in the telecommunications industry said that unions have proposed some flexible employment arrangements in bargaining, but they say employers have not shown an interest because they do not yet see worker retention as an important issue. Evidence suggests that at least some middle- and large-sized employers currently do not see a need for flexible employment programs, although this could change in the future. According to the Watson Wyatt survey, 70 percent of companies do not offer phased retirement programs to older workers because they simply have not considered it. Other reasons given for not offering programs were the programs’ incompatibility with corporate culture (16 percent), restrictions on in-service distributions (14 percent), employment costs (13 percent), and productivity concerns (9 percent). However, 28 percent of the employers who do not offer phased retirement indicated that they have a moderate to high interest in doing so over the next 2 to 3 years. Moreover, 70 percent of the employers surveyed said that phased retirement programs may be a solution to labor shortages brought on by demographic and economic change. The hesitancy on the part of employers to offer flexible employment programs appears to be at odds with the desire of older employees to have the option of participating in such programs, and thus possibly extending their work lives. According to 1996 data from the Health and Retirement Survey, 56 percent of persons age 55 to 65 would prefer to gradually reduce their hours of work as they age, but only 16 percent of full-time workers in this age group said their employers would be willing to allow them to reduce their hours. Another survey of workers age 54 to 74 who were employed in their career occupations found that 48 percent of workers wanted to work significantly fewer hours—citing workload and job demands (41 percent) and financial factors (28 percent) as their reasons for working more hours than they would prefer. A reduction in work hours seems to be a fairly common desire: 71 percent of retirees who have returned to work said the reason they initially retired was due to a lack of a more flexible work schedule. Furthermore, this option seems to be less available to rank and file workers, with managers and professionals more likely to believe a reduction in hours was possible (64 percent) than were workers in service and production occupations (31 percent). Some public sector employers have been very active in initiating broad programs that provide incentives for older workers to stay on the job. Driven in large part by teacher shortages in many public school districts, state and local government employers have implemented programs that provide incentives for older employees to remain on the job. In many instances, these incentives were created by redesigning their state-defined benefit pension plans to include Deferred Retirement Option Plan (DROP) features that allow a pension participant at an eligible retirement age to have pension benefits start even though he or she continues to work.These programs also include other pension plan revisions as well. At the state level, Arkansas, California, Louisiana, and Ohio have all adopted incentives for older teachers to stay on the job rather than retire. A growing number of state and local public employers have implemented, or are considering implementing, DROP pension features as incentives to encourage older employees to remain on the job. Although employers have used these for other public employees like firefighters or law enforcement personnel, many have focused on the retention of elementary and secondary public school teachers. For example, Arkansas has a DROP program in which all teachers who meet length-of-service requirements can have 70 percent of their monthly pension payments deposited into an account that is payable as a lump sum along with other options for payment. Teachers can stay in the DROP program for up to 10 years. The state also allows teachers who are eligible for retirement to draw their full pension and a full salary if they work in one of four subject areas deemed to have a critical shortage of teachers (math, science, foreign language, and special education) and if they separate from employment for 30 days. Louisiana has a variety of programs to encourage older teachers to stay on the job, and 4,300 teachers participated in them last year. The DROP program has been popular among the teachers because they can earn a lump sum in the range of $70,000 to $80,000 in 3 years. Two-thirds of eligible teachers participate in the DROP program and may participate for up to 3 years, after which they can continue working and will resume earning pension credits in their defined benefit system. The myriad of other Louisiana programs established to retain or attract retired teachers are being phased out and replaced with one program that allows retired teachers to earn their full pension while continuing to teach after a 12- month break in service. Some public employers are using other pension incentives to retain teachers. For example, facing a projected shortfall of 300,000 teachers over the next decade, the California legislature enacted several measures modifying the state teacher pension plan to encourage older teachers to continue to work. Starting in 2001, teachers who retire and then separate from employment for 1 year can return to teaching and earn a full salary while continuing to receive full pension payments. In addition, pension benefits have been enhanced in 3 ways: a longevity bonus of up to $400 per month has been added for 30 to 32 years of service; a 0.2 percent addition to the pension benefit has been granted for each year beyond 30 years of service; and 2 percent of salary is paid into a supplemental retirement account which is then payable as a lump sum. Nearly 10 percent (17,000 teachers) of Ohio’s teaching workforce consists of rehired retirees. Ohio teachers can draw a full salary and full pension benefits after a 2-month break in service. This provision also applies to other Ohio public employees in the event of a future shortage of employees. Internal Revenue Code requirements regarding pensions may discourage private employers from adopting DROP plans and other programs that could encourage workers to extend their employment after retirement eligibility. In 2000, the ERISA Advisory Council identified current ERISA and IRC regulations that could constrain private employers in implementing flexible employment arrangements, including regulations prohibiting in-service distributions of defined benefit pension benefits and rules governing nondiscrimination. Pension regulations prohibiting in-service pension benefit distributions can discourage the employer’s formation of DROP programs. Defined benefit pension plans sponsored by private employers are not allowed to pay pension benefits to older workers who become eligible for retirement income before the plan’s normal retirement age. Therefore, it would be difficult, if not impossible, for a private sector employer to provide a defined benefit DROP plan to workers who are younger than the pension plan’s normal retirement age. To address this issue, the Council recommended relaxing the IRS rules on in-service distributions to facilitate the formation of phased retirement plans, although concern was expressed by some witnesses that workers might outlive their retirement savings by beginning benefits at an earlier but lower rate. The ERISA Advisory Council also found that federal regulations governing nondiscrimination in pension benefits or contributions can restrict employers from offering phased retirement programs. For example, some employers reported to the Council that they did not establish flexible employment programs because of concerns with violating federal pension regulations governing nondiscrimination in benefits or contributions. The concerns are based on the likelihood that a higher percentage of highly compensated employees would be participating in the programs because their skills are more desirable. To the extent that older workers are more likely to be owners or highly compensated employees than younger workers, a DROP plan could disproportionately include the employer’s highest paid employees. In such a case, the employer’s pension plan could be deemed as discriminatory and potentially lose its tax-qualified status. To alleviate these concerns, the Council recommended that the IRS relax its rules on nondiscrimination if the intent of the plan amendment was clearly not to be discriminatory. Recognizing the complexity of this issue, the ERISA Advisory Council also suggested that the Secretary of Labor organize a task force to focus on the obstacles within ERISA and other relevant federal laws that inhibit private employers from instituting DROPs. A variety of factors contribute to discouraging the continued labor force participation of workers after a certain age. These factors include the following: Some employers may have negative perceptions of older workers and discriminate. Past surveys have found that some managers possess negative perceptions about the productivity of older workers. For example, managers have expressed a perception that age reduces workers’ physical stamina and ability to learn new skills. Under the ADEA, it is illegal to discriminate in employment on the basis of age, but evidence suggests that such discrimination does still occur. In 2000, the EEOC received 16,000 complaints of age discrimination, with nearly 3,000 merit resolutions and cumulative monetary damages of $45 million. Because some employers might seek to avoid hiring older workers because of potential litigation, the ERISA Advisory Council proposed that an interagency task force be convened to determine if any of the laws dealing with older workers’ pension benefits, including the ADEA, the IRC, and ERISA, need to be amended in order to encourage the continued development of flexible retirement alternatives for older workers. Employers perceive higher costs associated with hiring older workers. Employers may feel that it is more difficult to recoup the costs of hiring and training older workers. The shorter potential length of time an older worker may remain with an employer, compared with a younger worker, implies that these up-front fixed costs are greater for older workers because of the shorter time period for employers to recoup their investment. Moreover, all other things being equal, older workers can raise an employer’s cost of providing health coverage. To address these issues, the ERISA Advisory Council recommended that legislation be developed that would extend Medicare to workers between the ages of 55 and 64. Older workers have more health problems that inhibit work. According to CPS data on self-reported health status, 17 percent of persons age 55-64 have a work-limiting health problem compared with 9 percent of persons age 40-54 and 5 percent of persons age 30-39. Older workers play a key role in the labor market and their importance will only grow in the years to come. By 2008, 1 out of every 6 workers in the American labor force will be over age 55, and this ratio is estimated to reach over 1 out of 5 by 2025. Older workers will comprise a progressively larger number of our nation’s managers, supervisors, and executives. Employers will have to rely more heavily on this segment of the labor force, as their experience and “institutional knowledge” become an increasingly valuable resource. Thus, older workers will become a critical labor force component in maintaining future productivity and economic growth, particularly if, as projected, labor force growth continues to slow. Yet, employers have taken little action so far to prepare for this demographic transition. We identified few employers with well established, formalized programs to encourage older employees to work longer. Some private employers have indicated an awareness of the need to retain older workers and are experimenting with different options to extend the work lives of their older employees. However, these programs remain small and are often administered on an ad hoc basis. Flexible employment programs also remain to be addressed by employers and workers in the collective bargaining context. Public employer efforts to retain or rehire older workers have been broader and somewhat more common, largely in response to localized labor shortages in skilled occupations like teaching. Part of this inaction may be because these demographic changes, while inevitable, remain largely on the horizon. Most employers are not yet facing labor shortages or other economic pressures requiring them to consider phased retirement or related programs. For this reason, time is available to develop sound policies, programs, and practices to respond to this demographic challenge. Some public discussion on this matter is already taking place. For example, Labor’s ERISA Advisory Council has received testimony from employers and other interested parties as to how federal policy and laws should be changed to address phased retirement, and the older worker issue generally. From this testimony, the Advisory Council has made recommendations to the Secretary of Labor, particularly with regard to current pension law and policy. The ERISA Advisory Council has already urged that the Secretary of Labor convene a task force that would focus on issues concerning the extension of DROP plans to private employers. However, many of the recommendations suggested by the Advisory Council are beyond the purview of the Labor Department and would require action by other agencies or the Congress for implementation, as well as raising cost implications. Additional expert assessment and input from those agencies charged with administering the affected laws and regulations would help ensure that these recommendations are both carefully crafted and represent sound policy, particularly those calling for far reaching legislative changes. Expertise and input from outside agencies could also help to identify any unintended consequences of the actions that could be taken. For example, amending the ADEA to facilitate the expansion of phased retirement programs might result in some older workers losing legal protection against age discrimination in ways not previously recognized or understood. It also raises the risk that workers might outlive their retirement savings by beginning benefits too early. Finally, greater input from other agencies could help to identify other aspects of the issues already explored and additional recommendations not addressed by the Advisory Council. This is particularly important given that the diversity among firms and industries suggests a need for a range of solutions. For example, what may work for public employers—creating incentives to extend employment through alterations in the design of their defined benefit pension plans—may not be helpful for private employers who do not have such plans or could not afford such redesign. The challenge of how to extend the work lives of older employees in a manner that balances the competitive imperative of business with the life realities of older workers presents many opportunities. By focusing on the development of the policies, programs, and employment arrangements necessary to extend the work life of the growing numbers of older employees, the nation can ensure future supplies of skilled workers, bolster economic growth, and help secure retirement income adequacy for many working Americans. To address the potentially serious implications of the aging of the U.S. labor force and avoid possibly acute occupational labor shortages in the future, the relevant government agencies should work together to identify sound policies to extend the worklife of older Americans, including those legal changes that would foster creative solutions to extending workers’ careers. Specifically, we recommend that the Secretary of Labor convene an interagency task force to develop legislative and regulatory proposals addressing the issues raised by the aging of the labor force. This task force would include representatives from Labor, and other agencies that have either regulatory jurisdiction or a clear policy interest, bringing together the expertise necessary to consider fully the implications of each proposal. It would solicit input from employers, unions, and other interested parties and carefully balance the concerns of older workers, employers, and the general public. The task force would also serve as a clearinghouse of information about employer or collectively bargained programs to extend the work life of older workers. We provided the EEOC, Labor, Treasury, and the Social Security Administration the opportunity to comment on the draft report. EEOC provided us with written comments, which appear in their entirety in appendix II. EEOC agreed with our findings, strongly supporting the goal of encouraging older workers to remain in the labor force and endorsing our recommendation for the convention of an interagency task force. The agency also provided us with several technical comments, which we incorporated as appropriate. Labor, Treasury and the Social Security Administration provided us with technical comments, which we incorporated as appropriate. We are providing copies of this report to the Secretary of Labor, the Secretary of the Treasury, the Commissioner of Social Security, and the Commissioners of the Equal Employment Opportunity Commission. Copies will be made available to others upon request. Please contact me at (202) 512-7215, Charlie Jeszeck at (202) 512-7036, or Jeff Petersen at (415) 904- 2175, if you have any questions about this report. Other major contributors to this report are listed in appendix IV. Age 65-74 54 53 41 30 41 54 52 30 43 45 43 44 2008 (Projected percent) Most of the survey data used in this report are from the March Current Population Surveys (CPS). The annual March CPS is a source of income estimates for the United States and also includes employment and demographic data. We used the CPS because of its large sample size, its inclusion of detailed information on the economic and demographic characteristics of labor force participants, the timeliness of its data, and its collection frequency and consistency, which allows the opportunity to show trends over time and construct projections. We used CPS Basic Monthly Survey data from 1983 through 2000, March supplement data from 1989 through 2000, and February supplement data on displaced workers and job tenure and occupational mobility from 1996, 1998, and 2000. The Health and Retirement Survey (HRS) is composed of persons born between 1931 and 1941, and the respondents are questioned every 2 years. The first wave of questions was conducted in 1992. We used HRS data from Wave III that was conducted in 1996. The sampling errors for the estimated percentages used in this report from CPS data are less than plus or minus 1 percentage point at the 95 percent confidence level. This sampling error does not apply to our projections of occupational distributions or wages. Although widely used and a rich source of detailed data, CPS and other surveys that are based on self- reported data are subject to several sources of nonsampling error, including the following: inability to get information about all sample cases; difficulties of definition; differences in the interpretation of questions; respondents’ inability or unwillingness to provide correct information; and errors made in collecting, recording, coding, and processing data. These nonsampling errors can influence the accuracy of information presented in the report, although the magnitude of their effect is not known. Data were grouped into the age categories of 30-39, 40-54, 55-64, and 65-74 when the sample size was large enough to make calculations based upon these age groups. When the sample size was too small to support these age categories, we chose to group the data by over 55 and under 55. We based our occupational projections to the year 2008 on methods developed by the U.S. Department of Labor, Bureau of Labor Statistics. In order to do occupational projections by age group, we used 5-year age cohorts from 1988-93 and 1994-98 CPS Basic Monthly Survey data, calculating net replacement needs for 5-year intervals to 2003 and 2008. We made adjustments for the irregular size of bottom and top age groups. To compensate for missing historical data to project the younger age cohorts to 2008, we used BLS projections of the civilian labor force in 2008 for the 16-24 and 25-34 age groups and then we subtracted the percent unemployed as of 2000 for these age groups. We then distributed the projected employed by the percentage of those age groups in each occupational group in 2000. The accuracy of our model was checked by running projections from earlier data to the year 2000 and comparing the 2000 projections with actual 2000 data. We also adjusted our projected labor force numbers for 2008 by BLS’ labor force projections for 2008. To project earnings to 2008 for age groups over 40, we calculated mean earnings by occupation, age group, and year from 1989 to 1999. We then inserted a variable to control for the business cycle, projected the earnings by occupation and age group to 2008, and merged the projected earnings with our age group specific 2008 occupational projections. A potential shortcoming of our projections is that the cohort effects (e.g., the baby boomers are different from older generations) cannot be separated from age effects (e.g., the baby boomers labor force behavior will change as they pass from middle to old age) using cross-sectional data. We identified companies with flexible employment programs for older workers through interviews with experts and reviewing literature on the subject. We then interviewed officials from 13 companies who were knowledgeable about the programs. Public employers were identified and interviewed on the same basis. Other contributors to this report include Don Porteous, Roger Thomas, and Howard Wial.

The impending retirement of the "baby boom" generation is receiving considerable attention. The number of older workers will grow substantially during the next two decades, and they will become an increasingly significant share of the U.S. workforce. Although older workers are less likely than younger workers to lose a job, when they do lose a job, they are less likely than younger workers to find other employment. To retain older workers and extend their careers, some public and a few private employers are providing options, including flexible hours and financial benefits, reduced workloads through the use of part-time or part-year schedules, and job-sharing. Most employers are not yet facing labor shortages or other economic pressures that would require them to consider flexible employment arrangements because the retirement of the baby boom generation will occur gradually during the next several decades.

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The Immigration Reform and Control Act of 1986 created the VWP as a pilot program, and the Visa Waiver Permanent Program Act permanently established the program in October 2000. The program’s purpose is to facilitate the legitimate travel of visitors for business or tourism. By providing visa-free travel to the United States, the program is intended to boost international business and tourism, as well as airline revenues, and create substantial economic benefits to the United States. Moreover, the program allows State to allocate more resources to visa-issuing posts in countries with higher risk applicant pools. In November 2002, Congress passed the Homeland Security Act of 2002, which established DHS and gave it responsibility for establishing visa policy, including policy for the VWP. Previously, Justice had overall responsibility for managing the program. In July 2004, DHS created the Visa Waiver Program Oversight Unit within the Office of International Enforcement and directed that unit to oversee VWP activities and monitor participating VWP countries’ adherence to the program’s statutory and policy requirements. In September 2007, the office was renamed the Visa Waiver Program Office. To help fulfill its responsibilities, DHS established an interagency working group comprising representatives from State, Justice, and several DHS component agencies and offices, including U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement. Since the attacks on the United States on September 11, 2001, Congress has passed several other laws to strengthen border security policies and procedures. For example, the Enhanced Border Security and Visa Entry Reform Act of 2002 increased the frequency—from once every 5 years to at least once every 2 years—of mandated assessments of the effect of each country’s continued participation in the VWP on U.S. security, law enforcement, and immigration interests. The 9/11 Act also added security requirements for all VWP countries, such as the requirement that countries enter into an agreement with the United States to share information on whether citizens and nationals of that country traveling to the United States represent a threat to the security or welfare of the United States or U.S. citizens. When the Visa Waiver Pilot Program was established in 1986, participation was limited to eight countries. Since then, the VWP has expanded to 36 countries. Figure 1 shows the locations of the current member countries. To qualify for the VWP a country must offer reciprocal visa-free travel privileges to U.S. citizens; have had a refusal rate of less than 3 percent for the previous fiscal year for its nationals who apply for business and tourism visas; issue machine-readable passports to its citizens; enter into an agreement with the United States to report or make available through Interpol or other means as designated by the Secretary of Homeland Security information about the theft or loss of passports; accept the repatriation of any citizen, former citizen, or national against whom a final order of removal is issued no later than 3 weeks after the order is issued; enter into an agreement with the United States to share information regarding whether citizens and nationals of that country traveling to the United States represents a threat to U.S. security or welfare; and be determined not to compromise the law enforcement (including immigration enforcement) or security interests of the United States by its inclusion in the program. In addition, all passports issued after October 26, 2005, must contain a digital photograph in the document for travel to the United States under the program, and passports issued after October 26, 2006, must be e-passports that are tamper-resistant and incorporate a biometric identifier. Nationals from countries that have joined the VWP since 2008 must use e-passports in order to travel under the VWP. Effective July 1, 2009, all emergency or temporary passports must be e-passports as well for use under the VWP. To be eligible to travel without a visa under the program, nationals of VWP countries must have received an authorization to travel under the VWP through ESTA; have a valid passport issued by the participating country and be a national seek entry for 90 days or less as a temporary visitor for business or have been determined by CBP at the U.S. port of entry to represent no threat to the welfare, health, safety, or security of the United States; have complied with conditions of any previous admission under the program (for example, individuals must not have overstayed the 90-day limit during prior visits under the VWP); if entering by air or sea, possess a return trip ticket to any foreign destination issued by a carrier that has signed an agreement with the U.S. government to participate in the program, and must have arrived in the United States aboard such a carrier; and if entering by land, have proof of financial solvency and a domicile abroad to which they intend to return. Travelers who do not meet these requirements are required to obtain a visa from a U.S. embassy or consulate overseas before traveling to the United States. Unlike visa holders, VWP travelers generally may not apply for a change in status or an extension of the allowed period of stay. Individuals who have been refused admission to the United States previously must also apply for a visa. VWP travelers waive their right to review or appeal a CBP officer’s decision regarding their admissibility at the port of entry or to contest any action for removal, other than on the basis of an application for asylum. DHS has implemented ESTA to meet the 9/11 Act requirement intended to enhance program security and has taken steps to minimize the burden on travelers to the United States added by the new requirement, but it has not fully analyzed the risks of carrier and passenger noncompliance with the requirement. DHS developed ESTA to collect passenger data and complete security checks on the data before passengers board a U.S. bound carrier. In developing and implementing ESTA, DHS took several steps to minimize the burden associated with ESTA use. For example, ESTA reduced the requirement that passengers provide biographical information to DHS officials from every trip to once every 2 years. In addition, because of ESTA, DHS has informed passengers who do not qualify for VWP travel that they need to apply for a visa before they travel to the United States. Moreover, most travel industry officials we interviewed in six VWP countries praised DHS’s widespread ESTA outreach efforts, reasonable implementation time frames, and responsiveness to feedback but expressed dissatisfaction over ESTA fees. Also, although carriers complied with the ESTA requirement to verify ESTA approval for almost 98 percent of VWP passengers before boarding them in 2010, DHS does not have a target completion date for a review to identify potential security risks associated with the small percentage of cases of traveler and carrier noncompliance with the ESTA requirement. Pursuant to the 9/11 Act, DHS implemented ESTA, an automated, Web- based system, to assist in assessing passengers’ eligibility to travel to the United States under the VWP by air or sea before they board a U.S. bound carrier. DHS announced ESTA as a new requirement for travelers entering the United States under the VWP on June 9, 2008, and began accepting ESTA applications on a voluntary basis in August 2008. Beginning January 12, 2009, DHS required all VWP travelers to apply for ESTA approval prior to travel to the United States. DHS began enforcing compliance with ESTA requirements in March 2010, exercising the right to fine a carrier or rescind its VWP signatory status for failure to comply with the ESTA requirement. Although passengers may apply for ESTA approval anytime before they board a plane or ship bound for the United States, DHS recommends that travelers apply when they begin preparing travel plans. Prior to ESTA’s implementation, all travelers from VWP countries manually completed a form—the I-94W—en route to the United States, supplying biographical information and answering questions to determine eligibility for the VWP. DHS officials collected the forms from VWP passengers at U.S. ports of entry and used the information on the forms to qualify or disqualify the passengers for entry into the United States without a visa. DHS uses ESTA to electronically collect VWP applicants’ biographical information and responses to eligibility questions. The ESTA application requires the same information collected through the I-94W forms. When an applicant submits an ESTA application, DHS systems evaluate the applicant’s biographical information and responses to VWP eligibility questions. (See table 1.) If the DHS evaluation results in a denial of the application, the applicant is directed to apply for a U.S. visa. For all other applications, if this review process locates no information requiring further analysis, DHS notifies the applicant that the application is approved; if the process locates such information, DHS notifies the applicant that the application is pending, and DHS performs a manual check on the information. For example, if an applicant reports that a previous U.S. visa application was denied, DHS deems the ESTA application pending and performs additional review. If on further review of any pending application DHS determines that information disqualifies the applicant from VWP travel, the application is denied, and the individual is directed to apply for a visa; otherwise the applicant is approved. Figure 2 illustrates the ESTA application review process. (See app. II for information on how to apply for ESTA.) According to DHS data, the number of individuals submitting ESTA applications increased from about 180,000 per month in 2008, when applying was voluntary, to more than 1.15 million per month in 2009 and 2010 after DHS made ESTA mandatory. DHS approved over 99 percent of the almost 28.6 million ESTA applications submitted from August 2008 through December 2010, but it also denied the applications of thousands of individuals it deemed ineligible to travel to the United States under the VWP. The denial rate has decreased slightly from 0.42 percent in 2008 to 0.24 percent in 2010. (See fig. 3.) DHS data show that DHS denied 77,132 of the almost 28.6 million applications for VWP travel submitted through ESTA from 2008 through 2010. Reasons for denials included applicants’ responses to the eligibility questions, as well as DHS’s discovery of other information that disqualified applicants from travel under the VWP. Examples are as follows: DHS denied 19,871 applications because of applicant responses to the eligibility questions. DHS denied 36,744 pending applications because of the results of manual reviews of passenger data. DHS denied 15,078 applications because the applicants had unresolved cases of a lost or stolen passport that DHS decided warranted an in-person visa interview with a State consular officer. In addition, ESTA applications are regularly reevaluated as new information becomes available to DHS, potentially changing applicants’ ESTA status. In developing and implementing ESTA, DHS has taken steps to minimize the burden associated with ESTA’s use. Less frequent applications. ESTA approval for program participants generally remains valid for 2 years. Prior to ESTA implementation, passengers traveling under the program were required to complete the I- 94W form to determine their program eligibility each time they boarded a carrier to the United States. When DHS implemented ESTA, the burden on passengers increased because DHS also required ESTA applicants to complete an I-94W form. However, on June 29, 2010, DHS eliminated the I- 94W requirement for most air and sea travelers who had been approved by ESTA. According to travel industry officials in the six VWP countries we visited, this change has simplified travel for many travelers, especially business travelers who travel several times each year. DHS officials said the change also eliminated the problems of deciphering sometimes illegible handwriting on the I-94W forms. Earlier notice of ineligibility. ESTA notifies passengers of program ineligibility, and therefore of the need to apply for a visa, before they embark for the United States. Prior to ESTA implementation, passengers from VWP countries did not learn until reaching the U.S. port of entry whether they were eligible to enter under the VWP or would be required to obtain a visa. Because DHS received passengers’ completed I-94W forms at the port of entry, DHS officials did not recommend that carriers prevent passengers from VWP countries from boarding a U.S. bound carrier without a visa unless they were deemed ineligible based on other limited preboarding information provided by carriers. Widespread U.S. government outreach. VWP country government and travel industry officials praised widespread U.S. government efforts to provide information about the ESTA requirements. After announcing ESTA, DHS began an outreach campaign in VWP countries and for foreign government embassy staff in the United States, with the assistance of other U.S. agencies, to publicize the requirement. DHS officials said they spent $4.5 million on ESTA outreach efforts. Although none of the six embassies we visited tracked the costs associated with outreach, each embassy provided documentation of their use of many types of outreach efforts listed in table 2. VWP country government officials and travel industry officials we met said that although they were initially concerned that ESTA implementation would be difficult and negatively affect airlines and many VWP passengers, implementation went more smoothly than expected. Reasonable implementation time frames. Most of the VWP country airline officials with whom we met said that the ESTA implementation time frames set by DHS were reasonable. In 2008, DHS introduced ESTA and made compliance voluntary. The following year, DHS made ESTA mandatory but did not levy fines if airlines did not verify passengers’ ESTA approval before boarding them. This allowed the U.S. government more time to publicize the requirement, according to DHS officials. Enforcement began in March 2010. According to most of the officials we interviewed from 17 airlines in the six VWP countries we visited, the phased-in compliance generally allowed passengers sufficient time to learn about the ESTA requirement and allowed most airlines sufficient time to update their systems to meet the requirement. ESTA officials said that the phased- in compliance also provided time to fix problems with the system before enforcing airline and passenger compliance. DHS responsiveness to travel industry feedback. VWP travel industry officials said that DHS officials’ efforts to adapt ESTA in response to feedback have clarified the application process. Since initial implementation of ESTA in 2008, DHS has issued updates to the system on 21 occasions. According to DHS officials, many of these changes addressed parts of the application that were unclear to applicants. For example, DHS learned from some travel industry officials that many applicants did not know how to answer a question on the application about whether they had committed a crime of moral turpitude because they did not know the definition of “moral turpitude.” In September 2010, DHS released an updated ESTA application that included a definition of the term directly under the question. Further, updates have made the ESTA application available in 22 languages instead of only English. DHS also made it possible for denied applicants to reapply and be approved if they mistakenly answered “yes” to select eligibility questions. Although travel industry officials we met with in six VWP countries said there are still ways ESTA should be improved, they said that DHS’s responsiveness in amending the ESTA application had made the system more user friendly. Shorter reported passenger processing times. According to a study commissioned by DHS and conducted at three U.S. ports of entry, ESTA has reduced the average time DHS takes to process a VWP passenger before deciding whether to admit them into the United States by a range of between 17.8 and 54 percent. The study attributed this time savings to factors such as the reduction in number of documents DHS officers needed to handle and evaluate and the reduction in data entry needed at the port of entry. Although DHS took steps to minimize the burden imposed by ESTA implementation, almost all government and travel industry officials we met in six VWP countries expressed dissatisfaction over the Travel Promotion Act of 2009 (TPA) fee collected as part of the ESTA application. In September 2010, the U.S. government began to charge ESTA applicants a $14 fee when they applied for ESTA approval, including $10 for the creation of a corporation to promote travel to the United States and $4 to fund ESTA operations. According to many of the VWP country government and travel industry officials with whom we met, the TPA fee is unfair because it burdens those traveling to the United States with an added fee to encourage others to travel to the United States. Some of the officials pointed out that it was unrelated to VWP travel and that it runs counter to the program objective of simplifying travel for VWP participants. DHS officials said that many government and travel industry officials from VWP countries view the fee as a step away from visa-free travel and consider ESTA with the fee “visa-lite.” By comparison, a nonimmigrant visitor visa costs over $100 but is generally valid for five times as long as ESTA approval. Several foreign officials said they expected that the fee amount would continue to rise over time. DHS officials stated that they cannot control the TPA portion of the ESTA fee because it was mandated by law. In addition, some airline officials expressed concern that the ESTA requirement was one of many requirements imposed by DHS that required the carriers to bear the cost of system updates. DHS officials said that the ESTA requirement did impose a new cost to carriers, but that it was necessary to strengthen the security of the VWP. According to DHS, air and sea carriers are required to verify that each passenger they board has ESTA approval before boarding them. Carriers’ compliance with the requirement has increased since DHS made ESTA mandatory and has exceeded 99 percent in recent months. DHS data show the following: 2008. In 2008, when VWP passenger and carrier compliance was voluntary, airlines and sea carriers verified ESTA approval for about 5.4 percent of passengers boarded under the VWP. According to DHS officials, carriers needed time to update their systems to receive passengers’ ESTA status, and DHS needed time to publicize the new travel requirement. 2009. ESTA became mandatory in January 2009, and carriers verified ESTA approval for about 88 percent of passengers boarded under the VWP that year. 2010. In March 2010, DHS began enforcing carrier compliance. In that year, carriers verified ESTA approval for almost 98 percent of VWP passengers. As of January 2011, DHS had imposed fines on VWP carriers for 5 of the passengers who had been allowed to board without ESTA approval. Figure 4 shows the percentage of VWP passengers boarded by carriers who had verified the passengers’ ESTA approval. In addition, from September 2010 through January 2011, carrier compliance each month exceeded 99 percent. Although carriers verified ESTA approval for almost 98 percent of VWP passengers before boarding them for VWP travel in 2010, DHS has not fully analyzed the potential risks posed by cases where carriers boarded passengers for VWP travel without verifying that they had ESTA approval. In 2010, about 2 percent—364,086 VWP passengers—were boarded without verified ESTA approval. For most of these passengers—363,438, or about 99.8 percent—no ESTA application had been recorded. The remainder without ESTA approval—648, or about 0.2 percent—were passengers whose ESTA applications had been denied. DHS officials told us that, although there is no official agency plan for monitoring and oversight of ESTA, the ESTA office is undertaking a review of each case of a carrier’s boarding a VWP traveler without an approved ESTA application; however, DHS has not established a target date for completing this review. In its review of these cases, DHS officials said they expect to determine why the carrier boarded the passengers, whether and why DHS admitted these individuals into the United States, and whether the airline or sea carrier should be fined for noncompliance. DHS tracks some data on passengers that travel under the VWP without verified ESTA approval but does not track other data that would help officials know the extent to which noncompliance poses a risk to the program. For example, although DHS officials said that about 180 VWP travelers who arrive at a U.S. port of entry without ESTA approval are admitted to the United States each day, they have not tracked how many, if any, of those passengers had been denied by ESTA. DHS also reported that 6,486 VWP passengers were refused entry into the United States at the port of entry in 2010, but that number includes VWP passengers for whom carriers had verified ESTA approval. Officials did not track how many of those had been boarded without verified ESTA approval. DHS also did not know how many passengers without verified ESTA approval were boarded with DHS approval after system outages precluded timely verification of ESTA approval. Without a completed analysis of noncompliance with ESTA requirements, DHS is unable to determine the level of risk that noncompliance poses to VWP security and to identify improvements needed to minimize noncompliance. In addition, without analysis of data on travelers who were admitted to the United States without a visa after being denied by ESTA, DHS cannot determine the extent to which ESTA is accurately identifying individuals who should be denied travel under the program. Although DHS and partners at State and Justice have made progress in negotiating information-sharing agreements with VWP countries, required by the 9/11 Act, only half of the countries have entered into all required agreements. In addition, many of the agreements entered into have not been implemented. The 9/11 Act does not establish an explicit deadline for compliance, but DHS with support from State and Justice has produced a completion schedule that requires agreements to be entered into by the end of each country’s current or next biennial review cycle, the last of which will be completed by June 2012. In coordination with State and Justice, DHS also outlined measures short of termination that may be applied to VWP countries not meeting their compliance date. The 9/11 Act specifies that each VWP country must enter into agreements with the United States to share information regarding whether citizens and nationals of that country traveling to the United States represent a threat to the security or welfare of the United States and to report lost or stolen passports. DHS, in consultation with other agencies, has determined that VWP countries can satisfy the requirement by entering into the following three bilateral agreements: Homeland Security Presidential Directive 6 (HSPD-6), Preventing and Combating Serious Crime (PCSC), and Lost and Stolen Passports (LASP). According to DHS officials, countries joining the VWP after the 9/11 Act entered into force are required to enter into HSPD-6 and PCSC agreements with the United States as a condition of admission into the program. In addition, prior to joining the VWP, such countries are required to enter into agreements containing specific arrangements for information sharing on lost and stolen passports. As illustrated in table 3 below, DHS, State, and Justice have made some progress with VWP countries in entering into the agreements. All VWP countries and the United States share some information with one another on some level, but the existence of a formal agreement improves information sharing, according to DHS officials. As opposed to informal case-by-case information sharing, formal agreements expand the pool of information to which the United States has systematic access. They can draw attention to and provide information on individuals of whom the United States would not otherwise be aware. According to officials, formal agreements generally expedite the sharing of information by laying out specific terms that can be easily referred to when requesting data. DHS officials observed that timely access to information is especially important for CBP officials at ports of entry. HSPD-6 agreements establish a procedure between the United States and partner countries to share watchlist information about known or suspected terrorists. As of January 2011, 19 of the 36 VWP countries had signed HSPD-6 agreements, and 13 have begun sharing information according to the signed agreements. (See table 3.) Justice’s Terrorist Screening Center (TSC) and State have the primary responsibility to negotiate and conclude these information-sharing agreements. An interagency working group, co-led by TSC and State that also includes representatives from U.S. law enforcement, intelligence, and policy communities, addresses issues with the exchange of information and coordinates efforts to enhance information exchange. While the agreements are based on a template that officials use as a starting point for negotiations, according to TSC officials, the terms of each HSPD-6 agreement are unique, prescribing levels of information sharing that reflect the laws, political will, and domestic policies of each partner country. TSC officials said most HSPD-6 agreements are legally nonbinding. Officials said that this allows more flexibility in information-sharing procedures and simplifies negotiations with officials from partner countries. The TSC officials noted that the nonbinding nature of the agreements may allow some VWP countries to avoid bureaucratic and political hurdles. Noting that State and TSC continue to negotiate HSPD-6 agreements with VWP countries, officials cited concerns regarding privacy and data protection expressed by many VWP countries as reasons for the delayed progress. According to these officials, in some cases, domestic laws of VWP countries limit their ability to commit to sharing some information, thereby complicating and slowing the negotiation process. The terms of HSPD-6 agreements are also extremely sensitive, TSC officials noted, and therefore many HSPD-6 agreements are classified. Officials expressed concern that disclosure of the agreements themselves might either (1) cause countries that had already signed agreements to become less cooperative in sharing data on known or suspected terrorists and reduce the exchange of information or (2) cause countries in negotiation to become less willing to sign agreements or insist on terms prescribing less information sharing. The value and quality of information received through HSPD-6 agreements vary, and some partnerships are more useful than others, according to TSC officials. The officials stated that some partner countries were more willing than others to share data on known or suspected terrorists. For example, according to TSC officials, some countries do not share data on individuals suspected of terrorist activity but only on those already convicted. In other cases, TSC officials stated that some partner countries did not have the technical capacity to provide all information typically obtained through HSPD-6 agreements. For example, terrorist watchlist data include at least the name and date of birth of the suspect and may also include biometric information such as fingerprints or photographs. According to DHS officials, some member countries do not have the legal or technical ability to store such information. TSC has evidence that information is being shared as a result of HSPD-6 agreements. They provided the number of encounters with known or suspected terrorists generated through sharing watchlist information with foreign governments. TSC officials noted that they viewed these data as one measure of the relevance of the program, but not as comprehensive performance indicators. Although TSC records the number of encounters, HSPD-6 agreements do not contain terms requiring partner countries to reveal the results of these encounters, and there is no case management system to track and close them out, according to TSC officials. The PCSC agreements establish the framework for law enforcement cooperation by providing each party automated access to the other’s criminal databases that contain biographical, biometric, and criminal history data. (See table 3.) As of January 2011, 18 of the 36 VWP countries had met the PCSC information-sharing agreement requirement, but the networking modifications and system upgrades required to enable this information sharing to take place have not been completed for any VWP countries. The language of the PCSC agreements varies slightly because, according to agency officials, partner countries have different legal definitions of what constitutes a serious crime or felony, as well as varying demands regarding data protection provisions. Achieving greater progress negotiating PCSC agreements has been difficult, according to DHS officials, because the agreements require lengthy and intensive face-to-face discussions with foreign governments. Justice and DHS, with assistance from State, negotiate the agreements with officials from partner countries that can include representatives from their law enforcement and justice ministries, as well as their diplomatic corps. Further, sharing sensitive personal information with the United States is publicly unpopular in many VWP countries, even if the countries’ law enforcement agencies have no reluctance to share information. Officials in some VWP countries told us that efforts to overcome political barriers have caused further delays. Though officials expect to complete networking modifications necessary to allow queries of Spain’s and Germany’s criminal databases in 2011, the process is a legally and technically complex one that has not yet been completed for any of the VWP countries. According to officials, DHS is frequently not in a position to influence the speed of PCSC implementation for a number of reasons. For example, according to DHS officials, some VWP countries require parliamentary ratification before implementation can begin. Also U.S. and partner country officials must develop a common information technology architecture to allow queries between databases. In a 2006 GAO report, we found that not all VWP countries were consistently reporting data on lost and stolen passports. We recommended that DHS develop clear standard operating procedures for such reporting, including a definition of timely reporting. As of January 2011, all VWP countries were sharing lost and stolen passport information with the United States, and 34 of the 36 VWP countries had entered into LASP agreements. (See table 3.) The 9/11 Act requires VWP countries to enter into an agreement with the United States to report, or make available to the United States through Interpol or other means as designated by the Secretary of Homeland Security information about the theft or loss of passports. According to DHS officials, other international mandates have helped the United States to obtain LASP information. Since 2005, all European Union countries have been mandated to send data on lost and stolen passports to Interpol for its Stolen and Lost Travel Documents database. In addition, Australia and New Zealand have agreements to share lost and stolen passport information through the Regional Movement Alert System. According to officials, in fiscal year 2004, more than 700 fraudulent passports from VWP countries were intercepted at U.S. ports of entry; however, by fiscal year 2010, this number had decreased to 64. DHS officials attributed the decrease in the use of fraudulent passports in part to better LASP reporting to Interpol. More complete data has allowed DHS to identify more individuals attempting VWP travel with a passport that has been reported lost or stolen before they begin travel. Although the 9/11 Act does not establish an explicit deadline, DHS, with the support of partners at State and Justice, has produced a compliance schedule that requires agreements to be entered into by the end of each country’s current or next biennial review cycle, the last of which will be completed by June 2012. In March 2010, State sent a cable to posts in all VWP countries that instructed the appropriate posts to communicate the particular compliance date to the government of each noncompliant VWP country. However, DHS officials expressed concern that some VWP countries may not have entered into all agreements by the specified compliance dates. According to DHS officials, termination from the VWP is one potential consequence for VWP countries that do not enter into information-sharing agreements. However, U.S. officials described termination as undesirable, saying that it would significantly impact diplomatic relations and would weaken any informal exchange of information. Further, termination would require all citizens from the country to obtain visas before traveling to the United States. According to officials, particularly in the larger VWP countries, this step would overwhelm consular offices and discourage travel to the United States, thereby damaging trade and tourism. U.S. embassy officials in France told us that when the United States required only a small portion of the French traveling population—those without machine-readable passports—to obtain visas, U.S. embassy officials logged many overtime hours, while long lines of applicants extended into the embassy courtyard. DHS helped write a classified strategy document that outlines a contingency plan listing possible measures short of termination from the VWP that may be taken if a VWP country does not meet its specified compliance date for entering into information-sharing agreements. The strategy document provides steps that would need to be taken prior to selecting and implementing one of these measures. According to officials, DHS plans to decide which measures to apply on a case-by-case basis. DHS conducts reviews to determine whether issues of security, law enforcement, or immigration affect VWP country participation in the program; however, the agency has not completed half of the mandated biennial reports resulting from these reviews in a timely manner. In 2002, Congress mandated that, at least once every 2 years, DHS evaluate the effect of each country’s continued participation in the program on the security, law enforcement, and immigration interests of the United States. The mandate also directed DHS to determine based on the evaluation whether each VWP country’s designation should continue or be terminated and to submit a written report on that determination to select congressional committees. To fulfill this requirement, DHS conducts reviews of VWP countries that examine and document, among other things, counterterrorism and law enforcement capabilities, border control and immigration programs and policies, and security procedures. To document its findings, DHS composes a report on each VWP country reviewed and a brief summary of the report to submit to congressional committees. In conjunction with DHS’s reviews, the Director of National Intelligence (DNI) produces intelligence assessments that DHS reviews prior to finalizing its VWP country biennial reports. According to VWP officials, they visited 12 program countries in fiscal year 2009 and 10 countries in fiscal year 2010 to gather the data needed to complete these reports. As of February 2011, the Visa Waiver Program Office had completed 3 country visits and anticipated conducting 10 more for fiscal year 2011. If issues of concern are identified during the VWP country review process, DHS drafts an engagement strategy documenting the issues of concern and suggesting recommendations for addressing the issues. According to VWP officials, they also regularly monitor VWP country efforts to stay informed about any emerging issues that may affect the countries’ VWP status. In 2006, we found that DHS had not completed the required biennial reviews in a timely fashion, and we recommended that DHS establish protocols including deadlines for biennial report completion. DHS established protocols in 2007 that include timely completion of biennial reports as a goal. Our current review shows that DHS has not completed the latest biennial reports for 50 percent, or 18 of the 36 VWP countries in a timely manner. Also, over half of those reports are more than 1 year overdue. In the case of two countries, DHS was unable to demonstrate that they had completed reports in over 4 years. Further, according to the evidence supplied by DHS, of the 17 reports completed since the beginning of 2009, over 25 percent were transmitted to Congress 3 or more months after report completion, and 2 of those after more than 6 months. DHS cited a number of reasons for the reporting delays, including a lack of resources needed to complete timely reports. In addition, DHS officials said that they sometimes intentionally delayed report completion for two reasons: (1) because they frequently did not receive DNI intelligence assessments in a timely manner and needed to review these before completing VWP country biennial reports or (2) in order to incorporate anticipated developments in the status of information-sharing agreement negotiations with a VWP country. Further, DHS officials cited lengthy internal review as the primary reason for delays in submitting the formal summary reports to Congress. Without timely reports, it is not clear to Congress whether vulnerabilities exist that jeopardize continued participation in the VWP. The VWP facilitates travel for nationals from qualifying countries, removing the requirement that they apply in-person at a U.S. embassy for a nonimmigrant visa for business or pleasure travel of 90 days or less. In an attempt to facilitate visa-free travel without sacrificing travel security, Congress has mandated security measures such as ESTA, information- sharing requirements, and VWP country biennial reviews. While ESTA has added a fee and a new pretravel requirement that place additional burdens on the VWP traveler, it has reduced the burden on VWP travelers in several other ways. DHS does not fully know the extent to which ESTA has mitigated VWP risks, however, because its review of cases of passengers being permitted to travel without verified ESTA approval is not yet complete. Although the percentage of VWP travelers without verified ESTA approval is very small, DHS oversight of noncompliant travelers may reduce the risk that an individual that poses a security risk to the United States could board a plane or ship traveling to the United States. Even if DHS has authority to deny individuals entry to the United States in such cases, ESTA was designed to screen such individuals before they embark on travel to the United States. Moreover, with only half of the countries participating in the VWP in full compliance with the requirement to enter into information-sharing agreements with the United States, DHS may not have sufficient information to deny participation in the VWP to individuals who pose a security risk to the United States. In addition, the congressional mandate requiring VWP country biennial reports provides important information to Congress on security measures in place in VWP countries but also on potential vulnerabilities that could affect the countries’ future participation in the program. Because DHS has not consistently submitted the reports in a timely manner since the legal requirement was imposed in 2002, Congress does not have the assurance that DHS efforts to require program countries to minimize vulnerabilities and its recommendations for continued status in the VWP are based on up- to-date assessments. To ensure that DHS can identify and mitigate potential security risks associated with the VWP, we recommend that the Secretary of Homeland Security take the following two actions: establish time frames for the regular review and documentation of cases of VWP passengers traveling to a U.S. port of entry without verified ESTA approval, and take steps to address delays in the biennial country review process so that the mandated country reports can be completed on time. DHS provided written comments on a draft of this report. These comments are reprinted in appendix III. DHS, State, and Justice provided technical comments that we have incorporated into this report, as appropriate. In commenting on the draft, DHS stated that it concurred with GAO’s recommendations and expects to be able to implement them. DHS provided additional information on its efforts to ensure that VWP countries remain compliant with program requirements and to monitor and assess issues that may pose a risk to U.S. interests. DHS also provided information on actions it is taking to resolve the issues identified in the audit. For example, DHS stated it will have established procedures by the end of May 2011 to perform quarterly reviews of a representative sample of VWP passengers who do not comply with the ESTA requirement. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Homeland Security, the Secretary of State, the Attorney General, and other interested parties. The report also will be available on the GAO Web site at no charge at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-4268 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix IV. To assess the implementation of the Electronic System for Travel Authorization (ESTA), we reviewed relevant documentation, including 2006 and 2008 GAO reports evaluating the Visa Waiver Program (VWP) and statistics on program applicants and travelers. Between June and September 2010, we interviewed consular, public diplomacy, and law enforcement officials at U.S. embassies in six VWP countries: France, Ireland, Japan, South Korea, Spain, and the United Kingdom. We also interviewed political and commercial officers at embassies in five of these countries. While the results of our site visits are not generalizable, they provided perspectives on VWP and ESTA implementation. We met with travel industry officials, including airline representatives, and foreign government officials in the six countries we visited to discuss ESTA implementation. We selected the countries we visited so that we could interview officials from VWP countries in diverse geographic regions that varied in terms of information-sharing signature status, number of travelers to the United States, and the existence in-country of potential program security risks. We met with officials from the Department of Homeland Security (DHS) in Washington, D.C. We used data provided by DHS from the ESTA database to assess the usage of the program and airline compliance with the ESTA requirements and determined that the data was sufficiently reliable for our purposes. To evaluate the status of information sharing, we analyzed data regarding which countries had signed the agreements and interviewed DHS, Department of State (State), and Department of Justice (Justice) officials in Washington, D.C., and International Criminal Police Organization (Interpol) officials in Lyon, France. We reviewed the Implementing Recommendations of the 9/11 Commission Act of 2007, which contained the information-sharing requirement. We received and reviewed copies of many Preventing and Combating Serious Crime and Lost and Stolen Passport agreements. While conducting our fieldwork, we confirmed the status of the agreements in each of the countries we visited. We determined that the data on the status of information sharing were sufficiently reliable for our purposes. However, we were unable to view the signed Homeland Security Presidential Directive 6 agreements, because Justice’s Terrorist Screening Center declined to provide us requested access to the agreements. We also met with foreign government officials from agencies involved with VWP information-sharing agreement negotiations in the six countries we visited to discuss their views regarding VWP information-sharing negotiations with U.S. officials. In addition, with Interpol officials in France, we discussed the status of the sharing of information on lost and stolen passports. Interpol officials were unable to provide country-specific statistics regarding sharing of lost and stolen passport information due to its data privacy policy. To assess DHS efforts to complete timely biennial reviews of each VWP country, we reviewed DHS documents, as well as the links to completed reviews on the DHS intranet Web site to determine whether the reviews were completed in a timely manner. We also reviewed a 2006 GAO report that recommended improvements to the timeliness of DHS’s biennial reporting process. We conducted this performance audit from January 2010 to May 2011, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The official ESTA application can be completed online at https://esta.cbp.dhs.gov/esta/. (See fig 5.) DHS officials told us they actively publicize the official Web site, because many unofficial Web sites exist that charge an additional fee to fill out an application for an individual. They said the unofficial Web sites are not fraudulent if they do not use the official DHS or ESTA logos and provide the service they promise. In addition to the individual named above, Anthony Moran, Assistant Director; Jeffrey Baldwin-Bott; Mattias Fenton; Reid Lowe; and John F. Miller made key contributions to this report. Martin DeAlteriis, Joyce Evans, Etana Finkler, Richard Hung, Mary Moutsos, Jena Sinkfield, and Cynthia S. Taylor also provided technical assistance.

The Visa Waiver Program (VWP) allows eligible nationals from 36 member countries to travel to the United States for tourism or business for 90 days or less without a visa. In 2007, Congress required the Secretary of Homeland Security, in consultation with the Secretary of State, to implement an automated electronic travel authorization system to determine, prior to travel, applicants' eligibility to travel to the United States under the VWP. Congress also required all VWP member countries to enter into an agreement with the United States to share information on whether citizens and nationals of that country traveling to the United States represent a security threat. In 2002, Congress mandated that the Department of Homeland Security (DHS) review, at least every 2 years, the security risks posed by each VWP country's participation in the program. In this report, GAO evaluates (1) DHS's implementation of an electronic system for travel authorization; (2) U.S. agencies' progress in negotiating informationsharing agreements; and (3) DHS's timeliness in issuing biennial reports. GAO reviewed relevant documents and interviewed U.S., foreign government, and travel industry officials in six VWP countries. DHS has implemented the Electronic System for Travel Authorization (ESTA) and has taken steps to minimize the burden associated with the new program requirement. However, DHS has not fully evaluated security risks related to the small percentage of VWP travelers without verified ESTA approval. DHS requires applicants for VWP travel to submit biographical information and answers to eligibility questions through ESTA prior to travel. Travelers whose ESTA applications are denied can apply for a U.S. visa. In developing and implementing ESTA, DHS has made efforts to minimize the burden imposed by the new requirement. For example, although travelers formerly filled out a VWP application form for each journey to the United States, ESTA approval is generally valid for 2 years. Most travel industry officials GAO interviewed in six VWP countries praised DHS's widespread ESTA outreach efforts, reasonable implementation time frames, and responsiveness to feedback, but expressed dissatisfaction with the costs associated with ESTA. In 2010, airlines complied with the requirement to verify ESTA approval for almost 98 percent of VWP passengers prior to boarding, but the remaining 2 percent-- about 364,000 travelers--traveled under the VWP without verified ESTA approval. DHS has not yet completed a review of these cases to know to what extent they pose a risk to the program. To meet the legislative requirement, DHS requires that VWP countries enter into three information-sharing agreements with the United States; however, only half of the countries have fully complied with this requirement and many of the signed agreements have not been implemented. Half of the countries have entered into agreements to share watchlist information about known or suspected terrorists and to provide access to biographical, biometric, and criminal history data. By contrast, almost all of the 36 VWP countries have entered into an agreement to report lost and stolen passports. DHS, with the support of interagency partners, has established a compliance schedule requiring the last of the VWP countries to finalize these agreements by June 2012. Although termination from the VWP is one potential consequence for countries not complying with the information-sharing agreement requirement, U.S. officials have described it as undesirable. DHS, in coordination with State and Justice, has developed measures short of termination that could be applied to countries not meeting their compliance date. DHS has not completed half of the most recent biennial reports on VWP countries' security risks in a timely manner. According to officials, DHS assesses, among other things, counterterrorism capabilities and immigration programs. However, DHS has not completed the latest biennial reports for 18 of the 36 VWP countries in a timely manner, and over half of these reports are more than 1 year overdue. Further, in the case of two countries, DHS was unable to demonstrate that it had completed reports in the last 4 years. DHS cited a number of reasons for the reporting delays. For example, DHS officials said that they intentionally delayed report completion because they frequently did not receive mandated intelligence assessments in a timely manner and needed to review these before completing VWP country biennial reports. GAO recommends that DHS establish time frames for the regular review of cases of ESTA noncompliance and take steps to address delays in the biennial review process. DHS concurred with the report's recommendations.

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State child welfare systems consist of a complicated network of policies and programs designed to protect children. With growing caseloads over the past decade, the systems’ ability to keep pace with the needs of troubled children and their families has been greatly taxed. From fiscal year 1984 through 1995, the foster care population grew from an estimated 276,000 children to 494,000. In 1995, about 261,000 of these children were supported by federal funds through title IV-E of the Social Security Act. The federal government plays an important role in financing foster care and establishes minimum procedural requirements for the placement process. As required by the Adoption Assistance and Child Welfare Act of 1980 (P.L. 96-272), states must make reasonable efforts to prevent or eliminate the need for removing children from their homes. Once a child is removed from the home, the state must also provide services to the family and the child with the goal of reuniting them. If reunification is not possible, the state is to find permanent placement for the child outside the family home. To guide the permanency planning process by which a state is to find permanent placements for foster children, the act also requires that the state develop a case plan for each child. Each case plan must be reviewed at least every 6 months and, within 18 months, a permanency hearing must be held to determine the future status of the child. If a final decision is not made at this hearing, federal law provides that additional hearings must be held at least every 12 months. Options for the child’s future status can include, but are not limited to, reuniting the child with his or her family, placing the child for adoption, continuing temporary foster care, or continuing foster care permanently or long term because of the child’s special needs or circumstances. Increasingly, children are being placed with their own relatives, who then may sometimes receive foster care subsidies. The prolonged stays of children in foster care have prompted 26 states to enact laws or policies to shorten to less than the federally allowed 18 months the time between entering foster care and the first permanency hearing. Twenty-three of these states have enacted such laws, while three others have done so by administrative policy. A majority of these states require the hearing within 12 months. In two states, the shorter time frame applies only to younger children. Colorado requires that the permanency hearing be held within 6 months for children under age 6, and Washington requires the hearing to be held within 12 months for children aged 10 or younger. The remaining 24 states and the District of Columbia have statutes consistent with the federal requirement of 18 months. (For a description of the 26 state statutes, policies, and time requirements, see app. I.) The state laws, like federal law, do not require that a final decision be made at the first hearing. Ohio and Minnesota, however, do require that a permanency decision be determined after a limited extension period. Ohio, for example, requires a permanency hearing to be held within 12 months, with a maximum of two 6-month extensions. At the end of that time, a permanent placement decision must be made. According to officials in Ohio’s Office of Child Care and Family Services, the requirement for earlier permanency hearings was made to expedite the permanent placement process and reduce the time children spend in foster care. State officials also believed, however, that this requirement may have unintentionally resulted in increasing the number of children placed in long-term foster care because other placement options could not be developed. State data, in part, confirmed this observation. While long-term foster care placements for children supported with state funds dropped from 1,301 in 1990 to 779 in 1995, long-term placements for children from low-income families who are supported in part with federal funds rose from 1,657 to 2,057 in the same period. Although the states we reviewed did not systematically evaluate the impacts of their initiatives, they have implemented a variety of operational and procedural changes to expedite and improve the permanency process. The states reported that these actions have improved the lives of some children by (1) reuniting them with their families more quickly; (2) expediting the termination of parental rights when reunification is not feasible, making it possible for child welfare agencies to begin looking for an adoptive home sooner; or (3) reducing the number of different foster care placements in which children live. Some states implemented low-cost, creative methods for financing and providing services that address specific barriers to reuniting families. Arizona’s Housing Assistance Program focused on families in which the major barrier to reunification was inadequate housing for the family. According to reports and data from the Arizona Department of Economic Security, between 1991 and 1995, as the result of the program, 939 children were reunited with their families, representing almost 12 percent of the children reunified during this period. State officials estimated that this program saved the state over $1 million in foster care-related costs between 1991 and 1995. Arizona and Kentucky placed special emphasis on expediting the process by which parental rights could be terminated. Arizona’s Severance Project focused on cases in which termination of parental rights was likely or reunification services were not warranted and for which a backlog of cases had developed. In April 1986, the state enacted a law providing funds for hiring severance specialists and legal staff to work on termination cases. The following year, in 1987, the state implemented the Arizona State Adoption Project, which focused on identifying additional adoptive homes, including recruiting adoptive parents for specific children and contracting for adoptive home recruitment services. State officials reported that the Adoption Project resulted in a 54-percent increase in the number of new homes added to the state registry in late 1987 and 1988. In addition, they noted that the Severance Project contributed to a more than 32-percent reduction in the average length of stay between entering care and the filing of the termination petition for fiscal years 1991 through 1995. children available for adoption rose, the state was forced to focus its efforts on identifying potential adoptive homes and shifted its emphasis to strategies to better inform the public about the availability of adoptive children. Some states are experimenting with concurrent planning. Under this approach, child welfare officials work toward reuniting a family while developing an alternate plan for permanently removing the child if reunification efforts fail. By working on the two plans simultaneously, caseworkers reduce the time needed to prepare the paperwork for terminating parental rights if reunification efforts fail. Under a concurrent planning approach, caseworkers emphasize to the parents that if they do not adhere to the requirements set forth in their case plan, parental rights can be terminated. Some state officials attributed obtaining quicker permanent placements in part to parents making more concerted efforts to make the changes needed to have their children returned home. Colorado began using concurrent planning formally in 1994 for children under age 6 in conjunction with the implementation of the law requiring that for children under age 6, the permanency hearing must be held within 6 months of the child’s entering care. The program has been implemented in five counties. Preliminary data from an ongoing evaluation in Jefferson County shows that 65 out of 78 children, or 87 percent, achieved permanent placement within 1 year of initial placement as compared with 50 of 71 children, or 70 percent, in a control group. State Department of Human Services officials told us that concurrent planning was a key factor that contributed to the success of children’s being placed more quickly in permanent homes. All decisions regarding both the temporary and final placement of foster children come through states’ court systems. Therefore, Hamilton County, Ohio, juvenile court officials focused attention on the court’s involvement in achieving permanency more quickly by developing new procedures to expedite case processing. To do so, in 1985, they revised court procedures by (1) designating lawyers specially trained in foster care issues as magistrates to hear cases; (2) assigning one magistrate to each case for the life of that case to achieve continuity; and (3) agreeing at the end of every hearing—with all participants present—to the date for the next hearing. According to court officials, the county saved thousands of dollars because it could operate three magistrates’ courtrooms for about the cost of one judge’s courtroom. Also, a report on court activities indicated that because of these changes, between 1986 and 1990, the number of children (1) placed in four or more different foster care placements decreased by 11 percent and (2) the percentage of children leaving temporary and long-term foster care in 2 years or less increased from 37 to 75 percent. Our efforts to assess the overall impact of these initiatives were hampered by the absence of evaluation data. We found that the states generally did not conduct systematic evaluations of their programs, and outcome information was often limited to state reports and the observations of state officials. Although many of these efforts reported improvements, for example, in speeding the termination of parental rights once this goal was established, the lack of comparison groups or quality data from the period before the initiative made it difficult to reach definitive conclusions about the initiatives’ effectiveness. States increased their chances of successfully developing and implementing initiatives when certain key factors were a part of the process. When contemplating changes, state officials had to take into consideration the intricacies of the foster care process, the inherent difficulty that caseworkers and court officials face when deciding whether a child should be returned home, and the need, in some cases, for caseworkers and judges to recognize that termination of parental rights should be pursued. When Kentucky officials, for example, initiated a project to shorten the process for terminating parental rights, they faced the challenge of changing the way caseworkers and members of the legal system had viewed termination of parental rights. Many caseworkers saw the termination of parental rights as a failure on their part because they were not able to reunify the family. As a result, they seldom pursued termination and instead kept the children in foster care. In addition, judges and lawyers were often not sufficiently informed of the negative effects on children who do not have permanent homes. Thus, as part of this project, newsletters and training were provided about the effects on children of delaying termination of parental rights. Officials in the states we reviewed recognized that improving the permanency planning process requires concerted time and effort, coordination, and resources. These officials identified several critical, often interrelated factors required to meet these challenges. These included (1) long-term involvement of officials in leadership positions; (2) involvement of key stakeholders in developing consensus and obtaining buy-in about the problem and its solution; and (3) the availability of resources to plan, implement, and sustain the project. With the expected rise in foster care caseloads through the start of the next century further straining state and federal child welfare budgets, increasing pressure will be placed on states to develop initiatives to move children into permanent homes more quickly. Many of these initiatives will need to address the difficult issues of deciding under what circumstances to pursue reunification and what time period is appropriate before seeking the termination of parental rights. We found promising initiatives for changing parts of the permanency process so that children can be moved from foster care into permanent placements more quickly. Developing and successfully implementing these innovative approaches takes time and often challenges long-standing beliefs. To succeed, these initiatives must look to local leadership involvement, consensus building, and sustained resources. As these initiatives become a part of the complex child welfare system, however, they can also create unintended consequences. Identifying appropriate cases for the expeditious termination of parental rights and processing them faster—thereby making more children available for possible adoption—can create difficulties if efforts to develop more adoptive homes have not received equal emphasis. We also observed that a critical feature of these initiatives was often absent: Many of them lacked evaluations designed to assess the impact of the effort. The availability of evaluation information from these initiatives would not only point to the relative success or failure of an effort but also help identify unintended outcomes. The lack of program and evaluation data will continue to hinder the ability of program officials and policymakers to fully understand the overall impact of these initiatives. Mr. Chairman, this concludes my formal remarks. I will be happy to answer any questions you or other members of the Subcommittee may have. For more information on this testimony, please call Gale C. Harris, Assistant Director, at (202) 512-7235. Other major contributors are David D. Bellis, Social Science Analyst; Shellee S. Soliday and Octavia V. Parks, Senior Evaluators; Julian Klazkin, Senior Attorney; and Rathi Bose, Evaluator. Ariz. Rev. Stat. Ann., Section 8-515.C.(West Supp. 1996) Colo. Rev. Stat., Section 19-3-702(1)(Supp. 1996) Conn. Gen. Stat. Ann., Section 46b-129(d),(e) (West 1995) Ga. Code Ann., Section 15-11-419 (j),(k)(1996) 705 Ill. Comp. Stat. Ann., 405/2-22(5)(West Supp. 1996) Ind. Code Ann., Section 31-6-4-19(c)(Michie Supp. 1996) Iowa Code Ann., Section 232.104 (West 1994) Kan. Stat. Ann., Section 38-1565(b),(c)(1995) La. Ch. Code Ann., Arts. 702,710(West 1995) Mich. Stat. Ann., Section 27.3178(598.19a) (Law Co-op Supp. 1996) Minn. Stat. Ann., Section 260.191 Subd. 3b(West Supp. 1997) Miss. Code Ann., Section 43-21-613 (3)(1993) New Hampshire Court Rules Annotated, Abuse and Neglect, Guideline 39 (Permanency Planning Review) N.Y. Jud. Law, Section 1055(b)(McKinney Supp. 1997) Ohio Rev. Code Ann., Sections 2151.353(F) 2151.415 9 (A) (Anderson 1994) 42 Pa. Cons. Stat. Ann., Section 6351(e-g)(West Supp. 1996) (continued) R.I. Gen. Laws, Section 40-11-12.1(1990) S.C. Code Ann., Section 20-7-766(Law. Co-op. Supp. 1996) Utah Code Ann., Section 78-3a-312, (1996) Va. Code Ann., Section 16.1-282(Michie 1996) Wash. Rev. Code Ann., Section 13.34.145(3)(4) (West Supp. 1997) W. Va. Code Sections 49-6-5, 49-6-8(1996) Wis. Stat. Ann., Sections 48.355(4); 48.38; 48.365(5)(West 1987) Wyo. Stat. Ann., Section 14-6-229 (k)(Michie Supp. 1996) Michigan’s time frame to hold the permanency hearing was calculated by adding the days needed to conduct the preliminary hearing, trial, dispositional hearing, and the permanency hearing. Virginia’s time frame to hold the permanency hearing was calculated by adding the number of months required to file the petition to hold the permanency hearing plus the number of days within which the court is required to schedule the hearing. Child Welfare: Complex Needs Strain Capacity to Provide Services (GAO/HEHS-95-208, Sept. 26, 1995). Child Welfare: Opportunities to Further Enhance Family Preservation and Support (GAO/HEHS-95-112, June 15, 1995). Foster Care: Health Needs of Many Young Children Unknown and Unmet (GAO/HEHS-95-114, May 26, 1995). Foster Care: Parental Drug Abuse Has Alarming Impact on Young Children (GAO/HEHS-94-89, Apr. 4, 1994). Residential Care: Some High-Risk Youth Benefit, But More Study Needed (GAO/HEHS-94-56, Jan. 28, 1994). Foster Care: Services to Prevent Out-of-Home Placements Are Limited by Funding Barriers (GAO/HRD-93-76, June 29, 1993). Foster Care: State Agencies Other Than Child Welfare Can Access Title IV-E Funds (GAO/HRD-93-6, Feb. 9, 1993). Foster Care: Children’s Experiences Linked to Various Factors; Better Data Need (GAO/HRD-91-64, Sept. 11, 1991). Child Welfare: Monitoring Out-of-State Placements (GAO/HRD-91-107BR, Sept. 3, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed: (1) state efforts to reduce the time frames within which hearings must be held to determine permanent placements for foster children; (2) state initiatives designed to expedite permanent placements for foster children and the effectiveness of these initiatives; and (3) key factors that facilitate changes in this part of the child welfare system. GAO noted that: (1) signaling the importance of permanent placement to the well-being of children, 26 states have established more stringent requirements on the timing of the first permanency hearing than has federal law, which requires a hearing within 18 months; (2) in addition, the states it reviewed undertook operational and procedural initiatives to expedite the permanent placement process as well as make well-informed permanent placement decisions; (3) although most of these states did not systematically evaluate their initiatives, they reported that many of the initiatives have contributed to reducing the time spent in foster care or decreasing the total number of foster placements made for a child; (4) state officials reported that the key factors in successfully implementing these initiatives were the long-term involvement of key officials, an extended commitment of resources, and the need for a change in perspective of case workers and judges in order to recognize that, in some cases, termination of parental rights is the best solution for the child's future.

govreport

Signed into law on May 9, 2014, the DATA Act expanded on previous federal transparency legislation by requiring the disclosure of federal agency expenditures and linking agency spending information to federal program activities so that both policymakers and the public can more effectively track federal spending. The DATA Act requires government- wide reporting on a greater variety of federal funds, such as budget and financial information, as well as tracking of these funds at multiple points in the federal spending lifecycle. To improve the quality of these data, the act requires that agency-reported award and financial information comply with new data standards established by OMB and Treasury. These standards specify the items to be reported under the DATA Act and define and describe what is to be included in each element with the aim of ensuring that information will be consistent and comparable. The act identifies OMB and Treasury as the two agencies responsible for leading government-wide implementation. Two key components of ensuring the accuracy, completeness, and consistency of federal spending data are OMB releasing policy guidance and Treasury developing technical guidance for the agency submissions and publication of the data required under the act. Toward that end, OMB has taken a number of steps to help agencies meet their reporting requirements, including establishing 57 standardized data element definitions for reporting federal spending information, issuing guidance to operationalize selected standards and clarify agency reporting requirements, and meeting with agencies to assess their readiness to meet the reporting requirements under the act. Specific actions include the following: In May 2015, OMB issued initial guidance to federal agencies on reporting requirements pursuant to the Federal Funding Accountability and Transparency Act (FFATA) as well as the new requirements that agencies must employ pursuant to the DATA Act. The guidance also directs agencies to (1) implement data definition standards for collecting and reporting agency-level and award-level data by May 9, 2017; (2) implement a standard data exchange format for providing data to Treasury to be displayed on USASpending.gov or a successor site; and (3) link agency financial systems with award systems by continuing to use specified unique identification numbers for financial assistance awards and contracts. In May 2016, OMB released guidance on reporting financial and award information required under the act. This guidance addresses (1) reporting financial and award level data, (2) linking agency award and financial systems using a unique award identifier, and (3) assuring that data submitted to Treasury for publication on USASpending.gov are sufficiently valid and reliable. In November 2016, OMB issued additional guidance in response to questions and concerns reported by agencies. This guidance specifies DATA Act reporting responsibilities for intragovernmental transactions, explains how to report financial assistance awards with personally identifiable information, and clarifies the senior accountable official (SAO) assurance process over the data submitted to the DATA Act broker, a system to standardize data formatting and assist reporting agencies in validating their data prior to submission. The May and November 2016 guidance also directs agency SAOs to leverage existing data quality and management controls established in statute, regulations, or federal policy when submitting their assurance over the data. In addition to issuing policy guidance to help agencies meet their reporting requirements under the act, OMB’s Controller and Treasury’s Fiscal Assistant Secretary conducted a series of meetings with CFO Act agencies to obtain information on any challenges that could impede effective implementation and assess agencies’ readiness to report required spending data in May 2017. Treasury also led efforts to develop the technical guidance and reporting systems to facilitate agency reporting. In April 2016, Treasury released the DATA Act Information Model Schema (DAIMS), or schema version 1.0, which provides information on how to standardize the way financial assistance awards, contracts and other financial and non-financial data will be collected and reported under the DATA Act. A key component of the reporting framework laid out in the schema is the DATA Act broker. According to Treasury guidance documents, agencies are expected to submit three files sourced from their financial management systems to the broker. The broker is also expected to extract award and sub-award information from existing award reporting systems that currently supply award data (covering federal assistance including grants and loans, as well as procurements) to USASpending.gov. These award reporting systems—including the Federal Procurement Data System-Next Generation (FPDS-NG), System for Award Management (SAM), the Award Submission Portal (ASP), and the FFATA Subaward Reporting System (FSRS)—compile information submitted by agencies and award recipients to report, among other things, procurement and financial assistance award information required under FFATA. A more detailed discussion of the broker and the agency file submission process can be found in our August 2016 correspondence. In addition to developing the schema version 1.0 and the broker, Treasury also issued an implementation playbook that outlines 8 steps and a recommended timeline for agency implementation, and hosted multiple meetings, including weekly office hour calls and monthly technical workshops, to help agencies prepare and test their data for submission to the broker. To help improve the quality of the data, the act also requires agencies’ IGs and GAO to assess and report on the completeness, timeliness, quality, and accuracy of spending data submitted by federal agencies. The first IG reports were due to Congress in November 2016. However, agencies are not required to submit spending data in compliance with the act until May 2017. As a result, the IGs did not report on the spending data in November 2016. The Council of the Inspectors General on Integrity and Efficiency (CIGIE) developed an approach to address what it describes as the IG reporting date anomaly and maintain early IG engagement with the agencies. CIGIE encouraged but did not require the IGs to undertake assessments of their respective agencies’ readiness to submit spending data in accordance with DATA Act requirements and delayed issuance of the mandated audit reports to November 2017. The Federal Audit Executive Council DATA Act Working Group—established by CIGIE to assist the IG community in understanding and meeting its DATA Act oversight requirements—issued the DATA Act Readiness Review Guide (version 2.0) on June 2, 2016, to guide IGs in conducting their readiness reviews. According to the review guide, the main objectives of the IG readiness reviews are to assess whether an agency’s DATA Act implementation plan or process is “on track to meet the requirements of the DATA Act,” and to provide, as needed, recommendations or suggestions on how to improve the agency’s likelihood of compliance with the requirements of the DATA Act. As of February 2017, 22 of the 24 CFO Act agencies had issued annual financial reports for fiscal year 2016 and 19 of the 22 CFO Act agencies’ auditors reported material weaknesses and/or significant deficiencies in internal control over financial reporting in their audit reports that may affect the quality of information reported under the DATA Act. In addition, as of February 2017, 20 of the 24 CFO Act agencies’ IGs had issued readiness review reports. Of these, 16 IGs identified a range of issues and challenges which may affect agencies’ abilities to produce quality data for submission to Treasury as part of the DATA Act reporting requirements. Further, 9 of the 22 CFO Act agencies’ auditors reported agencies’ financial management systems did not substantially comply with Section 803(a) of FFMIA, which may limit an agency’s ability to provide reliable and timely financial information for managing day-to-day operations and to produce reliable financial statements, maintain effective internal control, and comply with legal and regulatory requirements, including the DATA Act. Our analysis of material weaknesses, significant deficiencies, and other challenges reported in agency annual financial reports and agency IGs’ DATA Act readiness reviews identified data quality issues and challenges in three broad areas that increase the risk agencies may not be able to report complete, timely, and accurate data as required under the DATA Act by May 2017. These issues and challenges relate to internal controls over financial reporting and financial management operations, properly recorded and reconciled accounting balances and transactions, and other issues related to the proper use of accounting practices in accordance with U.S. generally accepted accounting principles. Fourteen of the 22 CFO Act agencies’ auditor’s reports noted material weaknesses and significant deficiencies, and 14 of the 20 IG readiness reviews reported issues or challenges related to accounting and financial management. See appendix III for a list of agencies that had deficiencies in this area. According to some of the auditor’s reports, issues in this area could result in misstatements in budgetary balances, obligations, and undelivered orders—which are part of the information to be posted on USASpending.gov. Some examples include the following: One agency’s auditor reported a material weakness in controls over financial management related to the maintenance of accounting records, recording obligations at the transaction level, and accounting and internal controls over obligations and undelivered orders. The auditor also reported a significant deficiency related to ineffective monitoring and reviewing, and inappropriate certification as to the validity of obligation balances, which resulted in invalid obligations remaining open. According to the auditor, these deficiencies restrict the availability of funding authority, and increase the risk of misstating obligation balances as of year-end. These types of issues increase the risk that quarterly obligation amounts reported by agencies under DATA Act requirements may be inaccurate or incomplete. Another agency’s IG readiness review reported that the various layers of data validation and reconciliation involved in the agency’s DATA Act implementation are complex and require coordination with each reporting bureau. According to the agency’s IG, the complexities of performing reconciliations of reported data to source systems presents a challenge to the agency’s ability to ensure the quality and validity of data reported. This set of issues included longstanding challenges with disparate or antiquated financial management systems that affect financial reporting. These challenges include system infrastructure and integration issues such as systems that do not consolidate transaction level financial data or do not capture required data elements such as award identifiers used to link financial and non-financial data. Five of the 22 CFO Act agencies’ auditors’ reports noted material weaknesses and significant deficiencies, and 14 of the 20 IG readiness reviews reported issues or challenges related to financial management systems. See appendix III for a list of agencies that had deficiencies in this area. According to the auditors’ reports, issues in this area may cause ineffective application of controls used to identify and resolve differences in financial information with source systems to help ensure complete, accurate, and timely financial information for DATA Act reporting. Also, according to the IG readiness reviews, issues with agency financial management systems resulted in test file submissions being rejected by the DATA Act broker due to validation errors. Only data that have passed the broker validation and been approved by the SAO is included in USASpending.gov. Data that have not passed the broker validation will not be included, therefore increasing the risk of incomplete or misleading information. Some examples include the following: One agency’s annual financial audit report stated that the agency had not enabled the full functionality of its accounting systems to capture all budgetary accounting events and to automate budgetary reporting procedures. As a result, the agency made numerous manual adjustments related to budgetary resources amounts that were not supported and not properly recorded to the correct general ledger accounts. According to the auditor, manual adjustments increase the risk (1) that budgetary adjustments were unsupported or inconsistently recorded, and (2) of the likelihood of errors in the financial statements. These deficiencies increase the risk that budgetary information that will be submitted to USASpending.gov may be incomplete and inaccurate. Another agency’s IG readiness review reported that the agency faced challenges due to legacy and current financial systems using different technologies and data elements. Limited resources, such as lack of financial resources and human capital necessary to implement the act’s requirements, was also cited as a challenge. The IG also reported that the agency had been unable to resolve data quality issues that have impeded the complete and accurate reporting of departmental contract, grant, loan, and other financial assistance awards in USASpending.gov. Finally, according to the auditor’s reports, 9 of the 22 CFO Act agencies’ auditors reported agencies’ financial management systems did not substantially comply with 1 or more of the 3 requirements found in section 803(a) of FFMIA. Section 803(a) of FFMIA requires: (1) federal financial management systems requirements; (2) applicable federal accounting standards; and (3) the U.S. Standard General Ledger (USSGL) at the transaction level. Eight of 22 agencies did not comply with federal financial management system requirements, which consist of reliable financial reporting; effective, efficient, and cost effective financial operations; safeguarding resources; and internal controls over financial reporting and financial system security. Four of 22 agencies did not comply with federal accounting standards, which provide guidance to improve federal financial reporting and are essential for public accountability and the effective and efficient functioning of government. Five of 22 agencies did not comply with the USSGL at the transaction level which means that each time an approved transaction is recorded in the financial management system it will generate the appropriate general ledger accounts for posting the transaction in accordance with the rules defined in USSGL guidance. By not implementing effective internal controls over financial management systems and not adequately implementing requirements in section 803(a) of FFMIA, agencies will be challenged to provide consistent financial and non-financial information across component entities and functions, which increases the risk that agencies may not be able to submit quality data for DATA Act reporting. The third area consists of issues involving security over information technology (IT) systems; improper access controls to limit users to systems and functions needed for their work; and system configurations such as outdated system software, patch management, and lack of compliance with internal policies. Issues involving IT security and ineffective controls could limit management’s ability to provide assurance over the completeness and accuracy of recorded transactions. Eighteen of the 22 CFO Act agencies’ auditors’ reports noted material weaknesses and significant deficiencies related to IT security and controls. See appendix III for a list of agencies that had deficiencies in this area. The IG readiness reviews, which primarily focused on other steps taken by agencies to implement the DATA Act, did not specifically mention challenges or issues related to IT security and controls. According to the auditors’ reports, issues in this area increase the risk that unauthorized and/or inappropriate changes made either accidentally or intentionally to financial IT systems may go undetected by management, increasing the risk of misstatement due to fraud and disruption of critical financial operations, as well as increasing the risk that the reliability and integrity of agencies’ data could be compromised and adversely affect the agencies’ ability to provide complete, accurate, and timely information for DATA Act reporting. One example iss the following: One agency’s annual financial audit report stated that controls over access to programs and data and audit logs were not designed properly, consistently implemented, or fully effective. The auditor found that database and operating system patches were not documented, authorized or tested prior to implementation into the production environment, a complete and accurate listing of operating system patches could not be generated, and a feeder system was configured incorrectly to assign incorrect invoice acceptance date data, among other things. According to the auditor, these deficiencies increase the risk that unscrupulous, unauthorized, or inappropriate activity could be performed and not detected, which could lead to a compromise and/or security risk to the confidentiality, integrity, and availability of the data and systems. These issues also increase the risk that financial and non-financial information that will be submitted to USASpending.gov may be incomplete, inaccurate, and untimely. We have previously reported weaknesses, issues, and other challenges in key DATA Act award systems which increase the risk that the data that will be submitted to USASpending.gov may not be complete, accurate, and timely. The DATA Act broker is expected to extract award and sub- award information related to federal spending, such as federal assistance—including grants, loans, and procurements—directly from four award systems. The four award systems and related issues that we have previously identified are described below. Unlike the data submitted by agencies directly from their financial systems to the DATA Act broker, the award and sub-award information extracted from these four systems are not subject to any validations in the broker. Since 1978, FPDS-NG has been the primary government-wide central repository for procurement data, and feeds certain data to USASpending.gov—a searchable database of information on federal contracts and other government assistance such as grants and cooperative agreements. Individuals and entities awarded contracts over the micro-purchase threshold must submit detailed contract information to FPDS-NG. FPDS-NG includes information about the product or service, agency and vendor information, contract start and expiration dates, and location of contract performance, among other elements. According to Treasury officials, the DATA Act broker will extract procurement award and awardee information such as award description, amount, and awardee unique identifier from FPDS-NG to be reported on USASpending.gov. In our past work, we found that FPDS-NG often contains inaccurate or incomplete data as agencies do not always input or document required information. For example, in September 2016, our review of the Department of Veterans Affairs (VA) contracting policies and procedures found that total obligations balances reflected in VA’s subsidiary accounting records did not match what was recorded in FPDS-NG. We also identified inaccurate data in FPDS-NG such as misclassified 8(a) firms and incorrect obligations balances in our March 2016 review of the Small Business Administration’s (SBA) 8(a) Business Development Program. Further, our prior work on FPDS-NG also found data limitations with the system’s inability to identify more than one type of service purchased for each contract action. According to some of the IG reports we reviewed, these data quality issues were the result of human error, the lack of departmental internal controls to reasonably assure required procurement information is properly recorded in departmental systems and FPDS-NG, and limitations with the FPDS-NG functionality such as the inability to change incorrect data identified in FPDS-NG. These issues increase the risk that data reported from FPDS-NG to the Treasury data store will not be complete, accurate, and timely. SAM is the primary U.S. government repository for prospective federal awardee and federal awardee information, and the centralized Government system for certain contracts and grants. All entities that wish to do business with the government are to maintain an active registration in SAM unless exempt. As part of this registration, awardees register a name, unique identifier, address, and executive compensation information—all of which are required DATA Act standardized data elements. SAM also populates the entity name and address (street, city, state, congressional district, ZIP Code, and country) in FPDS-NG and certain executive compensation and other sub-awardee information is prepopulated from SAM to FSRS prior to the prime awardee’s reporting. We have previously identified data limitations with SAM that may affect DATA Act reporting. For example, in January 2017, we found that SAM did not contain information on lessors that listed physical or mailing addresses in China. Our work also found that certain information disclosed in SAM is not validated. If the addresses for foreign awardees are not recorded in SAM, then they will not be displayed in USASpending.gov for access by the public, resulting in incomplete and inaccurate awardee data for DATA Act reporting. We further noted that prior to November 1, 2014, the General Services Administration (GSA) was not required to collect certain information from lessors through SAM, such as the parent, subsidiary, or successor entities to the lessor. In addition, our June 2014 review of USASpending.gov found that ZIP Code information for awardees—which is provided by SAM—was one of the data elements that were significantly inconsistent with information in agency records. In that report, we recommended clarified guidance on agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov to improve the completeness and accuracy of data submissions. Although some progress has been made by the related agencies, the recommendations related to this report remain unresolved. These data limitations increase the risk that federal agencies may not submit quality awardee data for DATA Act reporting. ASP is the system used by federal agencies to report financial assistance data (e.g., grants) to USASpending.gov. According to Treasury, the DATA Act broker will extract financial assistance award information from the ASP—including awardee unique identifier, award characteristics, awards amount, awardee legal identify name, and address for financial assistance—all of which are required by the DATA Act to be reported. In December 2016, we reported that the DATA Act broker will not validate the accuracy of data extracted from the ASP and that according to Treasury officials ASP does apply some validation checks to the data submitted by federal agencies. In addition, ASP rejects individual records that fail 10 percent of the validation requirements. ASP also rejects entire file submissions if more than 10 percent of the records in the file submission fail validation checks. However, ASP partially accepts the file submission if less than 10 percent of the records in a file submission fail validation checks. The effectiveness of this validation process to prevent the submission of erroneous records raises concerns regarding the quality of awardee data that can be submitted for DATA Act reporting. FSRS allows prime grant award and prime contract recipients to report sub-award activity including executive compensation, and provides data on first-tier sub-awards reported by prime recipients. FSRS was created as a result of FFATA and became active in July 2010. Prime awardees must register and report sub-award information for first-tier sub-awardees, including award and entity information, such as Data Universal Numbering System (DUNS) identification numbers. FSRS contains the small business status of some subcontractors, but only for limited types of small businesses. The sub-awardee provides all of the information required for reporting to the prime awardee. This includes sub-awardee entity information, sub-awardee unique identifier, and relevant executive compensation data, if applicable. These are also DATA Act standardized data elements required to be reported. In June 2014, we reported that we could not verify the subcontract data in FSRS as agencies frequently do not maintain the records necessary to verify the information reported by the awardees. We also found inconsistencies in the reporting of 20 of 21 data elements caused by errors in data entry, missing data, or lack of clear guidance. In our report, we recommended clarified guidance on agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov. Our recommendation on this issue remains unresolved. These issues increase the risk that federal agencies may not submit complete, accurate, and timely sub-award data for DATA Act reporting. As agencies prepare to submit required financial and award information in May 2017, they have identified a number of reporting challenges that will affect the quality of data posted on USASpending.gov. Both OMB and Treasury acknowledged that these challenges are unlikely to be resolved before the first statutory deadline when data are collected in compliance with the act. Included in these challenges is how agencies are to report certain intragovernmental transactions that result from financial activities between federal government agencies. Specifically, in order to properly present the financial balances and activities of the federal government, the reciprocating balances and activities between the agencies should be offset and result in a zero balance. Reconciling intragovernmental transactions for financial reporting purposes is a longstanding and government-wide challenge. Federal accounting standards, laws, regulations, and policies govern the accounting, reporting, and business rules for each of the categories and subcategories of intragovernmental transactions. Our annual audits of the U.S. government’s consolidated financial statements have identified the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal entities as an impediment that has prevented us from rendering an opinion on the federal government’s accrual-based consolidated financial statements for many years. Our most recent audit found that the amount of unmatched funds from intragovernmental transactions amounted to hundreds of billions of dollars. In response to our previous recommendations, Treasury has continued to actively work with federal agencies and improve its processes to resolve intragovernmental transactions. However, the guidance OMB developed on how agencies are to report intragovernmental transactions does not appear to leverage the existing processes that Treasury has put in place to resolve on a quarterly basis the differences in intragovernmental transactions between federal agencies. Treasury has implemented a new initiative for identifying and monitoring systemic root causes of intragovernmental differences, in addition to other enhancements to its processes for reporting various aspects of agencies intragovernmental differences between agencies, including the composition of the differences by agency and category of intragovernmental transaction. USDA officials (one of our case example agencies) expressed concern about OMB’s guidance on intragovernmental transactions. Specifically, they told us that without a standard approach for reporting intragovernmental transactions—meaning whether the funding or awarding agency reports them—it is not appropriate for a funding agency to certify award data maintained in an awarding agency’s systems, a DATA Act reporting method allowed after the first data submission. HHS officials (our other case example agency) also expressed concern, and told us that although they will be prepared to report in a manner consistent with the current OMB guidance, they believe that OMB should revisit the guidance because it differs from other reporting requirements. Treasury officials told us that they are aware of these challenges, but they do not expect that these issues will be resolved before the May 2017 reporting deadline. These officials also told us that efforts to address longstanding challenges related to reporting intragovernmental transactions are under way, and that they plan to communicate data quality limitations to the public on USASpending.gov. The officials could not provide us with specifics on how they would communicate the limitations but indicated that it would likely be part of the SAO assurance process. OMB officials told us in January 2017 that they are unaware of any outstanding issues on this topic that would require an OMB policy response, and therefore OMB has no plans to issue additional implementation guidance at this time. Another reporting challenge identified by agencies involves missing or incorrect ZIP+4 information. OMB guidance requires agencies to validate federal assistance recipient information, including the recipient’s address and ZIP code, against the information in the System for Award Management (SAM) before they submit it to the DATA Act broker. This guidance requires agencies to ensure that award-level data in their systems for financial assistance recipients matches the recipients’ information in SAM. Consistent with OMB guidance, financial assistance recipients are required to register in SAM prior to submitting an application for an award, and OMB staff told us recipients are also required to provide accurate information as part of the terms and conditions of their award agreements. However, according to agency officials, because SAM does not enforce the use of ZIP+4 and agencies’ eligibility procedures may not flag incorrect or missing ZIP+4 information, some recipient records are incomplete or incorrect. In addition, some rural communities do not have ZIP+4 because the U.S. Postal Service (USPS) only assigns 5-digit ZIP codes in those areas. As a result of the requirement that ZIP+4 information be consistent with the USPS address database, Treasury officials told us some agencies are unable to validate their financial assistance award information in the DATA Act broker. For example, USDA officials told us in January 2017 that instituting the ZIP+4 validation rule in the broker as a fatal error rather than just a warning would cause a large number of their financial assistance records to fail and ultimately not be included in data that are displayed on USASpending.gov. In February 2017, Treasury implemented the ZIP+4 validation rule as a fatal error. Treasury officials told us that this was done in an effort to enforce existing requirements and improve data quality. Treasury officials said that they examined the scope and seriousness of the problem and determined that it is not significant enough at this time to warrant the policy change that would be required to address it prior to May 2017. According to a Treasury analysis, SAM records that are missing ZIP+4 information represent about 1 percent of the total dollar value of all the awards in SAM. In addition, according to Treasury, SAM records that are missing ZIP+4 because the address has not been assigned a ZIP+4 by USPS represent less than 0.5 percent of the total dollar value of all the awards in SAM. Treasury officials acknowledged that missing or invalid ZIP+4 information is a longstanding data quality issue with agency records, but believe that it is one best addressed at the agency level. In March 2017, Treasury officials told us that although they planned to continue to enforce the ZIP+4 requirement through the DATA Act broker, they were developing a workaround for agencies encountering problems. Agencies have also reported challenges linking their financial and award data using the unique award identifier. OMB guidance requires agencies to link their agency financial and award data using the unique award identifier. As our work in 2016 showed, agencies continue to report challenges related to integrating their financial and award systems to report under the DATA Act. Some agencies, according to OMB staff, are unable to record unique award identifiers in their financial systems, and may not be able to link financial and award data. This linkage should help policymakers and the public track spending more effectively—one of the objectives of the DATA Act. HHS and USDA officials reported in their DATA Act implementation plan updates and confirmed with us that they are using short-term solutions to link their financial and award data to generate and submit a required file by May 2017. They both confirmed they will link their financial and award systems with the unique award identifier when they implement long-term system solutions. OMB staff told us that five agencies—the Departments of Defense, Housing and Urban Development, the Interior, and Veterans Affairs, and the Environmental Protection Agency—indicated that they will not fully meet the May 2017 reporting requirements, in part because some of their components have been unable to record unique award identifiers in their financial systems. OMB staff told us that these agencies would be able to report some data, but not all of the award financial information required for agency submissions. Treasury officials told us that they are aware of this issue and have structured the broker so that after providing a warning it will accept agency data submissions, even if they contain significant gaps. OMB staff and Treasury officials told us they are creating a mechanism in the broker that will allow agencies to explain reporting anomalies in their data displayed on USASpending.gov. According to Treasury officials, the broker will include a text box for agencies to explain any reporting anomalies related to the data they are submitting and certifying before it is displayed on USASpending.gov. In addition, OMB staff told us they plan to provide agencies with standard language to explain certain reporting discrepancies, such as data that are not aligned as a result of the time it takes between when an agency completes a transaction and when it is recorded in its financial system. OMB staff explained that the purpose of the text boxes is not to provide qualifications about data quality, but to communicate what they believe are legitimate data discrepancies that could be perceived as data quality issues by the public. One of the purposes of the DATA Act is to provide consistent, reliable, and searchable government-wide spending data that are displayed accurately for taxpayers and policymakers on USASpending.gov (or a successor system). Longstanding issues related to agency financial information, systems and internal controls, and reporting challenges related to agency DATA Act report submissions underscore the need for OMB to address our open recommendation to provide additional guidance to address potential clarity, consistency, or data quality issues and for OMB to implement a process for communicating data quality limitations to the public. Information Quality Act (IQA) standards specify that data should have full, accurate, and transparent documentation where appropriate and should identify and disclose data quality issues. Similarly, OMB’s Policies for Federal Agency Public Websites and Digital Services requires that agencies be transparent about the quality of the information that they disseminate and take reasonable steps where practicable to inform users about the quality of disseminated content. We will continue to monitor the implementation of the DATA Act and how OMB, Treasury, and agencies communicate reporting anomalies and data quality limitations. Another area of risk to data quality is the agency senior accountable official (SAO) assurance process that leverages assurance processes of existing source systems with known data quality challenges. OMB guidance directs agency SAOs to leverage existing processes when providing assurances over required data submissions. However, during this review we have identified a number of concerns related to the effectiveness of some of these processes. OMB guidance directs agencies to match the procurement award data generated in the broker with data in the agency procurement award systems. The guidance also directs agencies to leverage the assurances provided in their annual Federal Procurement Data System- Next Generation (FPDS-NG) Data Verification and Validation reports submitted to OMB. Despite the requirement for agencies to conduct annual verification and validation reviews of the data contained in FPDS- NG, our prior work found that some award data reported on USASpending.gov contained information that was not fully consistent with agency records or was unverifiable due to gaps in agency records. OMB guidance also directs agencies to match financial assistance award data generated in the broker against data in their financial assistance award management systems for all award-level data and in SAM for prime awardee information (i.e., subrecipient executive compensation data). Although OMB guidance directs agencies to leverage existing assurance processes for other file submissions, there is no certification or assurance processes for the financial data submitted to the ASP. OMB guidance specifies that OMB is reviewing opportunities to enhance assurances over these data. However, as of March 2017, OMB has not established a timetable for this activity, so it is unclear whether new procedures will be in place in time for agencies to leverage these assurances for their May 2017 report submissions. GSA has posted on its website an assurance statement that provides assurance that the risk to federal agency operations, data, and assets resulting from the operation of the common controls of SAM and FSRS information systems are acceptable and meet all the security controls required for DATA Act reporting. According to OMB staff, agencies can rely on data from SAM and FSRS for DATA Act reporting. However, our review of the assurance statement posted on GSA’s website found that the statement focuses on security controls rather than data quality and appears to apply specifically to procurement management. The extent to which this assurance statement will be used by SAOs to provide assurances over the quality of the data for both procurement and financial assistance award information is uncertain. We will continue to monitor this issue moving forward. HHS officials told us they are still assessing the GSA assurance statement and its alignment to HHS’s overarching SAO certification. Since the requirements for SAM and FSRS are driven by both the FAR and Title 2 of the Code of Federal Regulations, officials said that HHS is interested in having GSA confirm that the assurance statement covers both procurement and financial assistance. OMB staff told us that agencies should leverage this assurance when certifying their data from these source systems. OMB staff also noted that the agencies are ultimately responsible for the quality of their data submissions. Furthermore, these staff stated that the quality of the information reported directly by awardees to SAM and FSRS is the responsibility of the awardee in accordance with the terms and conditions of their award agreements. The extent to which the GSA assurance statement regarding data integrity in SAM and FSRS will be used by agency SAOs when assuring the quality of their data submissions for May 2017 is unclear since some SAOs were still in the process of making that determination in March 2017. We will revisit this issue after May 2017 once agencies have made their determinations and will examine potential effects for data quality. OMB staff explained that the intent of OMB guidance on the SAO assurance process is to hold agency SAOs accountable for the reliability and validity of the data they submit. As discussed in OMB guidance, the SAO assurance process is also intended to leverage existing controls, processes, and procedures outlined in existing policies, regulations, and statutes, such as the internal control requirements outlined in OMB Circular A-123. However, questions regarding these assurance processes raise concerns about whether they will be effective in preventing or detecting data quality issues. They also increase the risk that SAO assurances over agency data quality will be unreliable. OMB staff told us that they are aware of these issues and are still finalizing the SAO assurance process, which they expect to do in time for the May 2017 reporting deadline. Accordingly, we are not making a recommendation at this time but will assess the quality of the assurance process in our future work. OMB has taken some actions to improve its data governance framework, but efforts to establish a fully functioning data governance structure are at an early stage with many specifics yet to be worked out. In July 2015, we reported that OMB and Treasury had begun standardizing data elements, but had not established a clear set of institutionalized policies and processes for enforcing data standards or adjudicating necessary changes to existing standards. Establishing a formal framework for providing data governance throughout the lifecycle of developing and implementing standards is key for ensuring that the integrity of data standards is maintained over time. In that report, we recommended that OMB, in collaboration with Treasury, establish a set of clear policies and procedures for developing and maintaining data standards that are consistent with leading practices. OMB and Treasury generally agreed with our recommendation. However, the recommendation remains open. In September 2016, OMB established a Data Standards Committee to focus on clarifying existing data element definitions and identifying the need for new standards. OMB approved a charter for this committee in November 2016. According to the charter, the committee will make recommendations on these topics to OMB, the DATA Act Executive Steering Committee, and federal communities such as the Chief Acquisition Officers Council and the Chief Information Officers Council. The charter states that the committee is an advisory body that is not responsible for approving or operationalizing the data standards. The committee’s membership includes representatives of OMB, Treasury, GSA’s Integrated Award Environment Program Management Office, and federal communities and councils representing various areas of responsibility and expertise. OMB staff told us that the Data Standards Committee will be solely focused on maintaining and updating data standards, including standards used by federal communities but not specifically required under the DATA Act. According to OMB staff, the Data Standards Committee has held several meetings and plans to produce operating procedures to guide its work but has not yet done so. OMB staff told us that although the committee has reviewed specific data standards, the committee has not made any recommendations regarding these standards, nor has it produced a work plan or timetable for addressing known challenges related to any data standards. While these staff also said that the committee has begun to develop processes and procedures to guide its reviews of data standards, no details or documentation were available beyond the six-page charter. Although the charter states that the committee will seek to promote transparency by making information on the topics of its proceedings and resulting outcomes available to the public, it has not yet done so. As we have previously reported, one component of good data governance involves establishing a process for consulting with and obtaining agreement from stakeholders, including non-federal stakeholders potentially affected by changes in data standards. Moreover, standards for internal control in the federal government state that management should communicate quality information to external parties so that these parties can help the entity achieve its objectives and address related risks. The DATA Act requires that OMB and Treasury consult with public and private stakeholders in establishing data standards. The charter states that the committee is to make publicly available both the topics of its proceedings and the resulting outcomes. Doing so could allow public and private stakeholders not represented on the committee to provide better informed opinions on new data standards or revisions. Without publicly available information about the committee, these stakeholders may not be able to direct their input toward standards that are under review. OMB staff told us that the committee has not kept records and therefore has no information about its proceedings available to release. Keeping records of the Data Standards Committee’s activities and releasing them publicly could facilitate consultation with stakeholders. Actions beyond recordkeeping and public release of information about the committee are needed to address our 2015 recommendation that OMB and Treasury establish a data governance structure consistent with leading practices. The Data Standards Committee may provide a useful forum for collecting stakeholder input. However, additional steps need to be taken to build a data governance structure that fully reflects leading practices. Across the federal government, agencies are making final preparations to submit the data required by the DATA Act’s May 2017 deadline. This represents the culmination of almost 3 years of effort by OMB, Treasury, and federal agencies to address the many policy and technical challenges presented by the act’s requirements including the need to standardize data elements across the entire federal government, link data contained in agencies’ financial and award management systems, and expand the type and amount of data to be reported. Their submissions will provide an important initial test of the efficacy of this endeavor. Looking forward, attention will increasingly focus on another critical goal of the act—improving the quality of the data being produced and the mechanisms and assurances needed to communicate such information to users. An important component of this will be the first round of mandated reviews agency IGs will conduct later this year, which will include sampling and testing of data quality. However, prior audits and reviews have already identified much about the challenges agencies face in producing quality data. These reviews have identified material weaknesses and significant deficiencies reported in agencies’ financial audits and identified several widespread and longstanding issues that present risks to agencies’ ability to submit quality data for DATA Act reporting. In addition, specific challenges related to the operationalization of the act’s requirements also represent potential risks to data quality. Because of this, it is especially important for the quality assurance and data governance frameworks established by OMB to be robust, transparent, and effective. Users will need such mechanisms to make informed decisions about the nature and limitations of the data being reported. This is essential to the full implementation of the DATA Act and its promise of improving the usefulness of those financial data to Congress, federal managers, and the American people. To promote transparency in the development and management of data standards for reporting federal spending, the Director of the Office of Management and Budget should ensure that the Data Standards Committee makes information about the topics of the committee’s proceedings and any resulting outcomes available to the public. We provided a draft of this report to the Secretaries of the Departments of Agriculture, Health and Human Services, and Treasury, and the Director of the Office of Management and Budget for review and comment. OMB generally agreed with our recommendation. In addition, OMB, USDA, and Treasury provided technical comments which we incorporated as appropriate. HHS had no comments on the draft report. We are sending copies of this report to the Secretaries of the Departments of Agriculture, Health and Human Services, and Treasury, and the Director of the Office of Management and Budget, as well as interested congressional committees and other interested parties. This report will be available at no charge on our website at http://www.gao.gov. If you or your staff has any questions about this report, please contact J. Christopher Mihm at (202) 512-6806 or [email protected] or Paula M. Rascona at (202) 512-9816 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of our report. Key contributors to this report are listed in appendix IV. This review is part of our ongoing effort to provide reports on the progress being made in implementing the Digital Accountability and Transparency Act of 2014 (DATA Act). This review focuses on what is already known about existing challenges that affect the quality of agency financial data as well as issues that will affect data quality as agencies begin to report under the act. More specifically, it addresses the following: (1) risks to data quality related to known material weaknesses and other deficiencies, including internal controls over financial reporting, that have been identified in selected previous audits, reviews, and reports conducted by GAO, inspectors general (IG), and external auditors; (2) risks to data quality related to challenges in operationalizing DATA Act policy and technical guidance; (3) approaches that agencies will use to assure the quality of their data submissions and any associated limitations; and (4) efforts taken to establish a data governance structure. We also update the current status of the Office of Management and Budget’s (OMB) and the Department of the Treasury’s (Treasury) efforts to address our open recommendations related to DATA Act implementation in appendix II. To assess potential risks to data quality related to known material weaknesses and other significant deficiencies, including internal controls over financial reporting, that have been identified in selected previous audits, reviews, and reports conducted by us, IGs, and external auditors, we examined: (1) the extent to which agencies’ independent auditors have reported material weaknesses, significant deficiencies, and other challenges, and (2) the extent to which we previously reported issues with government-wide systems. To describe the extent to which agencies’ independent auditors have disclosed material weaknesses, significant deficiencies, and other challenges, we reviewed 22 of the 24 Chief Financial Officers Act of 1990 (CFO Act) agencies’ Performance and Accountability Reports (PAR) or Agency Financial Reports (AFR) for fiscal year 2016 to identify material weaknesses and significant deficiencies reported by independent auditors. Two agencies had not issued a PAR or AFR prior to our cutoff date of February 28, 2017, and therefore were not included in our review. We categorized the material weaknesses and significant deficiencies reported by the independent auditors that could affect the quality of the data submitted by agencies under the DATA Act. We also reviewed these agency reports for any auditor-identified noncompliance with the Federal Financial Management Improvement Act of 1996 (FFMIA) to identify factors that may increase the risk to reporting quality data. In addition, because the DATA Act requires IGs and GAO to assess and report on the completeness, timeliness, quality, and accuracy of data submitted by federal agencies, we reviewed readiness reviews issued by IGs to identify reported issues and challenges that could affect the quality of spending data reported under the DATA Act. Four agency IGs did not conduct a readiness review or their reports were not issued prior to our cutoff date of February 28, 2017, and therefore were not included in our review. To ensure we had a comprehensive understanding of these material weaknesses, significant deficiencies, and other challenges, we analyzed these reported issues to determine the extent to which they may hinder the entities’ abilities to submit complete and accurate spending data and categorized them. In our analysis of agencies’ material weaknesses, significant deficiencies, and other challenges reported by independent auditors, we identified three overall categories that could affect data quality: (1) Accounting and Financial Management, (2) Financial Management Systems, and (3) Information Technology (IT) Security and Controls. We reviewed the auditor reports, PARs, AFRs, and readiness reviews using a data collection instrument to document our assessment of the extent to which the issues identified in these reports fit into the aforementioned categories. To describe the extent to which independent auditors have reported issues with government-wide systems, we reviewed our previous reports to identify reported deficiencies in government-wide systems that could affect the quality of spending data submitted to USASpending.gov. According to Treasury, the source systems include: (1) the Federal Procurement Data System-Next Generation, (2) System for Award Management, (3) the Award Submission Portal, and (4) the Federal Funding Accountability and Transparency Act Subaward Reporting System. Although the conditions observed in these reports may not be present in all federal agencies and systems, they illustrate conditions that increase the risks and effects to agency data quality. To assess the risks to data quality related challenges in operationalizing DATA Act policy and technical guidance during implementation of the act we examined (1) the extent to which selected agencies have been able to submit, validate, and certify their data submissions to the DATA Act broker and any challenges they reported, and the (2) the steps OMB and Treasury have taken to address known reporting challenges. To understand the extent to which agencies have been able to submit, validate, and certify their data submissions we reviewed technical documentation; reviewed experiences at two agencies; interviewed knowledgeable officials from OMB, Treasury, and selected federal agencies; and reviewed past GAO reports to identify data quality issues related to DATA Act implementation. The review of technical documentation included material related to the schema version 1.01 to understand reporting structure, and the broker to understand its functionality and validation processes. We obtained technical documentation from the Federal Spending Transparency public website. For the examination of experiences at agencies, we selected two agencies based on whether they were in compliance with existing federal requirements for federal financial management systems; the type of federal funding provided (such as grants, loans, or procurements); and their status as federal shared service providers for financial management. Based on these selection factors, we chose the U.S. Department of Health and Human Services (HHS), and the U.S. Department of Agriculture (USDA). Although the agencies’ experiences are not generalizable, they illustrate different conditions and challenges under which agencies are implementing the act. These two agencies were also selected for our January and December 2016 reports. To understand the steps OMB and Treasury have taken to address known reporting challenges, we reviewed OMB policy guidance intended to facilitate agency reporting. We also interviewed OMB staff and Treasury officials to obtain information about steps they have taken to respond to previously identified challenges, agency requests for clarification on reporting requirements, and any plans for additional guidance. We also met with OMB staff and Treasury officials to obtain information on the status of efforts to address our previous recommendations related to providing policy and technical guidance. To assess the approach that agencies will use to assure the quality of their data submissions and any associated limitations we (1) reviewed relevant OMB policy guidance; (2) spoke with relevant agency officials; and (3) examined experiences at our two case study agencies, HHS and USDA. We reviewed OMB policy guidance to understand the assurance process agency senior accountable officials (SAO) should follow, including the authoritative sources for each file to be submitted in the DATA Act reporting process. We spoke with OMB staff and Treasury officials to understand the purpose and rationale of parts of the assurance process, and asked about plans for additional guidance. We spoke with HHS and USDA officials, and requested and reviewed documentation where applicable, to understand any concerns they have or challenges they are facing or expect to face during the assurance process. To determine the current status of OMB’s and Treasury’s efforts to implement a data governance structure for the DATA Act, we met with OMB staff and Treasury officials to obtain information on the status of their efforts to address our previous recommendation that they establish such a structure. We reviewed documents provided by OMB, including policy memorandums and the charter of the Data Standards Committee, an advisory body established by OMB as part of its data governance efforts. We also met with representatives of organizations with expertise in data governance to review the key practices we described in our December 2016 report and obtain additional information about how these key practices have been implemented in data governance frameworks. We conducted this performance audit from January 2017 to April 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Recommendations 1. To improve the completeness and accuracy of data submissions to the USASpending.gov website, the Director of the Office of Management and Budget (OMB), in collaboration with the Department of the Treasury's (Treasury) Fiscal Service, should clarify guidance on (1) agency responsibilities for reporting awards funded by non-annual appropriations; (2) the applicability of USASpending.gov reporting requirements to non-classified awards associated with intelligence operations; (3) the requirement that award titles describe the award's purpose (consistent with our prior recommendation); and (4) agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov. Implementation Status Open. OMB and Treasury are working to implement the Digital Accountability and Transparency Act of 2014 (DATA Act), which includes several provisions that may address these recommendations once fully implemented. 1) OMB staff said they continue to agree with GAO that additional guidance is needed regarding agency responsibilities for reporting awards funded by non-annual appropriations but have not yet developed this guidance. 2) OMB staff stated that they believe a memorandum issued in November 2016 (M-17-04) addresses the applicability of USASpending.gov reporting requirements to non-classified awards associated with intelligence operations. We reviewed the memorandum and determined that additional guidance is still needed to ensure complete reporting of unclassified awards as required by FFATA. 3) OMB staff have agreed that it will be important to clarify guidance on how agencies can report on award titles to appropriately describe the award’s purposes and noted that they are working on providing additional guidance to agencies as part of their larger DATA Act implementation efforts. 4) OMB released policy guidance in May 2016 (Management Procedures Memorandum (MPM) No. 2016-03) and November 2016 (M-17-04) that identifies the authoritative sources for reporting procurement and award data. However, our review of this policy guidance determined that it does not address the underlying source that can be used to verify the accuracy of non- financial procurement data or any source for data on assistance awards. This recommendation was included in priority recommendation letters sent to OMB by the Comptroller General in July 2016 and Spring 2017. Recommendations 2. To improve the completeness and accuracy of data submissions to the USASpending.gov website, the Director of OMB, in collaboration with Treasury's Fiscal Service, should develop and implement a government-wide oversight process to regularly assess the consistency of information reported by federal agencies to the website other than the award amount. Implementation Status Open. As part of their DATA Act implementation efforts, OMB issued policy guidance in May 2016 (MPM 2016-03) and November 2016 (M-17-04) that identifies authoritative systems to validate agency spending information. The guidance also directs the DATA Act senior accountable officials (SAO) to provide quarterly assurance over the data reported to USASpending.gov and specifies that this assurance should leverage data quality and management controls established in statute, regulation, and federal government-wide policy and be aligned with the internal control and risk management strategies in Circular A-123. In addition, the DATA Act broker will provide a set of validation rules to further ensure the proper formatting of data submitted to USASpending.gov. In addition, OMB staff stated that they have reviewed reports from agency inspectors general (IG) on DATA Act implementation and plan to use future IG reports on data quality as part of a government-wide monitoring plan. However, OMB has not documented this monitoring plan. OMB staff noted that OMB and Treasury had prioritized linking financial data to award data as a means of addressing the issue of unreported awards we previously identified. We agree that linking financial and award data can help agencies identify gaps in reporting. However, other than citing agencies’ responsibility to certify the accuracy of their data, OMB did not identify any new or revised processes aimed at addressing the accuracy concerns we addressed. This recommendation was included in priority recommendation letters sent to OMB by the Comptroller General in December 2015, July 2016, and Spring 2017. 1. To ensure that federal program spending data are provided to the public in a transparent, useful, and timely manner, the Director of OMB should accelerate efforts to determine how best to merge DATA Act purposes and requirements with the GPRAMA requirement to produce a federal program inventory. Open. OMB staff told us that they do not expect to be able to identify programs for the purposes of DATA Act reporting until sometime after May 2017. However, they said that they are studying a program definition and alignment to identify a more consistent framework for defining federal agency programs with the aim of improving government-wide comparability and tying programs to spending. The effort is supported by a working group comprised of representatives from the Chief Financial Officers (CFO) community and other federal communities. OMB staff stated that they are incorporating ongoing feedback from this group into OMB’s efforts to identify a framework for defining federal agency programs. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB in December 2015, July 2016, and Spring 2017. Recommendations 2. To ensure that the integrity of data standards is maintained over time, the Director of OMB, in collaboration with the Secretary of the Treasury, should establish a set of clear policies and processes for developing and maintaining data standards that are consistent with leading practices for data governance. 1. To help ensure that agencies report consistent and comparable data on federal spending, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, provide agencies with additional guidance to address potential clarity, consistency, or quality issues with the definitions for specific data elements including Award Description and Primary Place of Performance and that they clearly document and communicate these actions to agencies providing this data as well as to end-users. Implementation Status Open. OMB and Treasury have taken some initial steps to build a data governance structure including conducting interviews with key stakeholders and developing a set of recommendations for decision-making authority. In September 2016, OMB and Treasury took another step toward establishing a data governance structure by creating a new Data Standards Committee that will be responsible for advising OMB and Treasury on new data elements and revisions to established standards. According to OMB staff, the committee has held several meetings but has not yet provided recommendations to OMB. However, more remains to be done. As part of our ongoing feedback to OMB, we shared five key practices that we believe should inform their plans to develop a data governance framework moving forward. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB in December 2015 and to the Director of OMB and the Secretary of the Treasury in July 2016 and Spring 2017. Open. In May 2016, OMB issued additional guidance for implementing the DATA Act entitled Implementing the Data- Centric Approach for Reporting Federal Spending Information (Management Procedures Memorandum No. 2016-03). This memorandum provided guidance on new federal prime award reporting requirements, agency assurances, and authoritative sources for reporting. In November 2016, OMB followed this with additional guidance intended to provide clarification on how agencies should: (1) report financial information for awards involving Intragovernmental Transfers (IGTs); (2) report financial assistance award records containing personally identifiable information (PII); and (3) provide agency SAO assurance regarding quarterly submissions to USASpending.gov. OMB staff also stated that they sent an email announcement to agency senior accountable officials to clarify that information submitted to USASpending.gov is subject to plain language requirements. Despite these positive steps, additional guidance is needed to facilitate agency implementation of certain data definitions (such as "primary place of performance" and "award description") in order to produce consistent and comparable information. We continue to have concerns about whether the guidance provides sufficient detail in areas such as the process for providing assurance on data submissions. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB and the Secretary of the Treasury in July 2016 and Spring 2017. Recommendations 2. To ensure that federal agencies are able to meet their reporting requirements and timelines, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, take steps to align the release of finalized technical guidance, including the DATA Act schema and broker, to the implementation time frames specified in the DATA Act Implementation Playbook. 1. To enable the development of effective recommendations for reducing reporting burden for contractors, the Director of OMB should ensure that the procurement portion of the pilot reflects leading practices for pilot design. Implementation Status Closed–Implemented. OMB and Treasury issued the finalized technical guidance (DATA Act Information Model Schema, version 1.0) in April 2016 intended to provide a stable base for agencies and enterprise resource planning (ERP) vendors to develop data submission plans. Treasury also released an alpha version of the broker in April 2016 and a beta version of the broker in June 2016. On September 30, 2016, Treasury released its latest version of the broker, which it stated was fully capable of performing the key functions of extracting and validating agency data. Following this release, Treasury continued to release broker updates approximately every 2 weeks. The software patches developed by ERP vendors, intended to help agencies submit required data to the broker, were all released by the end of December 2016. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB and the Secretary of the Treasury in July 2016. Closed-implemented. Our review of the revised design for the procurement portion of the Section 5 Pilot updated in January 2017 found that it largely reflected all 5 leading practices for effective pilot design. For example, in the revised design OMB provides additional details regarding its assessment methodology, includes a data analysis plan to evaluate pilot results, describes a strategy for two-way stakeholder outreach, and includes additional details on scalability of the pilot design. As a result we are closing this recommendation as implemented. Recommendations 1. To help ensure effective government- wide implementation and that complete and consistent spending data will be reported as required by the DATA Act, the Director of OMB, in collaboration with the Secretary of the Treasury, should establish or leverage existing processes and controls to determine the complete population of agencies that are required to report spending data under the DATA Act and make the results of those determinations publicly available. 2. To help ensure effective government- wide implementation and that complete and consistent spending data will be reported as required by the DATA Act, the Director of OMB, in collaboration with the Secretary of the Treasury, should reassess, on a periodic basis, which agencies are required to report spending data under the DATA Act and make appropriate notifications to affected agencies. Implementation Status Open. As we previously reported, OMB stated that each agency is responsible for determining whether it is subject to the DATA Act. To help agencies make that determination, OMB published guidance in the form of frequently asked questions and stated that the agencies may consult with OMB for additional counsel. In response to our recommendation, OMB staff told us they have reached out to federal agencies to identify which agencies have determined that they are exempt from reporting under the DATA Act and prepared a list of such agencies. However, OMB has not provided us the list or the procedures for reviewing agency determinations and compiling the results. In addition, OMB has not established procedures for ensuring non-exempt agencies are reporting spending data as required. Finally, OMB has not stated whether it will make the results of the determinations publicly available. Further, additional clarification would improve the usefulness of the frequently asked questions. For example, they state “Any Federal agency submitting data that OMB posts on its SF 133 Report on Budget Execution and Budgetary Resources is required to comply with DATA Act reporting.” However, the SF 133 Report for the third quarter of 2016 includes entities such as the Postal Service which are not required by the DATA Act to report financial and payment information. In explaining the frequently asked questions to us, OMB officials clarified that they meant that an entity is required to report if its data appears on the SF 133 and it meets the applicable statutory definition of agency. The frequently asked questions document does not clearly communicate this two-prong approach. Additionally, OMB’s verbal clarification when meeting with us does not account for those entities that meet the statutory definition of agency and are required by the DATA Act to report financial and payment information but do not appear on the SF 133. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Open. OMB does not have plans to reassess, on a periodic basis, which agencies are required to report spending data under the DATA Act. We continue to believe action on this recommendation is important to effectively implement the DATA Act. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Recommendations 3. To help ensure effective implementation of the DATA Act by the agencies and facilitate the further establishment of overall government- wide governance, the Director of OMB, in collaboration with the Secretary of the Treasury, should request that non-Chief Financial Officers Act of 1990 (CFO Act) agencies required to report federal spending data under the DATA Act submit updated implementation plans, including updated timelines and milestones, cost estimates, and risks, to address new technical requirements. 4. To help ensure effective implementation of the DATA Act by the agencies and facilitate the further establishment of overall government- wide governance, the Director of OMB, in collaboration with the Secretary of the Treasury, should assess whether information or plan elements missing from agency implementation plans are needed and ensure that all key implementation plan elements are included in updated implementation plans. Implementation Status Open. On June 15, 2016, OMB directed CFO Act agencies to update key components of their implementation plans by August 12, 2016. The requirement did not extend to non-CFO Act agencies. OMB stated that it is monitoring non-CFO Act agencies by providing feedback to non-CFO Act agencies through workshops instead of requesting updated implementation plan information. According to OMB officials, OMB has not followed-up with non-CFO Act agencies or requested updated implementation plan information because they are working with the CFO Act agencies which comprise approximately 90 percent of federal spending. In addition to these outreach efforts, OMB has worked with Treasury to engage with small and independent agencies through weekly phone calls and other forms of communication. However, the DATA Act applies to most federal agencies, and we believe that it is important to monitor smaller agencies’ implementation plans as well as large agencies. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Closed–Implemented. On December 8, 2016, OMB testified that OMB had reviewed implementation plan updates from the 24 CFO Act agencies, which enabled them to track and assess agency progress toward successful implementation and identify areas where subsequent action was needed. OMB also conducted in-person follow-up meetings with nine agencies that reported significant issues to better understand their challenges. We determined that these actions meet the intent of our recommendation. Recommendations 1. Implementation Status Closed–implemented. In response to our recommendation, OMB has made some revisions to the procurement portion of the pilot design including adding additional explanatory language. Our review of the revised design for the procurement portion of the Section 5 Pilot updated in January 2017 found that it largely reflected all 5 leading practices for effective pilot design. As a result we are closing this recommendation as implemented. In order to ensure that the procurement portion of the Section 5 Pilot better reflects leading practices for effective pilot design, the Director of OMB should clearly document in the pilot's design how data collected through the centralized certified payroll reporting portal will be used to test hypotheses related to reducing reporting burden involving other procurement reporting requirements. This should include documenting the extent to which recommendations based on data collected for certified payroll reporting would be scalable to other Federal Acquisition Regulation- required reporting and providing additional details about the methodology that would be used to assess this expanded capability in the future. OMB and the Secretary of the Treasury establish mechanisms to assess the results of independent audits and reviews of agencies’ compliance with the DATA Act requirements, including those of agency Offices of Inspectors General, to help inform full implementation of the act’s requirements across government. Open. OMB stated that it generally concurred with our recommendation, but noted that OIG readiness reviews are just one of its agency engagement efforts, which also includes reviewing agency implementation plans, holding numerous meetings with the agencies, and requesting regular progress updates on the agencies’ implementation efforts. We recognize that OMB’s efforts to engage regularly with agencies are helpful for monitoring agencies’ implementation. However, it is also important to use information in independent audits and reviews to validate agencies’ progress. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Legend: — = not applicable. = Significant deficiency or material weakness identified in deficiency category. Agency auditor determined noncompliance with Section 803(a) of the Federal Financial Management Improvement Act of 1996 (FFMIA). Agency did not issue its performance and accountability report or agency financial report by February 28, 2017, therefore it was not included in our review. Auditors did not report any material weaknesses or significant deficiencies relevant to Digital Accountability and Transparency Act of 2014 (DATA Act) reporting. In addition to the above contacts, Peter Del Toro (Assistant Director), Michael LaForge (Assistant Director), Kathleen Drennan (Analyst-in- Charge), Theodore Alexander, Maria C. Belaval, Thomas Hackney, Charles Jones, Kirsten Leikem, Robert L. Gebhart, Carroll M. Warfield, Jr., James Skornicki, Sophie Geyer, Mark Canter, James Sweetman, Jr., Andrew J. Stephens, Carl Ramirez and Jenny Chanley made major contributions to this report. Additional members of GAO’s DATA Act Internal Working Group also contributed to the development of this report. DATA Act: Office of Inspector General Reports Help Identify Agencies’ Implementation Challenges. GAO-17-460. Washington, D.C.: April 26, 2017. DATA Act: Implementation Progresses but Challenges Remain. GAO-17-282T. Washington, D.C.: December 8, 2016. DATA Act: OMB and Treasury Have Issued Additional Guidance and Have Improved Pilot Design but Implementation Challenges Remain. GAO-17-156. Washington, D.C.: December 8, 2016. DATA Act: Initial Observations on Technical Implementation. GAO-16-824R. Washington, D.C.: August 3, 2016. DATA ACT: Improvements Needed in Reviewing Agency Implementation Plans and Monitoring Progress. GAO-16-698. Washington, D.C.: July 29, 2016. DATA Act: Section 5 Pilot Design Issues Need to Be Addressed to Meet Goal of Reducing Recipient Reporting Burden. GAO-16-438. Washington, D.C.: April 19, 2016. DATA Act: Progress Made but Significant Challenges Must Be Addressed to Ensure Full and Effective Implementation. GAO-16-556T. Washington, D.C.: April 19, 2016. DATA Act: Data Standards Established, but More Complete and Timely Guidance Is Needed to Ensure Effective Implementation. GAO-16-261. Washington, D.C.: January 29, 2016. Federal Spending Accountability: Preserving Capabilities of Recovery Operations Center Could Help Sustain Oversight of Federal Expenditures. GAO-15-814. Washington, D.C.: September 14, 2015. DATA Act: Progress Made in Initial Implementation but Challenges Must be Addressed as Efforts Proceed. GAO-15-752T. Washington, D.C.: July 29, 2015. Federal Data Transparency: Effective Implementation of the DATA Act Would Help Address Government-wide Management Challenges and Improve Oversight. GAO-15-241T. Washington, D.C.: December 3, 2014. Government Efficiency and Effectiveness: Inconsistent Definitions and Information Limit the Usefulness of Federal Program Inventories. GAO-15-83. Washington, D.C.: October 31, 2014. Data Transparency: Oversight Needed to Address Underreporting and Inconsistencies on Federal Award Website. GAO-14-476. Washington, D.C.: June 30, 2014. Federal Data Transparency: Opportunities Remain to Incorporate Lessons Learned as Availability of Spending Data Increases. GAO-13-758. Washington, D.C.: September 12, 2013. Government Transparency: Efforts to Improve Information on Federal Spending. GAO-12-913T. Washington, D.C.: July 18, 2012. Electronic Government: Implementation of the Federal Funding Accountability and Transparency Act of 2006. GAO-10-365. Washington, D.C.: March 12, 2010.

Across the federal government, agencies are making final preparations to submit the required data by the DATA Act's May 2017 deadline. This represents the culmination of almost 3 years of effort by OMB, Treasury, and federal agencies to address many policy and technical challenges. Moving forward, attention will increasingly focus on another critical goal of the act: improving the quality of the data produced. Consistent with GAO's mandate under the act, this is the latest in a series of reports reviewing the act's implementation. This report examines (1) risks to data quality related to known material weaknesses and other deficiencies previously identified by GAO, IGs, and external auditors; (2) risks to data quality related to challenges in operationalizing policy and technical guidance; (3) agencies' assurances of the quality of their data submissions; and (4) efforts taken to establish a data governance structure. GAO reviewed DATA Act implementation documents and auditors' reports on known challenges and interviewed staff at OMB, Treasury, and other agencies. Internal control weaknesses and other challenges pose risks to data quality. Material weaknesses and significant deficiencies reported in agencies' financial audits and other challenges reported in Inspectors General (IG) readiness review reports show several widespread and longstanding issues that present risks to agencies' abilities to submit quality data as required by the Digital Accountability and Transparency Act of 2014 (DATA Act). These issues fall into three categories: (1) accounting and financial management, (2) financial management systems, and (3) information technology security and controls. GAO has also reported weaknesses and challenges in government-wide financial management systems used for DATA Act reporting. Challenges with guidance will impact data quality. Challenges related to how agencies report certain intragovernmental transactions, reconcile recipient address information, and align required DATA Act files with missing data continue to present risks to the quality of data displayed on USASpending.gov. The Office of Management and Budget (OMB) and the Department of the Treasury (Treasury) have stated that they do not expect to resolve these challenges before the May 2017 reporting deadline. Unresolved challenges affecting data quality could lead policymakers and the public to draw inaccurate conclusions from the data. This challenge underscores the need for OMB to address GAO's open recommendation that it provide agencies with additional guidance to address data quality issues. GAO will continue to assess how OMB, Treasury, and agencies address data quality issues moving forward. Limitations exist with data quality assurance processes. OMB guidance directs senior accountable officials at each agency to rely on existing assurance processes when they certify that their agencies' DATA Act submissions are valid and reliable. However, GAO identified concerns regarding some existing assurance processes. For example, OMB directed agencies to use a General Services Administration assurance statement attesting to the quality of data in two source systems, but the assurance statement focuses on data security rather than data quality, and it is unclear whether it applies to both procurement and financial assistance data. OMB is aware of these issues and expects to finalize the assurance process in time for the May 2017 reporting deadline. Accordingly, GAO is not making a recommendation at this time but will assess the quality of the assurance process in future work. Efforts to establish a data governance structure are still at an early stage. OMB has taken some actions to improve its data governance framework, but efforts to establish a fully functioning data governance structure are at an early stage with many specifics yet to be worked out. OMB formally chartered the Data Standards Committee as an advisory body in November 2016 to focus on clarifying existing data element definitions and identifying needs for new standards. The charter states that the committee will promote transparency by making the topics and outcomes of its proceedings public, but OMB has not kept records of the committee's meetings nor has the committee produced a work plan for moving forward. Public information about the committee's activities and outcomes would facilitate consultation with stakeholders, as required by the act. GAO recommends that the Director of OMB ensures that the Data Standards Committee publicly releases information about the topics of its proceedings and any resulting outcomes. OMB generally agreed with GAO's recommendation.

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OSC, which does not have in-house contracting staff, has an agreement with ARC, an office within Treasury’s Bureau of the Public Debt, to provide contracting support for a fee. As a member of the Treasury franchise fund, ARC does not receive direct appropriated funds, but instead relies on revenue from its federal agency customers to pay organizational expenses. Franchise funds are government-run, self-supporting, business-like enterprises that provide a variety of common administrative services, such as payroll processing, information technology support, and contracting. The agreement between ARC and OSC is a mechanism for interagency contracting. This type of fee-for-service procurement process generally involves three parties: the agency requiring a good or service, the agency placing the order or awarding the contract, and the contractors that provide the goods and services. The requiring agency officials determine the goods or services needed and, if applicable, prepare a statement of work, sometimes with the assistance of the ordering agency. The contracting officer at the ordering agency ensures that the contract or order is properly awarded or issued (including any required competition) and administered under applicable regulations and agency requirements. If contract performance will be ongoing, a contracting officer’s representative—generally an official at the requiring agency with relevant technical expertise—is normally designated by the contracting officer to monitor the contractor’s performance and serve as the liaison between the contracting officer and the contractor. While interagency contracting can offer the benefits of improved efficiency and timeliness, this approach needs to be effectively managed. Due to the challenges associated with interagency contracts, we recently designated interagency contracting as a governmentwide high-risk area. As authorized by OSC’s appropriation, OSC may use 5 U.S.C. § 3109 to hire intermittent consultants. Section 3109 permits agencies, when authorized by an appropriation or other statute, to acquire the temporary or intermittent services of experts or consultants. Under the statute, appointments of experts and consultants may be made without regard to competitive service provisions and classification and pay requirements. Individuals appointed under this authority may not be paid in excess of the highest rate payable for a GS-15 unless a higher rate is expressly provided for by statute or an appropriation. Under section 3109, OPM is responsible for prescribing criteria governing circumstances in which it is appropriate to employ an expert or consultant and for prescribing criteria for setting pay. Section 3109 of title 5 and OPM’s implementing regulations in 5 C.F.R. Part 304 provide for broad discretion in the appointment of experts and consultants. In promulgating its regulations, OPM recognized that agencies need to obtain outside opinion and expertise to improve federal programs, operations, and services and that by bringing in the talent and insights of experts and consultants, agencies can work more economically and effectively. OSC’s primary mission is to protect federal employees from prohibited personnel practices. It carries out this mission by conducting investigations, attempting informal resolution through discussions with the agency during the investigation phase (or by offering mediation), and, when necessary, prosecuting corrective and disciplinary actions before the MSPB. An individual may also request that the Special Counsel go before the MSPB to seek to delay an adverse personnel action, such as a termination, pending an OSC investigation. If an agency fails to remedy a prohibited personnel practice upon request by OSC, corrective action may be obtained through litigation before the MSPB. OSC may also seek disciplinary action against an employee believed to be responsible for committing a prohibited personnel practice by filing a complaint with the MSPB. However, when the disciplinary action involves presidential appointees (subject to Senate confirmation), OSC forwards its complaint against the appointee, a statement of supporting facts, and any response of the appointee to the President for appropriate action. Obtaining the assistance of OSC may be an individual’s only recourse with regard to an alleged prohibited personnel practice, unless the individual can pursue the matter with the MSPB or through the discrimination complaint process. Only employees who have been subject to an adverse action, such as a termination, demotion, or suspension beyond 14 days, may appeal to the MSPB and argue that such adverse action was the result of a prohibited personnel practice. An employee would not be able to go directly to the MSPB to complain that a geographic relocation was the result of a prohibited personnel practice. Even when an employee alleges that he or she was retaliated against for whistleblowing, he or she must first go to OSC and wait 120 days before filing directly with the MSPB, unless that employee was subject to an adverse action as noted above. An employee may also pursue resolution of a prohibited personnel practice through the federal equal employment opportunity (EEO) process if the prohibited practice relates to discrimination covered under the antidiscrimination laws enforced by the EEOC. In contracting with MPRI for the organizational assessment, several required steps were not taken: competition was not sought among Schedule vendors, and there was no convincing demonstration of why a sole-source order was necessary, the determination of the reasonableness of MPRI’s price was not OSC officials performed duties normally done by contracting officer’s representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. Contracting officers are generally required by the Competition in Contracting Act to promote and provide for full and open competition in soliciting offers and awarding government contracts. Use of GSA’s Schedule program is considered a competitive procedure as long as the procedures established for the program are followed. In this instance, GSA’s procedures required ordering offices to prepare a request for quotes and evaluate contractor catalogs and price lists, transmit the request to at least three contractors, and after evaluating the responses, place the order with the Schedule contractor that represented the best value. GSA’s Schedule for Management, Organizational and Business Improvement Services (MOBIS), under which the MPRI task order was issued, includes these special ordering procedures. At the time the MPRI order was placed (April 2004), neither the FAR nor GSA’s ordering procedures explicitly provided for sole-source orders under GSA Schedule contracts. However, ordering offices could meet competition requirements by properly justifying such an order. Rather than follow the required GSA special ordering procedures by placing the task order competitively on behalf of OSC, ARC approved a written sole-source justification prepared by OSC. The justification stipulated that the required services were available from only one responsible source—MPRI—and no other contractor could satisfy agency requirements. When supplies or services are available from only one responsible source and no other type of supplies or services will satisfy agency requirements, full and open competition need not be provided for. However, the justification merely asserted that “no other contractor except MPRI, Inc. has the experience and background in this type of sensitive assessment.” It did not contain sufficient facts and rationale to justify a sole-source order and did not provide the minimum required information. For example, the justification did not demonstrate that the proposed contractor’s unique qualifications or the nature of the acquisition required an exception to full and open competition, describe efforts made to ensure that offers were solicited from as many potential sources as practicable, determine that the anticipated cost would be fair and reasonable, or describe the market research conducted and the results. The only support in OSC’s justification for the statement that MPRI was uniquely qualified for the task is a statement that “an informal market survey reveals that only MPRI has the demonstrated past performance in bringing together the required unbiased and highly ethical subject matter experts to complete this type of assessment in the time allocated.” However, the cited market survey does not provide a credible foundation for the conclusion that only MPRI could perform the work. The Special Counsel and his Deputy asked three vendors, including MPRI, for presentations. OSC officials could not recall how these three vendors were selected, and no documentation was available—such as a request for quotes—that set forth the requirement to which the vendors were responding. Rather, the request was communicated orally to the vendors. OSC provided us with proposals submitted by two of the vendors and stated that MPRI submitted a statement of work as its proposal. This statement of work subsequently became part of ARC’s official contract file. We found that the summary statement of OSC’s requirement and the scope of work differ among the three proposals. OSC officials explained that the two vendors’ proposals were not well-matched to what the Special Counsel had communicated to them as OSC’s requirements and that MPRI offered a “no-frills” approach that met OSC’s needs. Nevertheless, in the absence of a documented request for quotes or other solicitation tool, it is not possible to determine whether MPRI and the other vendors were responding to the same set of requirements. Further, our recent search of GSA’s Web site revealed that 1,668 vendors (1,163 of them small businesses) had contracts under GSA’s MOBIS schedule, many of which could have potentially performed the required services. The sole-source justification listed other factors as well. It stated that “there is insufficient time and no contractor’s currently have the expertise to meet Government’s requirements given the required budget limitations.” There is no explanation in the justification as to why only this contractor could perform the task within the required time frame. In fact, despite the reference to urgency, 3 days before the period of performance was to end, OSC asked ARC to change the required completion date, almost doubling the time frame from 3 to 5-½ months (with no increase in price). While acknowledging that the final, written report was a contract deliverable in the statement of work, OSC officials explained that MPRI met their needs within the 3-month period by providing a briefing on its findings that enabled OSC to begin addressing the problems that had been identified. Further, contracting without providing for full and open competition cannot be justified on the basis of concerns related to the amount of funds available. Thus, the justification’s reference to budget constraints necessitating a sole-source order is not a valid rationale. ARC contracting officials did not question or validate OSC’s justification, but told us they relied to a great extent on OSC’s input in justifying the sole- source order. They said that they are now paying closer attention to requests from customer agencies, including OSC, for sole-source orders. OSC officials told us that, because ARC did not raise questions about the justification, they assumed it was adequate. A sole-source justification is required to document a determination by the contracting officer that the anticipated cost to the government will be fair and reasonable. Neither ARC, which was responsible for doing so, nor OSC adequately documented that MPRI’s price was reasonable. Although vendors’ GSA Schedule labor rates have already been determined by GSA to be fair and reasonable, ordering agencies are required to evaluate the contractor’s price for orders requiring a statement of work. The contractor’s price is based on the labor rates in the Schedule contract, the mix of labor categories, and the level of effort required to perform the services. Normally, when ordering services from GSA Schedules that require a statement of work, the ordering office is responsible for evaluating the contractor’s level of effort and mix of labor proposed to perform the specific tasks being ordered and for making a determination as to whether the price is reasonable. ARC officials told us that they relied on OSC to conduct the price reasonableness assessment by reviewing a breakout of MPRI’s price by skill mix, number of hours, and rates for each labor category. They maintain that the minimum requirements for price reasonableness documentation were met. However, we found no documentation demonstrating that the required price evaluation had been performed. OSC officials stated that the informal market survey was adequate to determine MPRI’s price as reasonable because MPRI’s price—which the Deputy Special Counsel negotiated with the vendor—was lower than the other vendors’ prices. However, the absence of a solicitation instrument that would show all three vendors responded to the same requirement, and the disparities in the vendors’ proposed scopes of work, do not support OSC’s assertion. One of the contracting officer’s key responsibilities is ensuring that the government monitors the contractor’s performance. The contracting officer, in this case ARC, may designate a contracting officer’s representative in the requiring agency, in this case OSC, to act as the contracting officer’s technical expert and representative in the monitoring and administration of a contract or task order. ARC’s standard designation letter to contracting officer’s representatives outlines the scope of these responsibilities, including such things as monitoring the contractor’s performance, representing the government in meetings with the contractor, keeping the contracting officer informed, and reviewing the contractor’s invoices. ARC follows Treasury’s training program for contracting officer’s representatives, which consists of a basic acquisition course of at least 24 hours that includes pre-award, post-award, and procurement ethics training. ARC contracting staff named OSC’s former human resource chief, who had taken the required training, as the contracting officer’s representative for the MPRI task order. However, two other OSC officials not named by ARC, the Special Assistant and Director of Management and Budget and the Deputy Special Counsel, who had not received the training, effectively acted in the role of contracting officer’s representatives on the MPRI order. In an April 20, 2004, e-mail to OSC staff, the Special Counsel named the Special Assistant as the liaison between the agency and the contractor. The statement of work names this official as the “governing authority” for the effort and as responsible for coordinating with the contractor on “any other direct costs” and certain travel requirements. Also, the Deputy Special Counsel was responsible for approving MPRI’s contract execution plan and the contract deliverables. Further, ARC’s delegation letter to contracting officer’s representatives prohibits the delegation of or responsibility for certain duties, such as soliciting proposals, making commitments or promises to a contractor relating to the award of a contract, and negotiating the price with the contractor. The Special Counsel and Deputy Special Counsel, as discussed above, solicited proposals from three vendors, and the Deputy negotiated the final price with MPRI, functions that should have been performed by the ARC contracting officer. ARC contracting staff were not aware that the OSC officials had performed these duties until we informed them. They said that only the former human resource chief had received the training and authorization to act as a contracting officer’s representative. OSC officials said that ARC, as their contracting office, never told them they were not following proper contracting practices. The tasks specified in the statement of work for the consultant that OSC hired on March 17, 2004, and that he completed before his departure were consistent with OPM criteria for appropriate uses of expert and consultant appointments. The employee, who was employed on an intermittent basis, was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in his qualifications and used its discretion to both hire him and set his compensation rate. OPM regulations permit agency heads to establish expert or consultant pay rates, but in doing so to consider specified factors, including level of difficulty of the work, qualifications of the expert or consultant, and pay rates of individuals performing comparable work. At the suggestion of the Special Counsel, OSC officials hired Alan J. Hicks as an intermittent employee on March 17, 2004, using the appointment authority under 5 U.S.C. § 3109. According to the appointment paperwork, Mr. Hicks’s appointment was to last from March 17, 2004, until March 16, 2005, and he was to work an intermittent schedule. His pay rate was set slightly below the highest rate for a GS-15. Mr. Hicks resigned his appointment effective October 24, 2004. During the 7 months Mr. Hicks was employed by OSC, he worked a total of 123 hours for a total of $6,621.09 in pay. Before hiring Mr. Hicks, the Special Counsel identified him as a possible consultant based on prior knowledge of Mr. Hicks’s work as the headmaster of a private secondary school. The Deputy Special Counsel told us that he justified Mr. Hicks’s pay on the basis of his qualifications— specifically, his experience as headmaster and his educational level. He also noted that the Special Counsel had worked with Mr. Hicks and respected his opinion and judgment. According to Mr. Hicks’s resume, during the 10 years of his headmaster position, he was responsible for a number of administrative functions, including designing and writing student curricula, recruiting and training faculty and staff, establishing financial and organizational structures of the school, hiring and management decisions, as well as teaching history, logic, and biology. According to his resume, Mr. Hicks had also taught at the college level. OPM regulations provide that agencies may appoint qualified experts or consultants to an expert or consultant position that requires only intermittent and/or temporary employment. While OPM regulations do not establish specific criteria for determining qualifications, they do generally describe the expectations for such positions and what constitutes appropriate tasks for experts and consultants to perform. For example, the regulations describe a consultant as a person who can provide valuable and pertinent advice generally drawn from a high degree of broad administrative, professional, or technical knowledge or experience. Furthermore, a consultant position is one that requires providing advice, views, opinions, alternatives, or recommendations on a temporary or intermittent basis on issues, problems, or questions presented by a federal official. The regulations also provide examples of inappropriate uses of expert/consultant appointments, including work performed by the agency’s regular employees. Mr. Hicks’s tasks were related to addressing OSC’s backlog that we identified in our March 2004 report. Specifically, an OSC official noted that his experience in curricula development at the boarding school was viewed as key to cross-train employees in different units so those employees could be utilized in a number of ways to address workload. According to the OSC official, Mr. Hicks’s efforts would complement those of MPRI. The official said he was confident that Mr. Hicks was fully qualified to do the work, and that OSC used management discretion to approve the appointment. Another official observed that Mr. Hicks provided both an outside perspective and experience that regular OSC staff did not have. Officials also said that although Mr. Hicks only worked at OSC for a short time, the agency was pleased with the value he added. Both the duties set out in Mr. Hicks’s statement of work, as well as those duties he actually performed, were consistent with OPM regulations. According to the statement of work prepared by the human resource chief at the Deputy Special Counsel’s direction, Mr. Hicks was to (1) review and analyze OSC program policies and procedures for efficiency and make recommendations and develop written revisions to these policies and procedures and (2) develop a long-term training curriculum and deliver training. Shortly before he terminated his consultant work for OSC, Mr. Hicks submitted a report outlining the work that he performed. In his report, Mr. Hicks made a number of observations on his concurrence with MPRI’s conclusions. The report also said he was involved in a number of other tasks, including examining operational training manuals, meeting with staff concerning the procedures for handling assisting with and attending the Special Counsel’s testimony before a preparing a paper for presentation at a staff retreat on philosophical matters related to work, meeting with MPRI to discuss its assessments and to share his observations based on his work, and having numerous conversations with the Special Counsel concerning the assessment team, his recommendations for curriculum and training, and the need for streamlined procedures. While most of the tasks that Mr. Hicks actually performed were consistent with those enumerated in his statement of work, Mr. Hicks also worked on whistleblower disclosure cases. According to an OSC official, Mr. Hicks spent approximately 25 percent of his time working through 50 disclosure case files. The OSC official stated that Mr. Hicks was not provided disclosure case files that contained sensitive information for which a security clearance would have been required. While Mr. Hicks noted in his report that this work on the disclosure cases “served the dual purpose of analysis of procedures and a reduction of backlog,” an OSC official stated that Mr. Hicks’s efforts were related to an analysis of the process of handling disclosures and not the type of efforts OSC’s disclosure unit employees perform in handling such cases. According to the OSC official, while Mr. Hicks contacted some of the whistleblowers directly, it was for the purpose of determining those individuals’ impressions about the process. This official stated that these activities were performed at the initiative of the Special Counsel and his senior staff, in order for Mr. Hicks to gain a better understanding of those processes and procedures specified in the statement of work. This official stated that prior to Mr. Hicks’s arrival at OSC, the Special Counsel forwarded to Mr. Hicks statutory provisions on OSC’s duties relating to disclosures from whistleblowers, including the obligation of OSC to maintain the confidentiality of a whistleblower’s identity. Although OSC employees, like other federal employees, can seek redress for alleged prohibited personnel practices through OSC, this may be unworkable for OSC employees in certain circumstances. Two other agencies with redress roles, MSPB and EEOC, have acknowledged the need to avoid conflicts when their employees have complaints and have taken steps to avoid such conflicts when their employees use their agency’s respective redress processes. Title 5 of the United States Code protects federal employees, including OSC employees, from prohibited personnel practices. OSC employees who believe that a prohibited personnel practice has occurred may seek redress from OSC. OSC employees may also seek redress through appealing adverse actions to the MSPB and filing EEO complaints. According to OSC officials, there are two ways in which an OSC employee could bring a prohibited personnel practice allegation within OSC. First, OSC employees may use the agency’s administrative grievance system. If fact-finding is needed for a complaint filed against OSC staff, an OSC employee who has not been involved in the matter being grieved and, when possible, does not occupy a position subordinate to any official involved in the matter being grieved, is selected to conduct a review and prepare a report. Ideally, that employee is also located in a different geographic area; for example, an OSC employee in Dallas could be assigned to a complaint filed in Washington, D.C. OSC officials stated that this would ensure objectivity and independence in the processing of the complaint. Fact- finding is conducted informally and includes the collection of documents and statements of witnesses, as necessary. The grievant’s second-level supervisor would render a decision based upon the fact-finder’s report and any comments on the report provided by the grievant. The grievant may appeal this decision to the Deputy Special Counsel, or, if the matter was grieved to the Deputy Special Counsel in the first instance, to the Special Counsel. Both current and former OSC officials stated that this process could be successfully used when the prohibited personnel practice allegation relates to the actions of an official below the Deputy Special Counsel level. However, if the administrative grievance system were to be used to address grievances against the Special Counsel or the Deputy Special Counsel, there would be a conflict of interest since the final decision maker in this process is the Special Counsel. Second, OSC officials stated that OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside OSC. However, OSC employees do not have an outside agency to represent them in an independent manner— the role that OSC plays for non-OSC employees in cases involving prohibited personnel practices. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because, OSC officials stated, all OSC employees ultimately report to the Special Counsel. OSC officials also stated that there cannot be an independent review when the employee performing the investigation reports to the individual being investigated. According to former and current OSC officials, the difficulty also extends to allegations against the Deputy Special Counsel because the Deputy Special Counsel, who is typically a noncareer senior executive, has a confidential relationship with the Special Counsel. According to the previous Special Counsel, an effort among senior staff to establish procedures for handling OSC employee allegations of prohibited personnel practices against senior OSC officers, including the Special Counsel, was initiated during her tenure. However, the effort was not completed, she said, noting that OSC staff did not reach a consensus over what the alternative process should be for handling complaints against the Special Counsel. The previous Special Counsel and current OSC officials who were involved in this effort told us that one of the options being considered was to have the matter investigated by an outside inspector general. At the time, however, concern was expressed about allowing inspectors general, who were subject to OSC’s investigative and prosecutorial authority, to investigate the Special Counsel. The potential difficulties described above were recently illustrated when a complaint was filed anonymously against the Special Counsel on behalf of a number of OSC employees. The complainants requested that the complaint be referred to the chairman of the PCIE for an independent investigation, including a recommendation for corrective or disciplinary action. The PCIE is an interagency council, including presidentially appointed inspectors general, charged with promoting integrity and efficiency in federal programs. The complaint stated that OSC could not investigate these allegations because the Special Counsel could not oversee an investigation of which he is the subject and that all OSC staff are his subordinates. The complaint further observed that the complainants’ ability to remain anonymous would be jeopardized if any OSC staff were assigned to work on the investigation. As discussed above, current OSC policy and procedures do not provide for special handling of complaints against the Special Counsel or the Deputy Special Counsel. The Deputy Special Counsel told us that he and the Special Counsel agreed that OSC should not handle the complaint, and subsequently forwarded it to the PCIE’s Integrity Committee and notified the chair of the PCIE. In mid- October, 2005, the chair assigned OPM’s inspector general to conduct the investigation. Two other agencies in the executive branch with major roles in ensuring the protection of employee rights, the MSPB and EEOC, have taken steps to address potential conflicts of interest when their own employees use their agencies’ respective redress processes. The MSPB is an independent quasi-judicial agency established to protect federal merit systems against prohibited personnel practices and to ensure adequate protection for employees against abuses by agency management. MSPB carries out this mission, in part, by adjudicating federal employee appeals of adverse personnel actions. The MSPB has developed regulations which state that MSPB employee appeals are not to be heard by board-employed administrative judges who hear appeals from employees of other federal agencies, but instead are to be heard by administrative law judges (ALJ). According to the MSPB General Counsel, MSPB does not employ its own ALJs; rather, MSPB has a memorandum of understanding with the National Labor Relations Board to use its ALJs for MSPB employee appeals and other matters, including whistleblower retaliation cases brought by OSC. MSPB regulations further provide that the board’s policy is to insulate the adjudication of its own employees’ appeals from agency involvement as much as possible. The regulations provide that if an initial decision rendered by the ALJ is appealed to the board, the initial decision will not be altered unless there has been “harmful procedural irregularity” in the proceedings or there is a clear error of law. According to the MSPB General Counsel, this provides the board with very limited review authority. Finally, the regulations state what procedures are to be followed if a board member must recuse himself or herself from a specific case. The EEOC is responsible for enforcing the federal sector employment discrimination prohibitions contained in the federal antidiscrimination statutes, including Title VII of the Civil Rights Act of 1964, as amended. As part of this responsibility, EEOC provides for the adjudication of complaints and hearing of appeals. As is the case for all individuals who file a formal complaint of discrimination, EEOC employees may either request a hearing before an administrative judge or a final decision by the agency itself. However, according to EEOC officials, when EEOC employees request a hearing over their complaint of discrimination, such hearings are not to be conducted by the administrative judges employed by EEOC, but rather through contract administrative judges. EEOC officials state that using contract administrative judges is necessary to preserve the neutrality of the process, since EEOC’s administrative judges are coworkers of any EEOC complainant. EEOC officials also told us that if an employee of its Office of Equal Opportunity (OEO), EEOC’s own EEO office, raises an allegation of discrimination, the matter is sent outside the agency to another agency’s EEO office for informal counseling, investigation, and/or mediation to guard against potential conflicts of interest within the OEO. Steps can be taken to ensure that OSC employees have alternative avenues of recourse when their prohibited personnel practice allegations involve the Special Counsel or the Deputy Special Counsel. Potential options are discussed below. However, unlike the MSPB and the EEOC, which have taken steps to address potential conflicts of interest when their own employees use their respective redress processes, OSC would need explicit authority for implementing such options. OSC employees could be afforded an external investigation of their prohibited personnel practice allegations against the Special Counsel or Deputy Special Counsel through an independent entity. Most of the current and former OSC officials we spoke with acknowledged that the option of such an external investigation is warranted. If such an external investigation were authorized, it may be desirable to also provide the results of the investigation to the President, who has the authority to take appropriate corrective action. However, OSC would need specific authority to implement this option since OSC does not have the mechanism to provide for such investigations. OSC employees could be afforded expanded rights to appeal directly to MSPB that would specifically encompass prohibited personnel actions involving the Special Counsel or the Deputy Special Counsel. As discussed above, OSC employees, as is the case with other federal employees, can take allegations of prohibited personnel practices to the MSPB only when certain adverse actions have been taken against those employees. One OSC official observed that care should be taken in expanding jurisdiction so as to prevent minor personnel actions from being appealable to the board. Since the MSPB appeals process is in statute, this option would require legislation for implementation. OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside the agency. However, OSC employees do not have an external, independent agency like OSC to represent them. This becomes particularly important when the complaint is filed against the Special Counsel or the Deputy Special Counsel. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because OSC employees ultimately report to the Special Counsel, including the complainant and any staff who would conduct an internal investigation. This difficulty extends to allegations against the Deputy Special Counsel because this individual has a confidential relationship with the Special Counsel. Steps could be taken to ensure that OSC employees, who cannot effectively obtain the services of OSC in addressing allegations of prohibited personnel practices, have alternative avenues of redress. Adequate management oversight is critical to ensuring that, in an interagency contracting environment, the requiring agency and the agency ordering the services on its behalf work together to follow proper contracting procedures. In agreeing to issue the sole-source order for the organizational assessment despite the flawed justification, and in being uninvolved in and unaware of the pre- and post-award activities conducted by OSC officials, ARC contracting officials neglected to fulfill their responsibilities. For their part, OSC officials demonstrated a lack of awareness of their responsibilities in the process of engaging MPRI and overseeing the contractor’s work. Due to the unique nature of OSC and the difficulties involved when a prohibited personnel practice allegation is made against the Special Counsel or the Deputy Special Counsel, Congress should consider affording OSC employees (and former employees and applicants for employment) alternative means of addressing prohibited personnel practice allegations other than going through OSC. These means could include establishing (1) a right to an external investigation through an independent entity, where the entity would forward its findings to the President, who would decide the appropriate action, as is done when OSC handles allegations of prohibited personnel practices against Senate- confirmed presidential appointees; or (2) an expansion of the personnel actions that could be the basis for an appeal directly to the MSPB. We recommend that the Director of ARC’s Division of Procurement take the following two actions to ensure that (1) documents prepared by program offices requesting contracting assistance—such as statements of work and sole-source justifications—are carefully reviewed for compliance with competition requirements and (2) ARC contracting staff, through regular communication with the program offices they support, ensure that only authorized program officials act as contracting officer’s representatives. We also recommend that the Special Counsel put in place procedures to ensure that only those officials who have taken the required training and been designated as contracting officer’s representatives act in that role and that program staff do not exceed their authority in interacting with contractors. On September 23, 2005, we provided a draft of this report to OSC and to ARC for review and comment. OSC’s written response is included in appendix I, and ARC’s written response is included in appendix II. OSC and ARC agreed with our recommendations. However, OSC suggested several wording changes to the report and expressed concern about the tone of the section on the sole-source order with MPRI. While we clarified our wording in several places, we did not make other changes suggested by OSC in its comment letter for the reasons discussed below. OSC recommended we add a paragraph that, in addition to making reference to our earlier report on case backlogs at OSC (which is discussed in the first paragraph of our current report), would make other points that are already addressed in our report. Thus, we did not include OSC’s suggested language. OSC pointed out that ARC, as the contracting office, did not question the sole-source justification and that, if it had done so, another approach could have been taken for the procurement. Our report already clearly reflects the fact that this was ARC’s responsibility and that ARC contracting personnel did not question the validity of the sole-source justification but, rather, relied on OSC’s rationale. OSC suggested we revise the wording in our report to state that program staff participated in negotiations with MPRI, rather than state that the Deputy Special Counsel negotiated the price with the company. Our discussions with OSC officials—including one with the Deputy himself— support our finding that the Deputy negotiated the final price with MPRI, and we have added the word “final” to make that clear. There is no evidence that ARC “set the final price,” as OSC suggests; rather, ARC issued a task order using the final price provided to it by OSC. OSC also took exception to our statements that the Deputy Special Counsel was responsible for approving MPRI’s contract execution plan and contract deliverables and suggested we change the wording to “Also, OSC program officials were included in the approval process for MPRI’s contract execution plan and contract deliverables.” Again, the evidence supports our finding as stated in the report. In fact, the contract’s statement of work names the Deputy as the contracting officer’s representative, as the official responsible for approving MPRI’s contract execution plan, and as the recipient of the contractor’s monthly reports. Further, the contract execution plan is addressed to the Deputy and it identifies him as the contracting officer’s representative. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to OSC, the Bureau of the Public Debt, and interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staff have questions about this report, please call me at (202) 512-9490. Key contributors to this report included Kimberly Gianopoulos, Karin Fangman, Sharon Hogan, Michele Mackin, and Adam Vodraska.

In January 2005, the U.S. Office of Special Counsel (OSC) implemented a plan, in part, to address a backlog of pending cases. This report discusses actions related to the development of this plan, including whether required practices and procedures were followed in contracting for the services of a management consulting company and in hiring an intermittent employee as a consultant. Also, the report identifies avenues of redress available to OSC employees for filing prohibited personnel practice allegations against OSC, and other redress options that could be made available. At OSC's request, the Administrative Resource Center (ARC), an office within the U.S. Department of the Treasury's Bureau of the Public Debt which provides OSC with contracting support for a fee, issued a $140,000 sole-source task order for an organizational assessment to a consulting firm, Military Professional Resources, Inc. (MPRI). In doing so, several required steps were not taken: competition was not sought among Schedule vendors and there was no convincing demonstration of why a sole-source order was necessary; the determination of the reasonableness of MPRI's price was not documented; and OSC officials performed duties normally done by contracting officer's representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. ARC officials told us they relied largely on OSC's input in justifying the sole-source order and determining MPRI's price to be reasonable and that they were unaware that the OSC officials had performed contracting-related duties. They told us that they are now paying particular attention to requests from their customers, including OSC, for sole-source orders. OSC officials said that they relied on ARC's expertise, as their contracting office, to ensure that proper contracting procedures were followed. The tasks specified in the statement of work for the consultant that OSC hired as an intermittent employee and that he completed before his departure were consistent with Office of Personnel Management criteria for appropriate uses of expert and consultant appointments. The intermittent employee was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in the individual's qualifications and was within its discretion to both hire him and set his level of compensation. While OSC employees, like other federal employees, are protected against prohibited personnel practices and may seek redress from OSC in making such allegations, this option becomes unworkable because of potential conflicts of interest when an OSC employee raises such an allegation of a prohibited personnel practice against either of the two top OSC officials. Two other federal agencies with redress roles, the Merit Systems Protection Board (MSPB) and the Equal Employment Opportunity Commission, have taken steps to address potential conflicts of interest when their own employees use their agency's respective redress processes. Steps could be taken to ensure that OSC employees have alternative avenues of recourse; for example, they could have an external investigation conducted through an independent body or broader appeal rights to the MSPB. OSC could not independently implement these options, and would need to be given authority to do so.

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VA’s mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and lasting memorials. It is the second largest federal department and, in addition to its central office located in Washington, D.C., has field offices throughout the United States, as well as the U.S. territories and the Philippines. The department’s three major components—the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration (NCA)—are primarily responsible for carrying out its mission. More specifically, VBA provides a variety of benefits to veterans and their families including disability compensation, educational opportunities, assistance with home ownership, and life insurance. VHA provides health care services, including primary care and specialized care, and it performs research and development to improve veterans’ needs. Lastly, NCA provides burial and memorial benefits to veterans and their families. Collectively, the three components rely on approximately 340,000 employees to provide services and benefits. These employees work in 167 VA medical centers, approximately 800 community-based outpatient clinics, 300 veterans centers, 56 regional offices, and 131 national and 90 state or tribal cemeteries situated throughout the nation. The use of IT is critically important to VA’s efforts to provide benefits and services to veterans. As such, the department operates and maintains an IT infrastructure that is intended to provide the backbone necessary to meet the day-to-day operational needs of its medical centers, veteran- facing systems, benefits delivery systems, memorial services, and all other IT systems supporting the department’s mission. The infrastructure is to provide for data storage, transmission, and communications requirements necessary to ensure the delivery of reliable, available, and responsive support to all VA staff offices and administration customers, as well as veterans. Toward this end, the department operates approximately 240 information systems, manages 314,000 desktop computers and 30,000 laptops, and administers nearly 460,000 network user accounts for employees and contractors to facilitate providing benefits and health care to veterans. These systems are used for the determination of benefits, benefits claims processing, patient admission to hospitals and clinics, and access to health records, among other services. For example, VBA relies on VBMS to collect and store information such as military service records, medical examinations, and treatment records from VA, DOD, and private medical service providers. IT also is widely used and critically important to supporting the department in delivering health care to veterans. VHA’s systems provide capabilities to establish and maintain electronic health records that health care providers and other clinical staff use to view patient information in inpatient, outpatient, and long-term care settings. Specifically, the Veterans Health Information Systems and Technology Architecture, known as VistA, consists of many computer applications and modules that collect, among other things, information about a veteran’s demographics, allergies, procedures, immunizations, and medical diagnoses. However, a number of VA’s systems are old. For example, our recent report on legacy systems used by federal agencies identified 2 of the department’s systems as being over 50 years old and among the 10 oldest investments and/or systems that were reported by 12 selected agencies. Personnel and Accounting Integrated Data (PAID)—This 53-year old system automates time and attendance for employees, timekeepers, payroll, and supervisors. It is written in Common Business Oriented Language (COBOL), a programming language developed in the late 1950s and early 1960s, and runs on IBM mainframes. VA plans to replace PAID with a project called Human Resources Information System Shared Service Center in 2017. Benefits Delivery Network (BDN)—This 51-year old system tracks claims filed by veterans for benefits, eligibility, and dates of death. It is a suite of COBOL mainframe applications. VA has general plans to roll the capabilities of BDN into another system, but there is no firm date associated with this transition. To address these obsolete systems that are in need of modernization or replacement, we recommended that the Secretary of Veterans Affairs direct the department’s Chief Information Officer (CIO) to identify and plan to modernize or replace legacy systems, as needed, and consistent with draft OMB guidance, including time frames, activities to be performed, and functions to be replaced or enhanced. VA concurred with our recommendation and stated that it is planning to retire PAID and BDN in 2017 and 2018, respectively. In 2014, VA issued its 6-year strategic plan, which emphasizes the department’s goal of increasing veterans’ access to benefits and services, eliminating the disability claims backlog, and ending veteran homelessness. According to the plan, the department intends to improve access to benefits and services through the use of improved technology to provide veterans with access to more effective care management. The plan also calls for VA to eliminate the disability claims backlog by fully implementing an electronic claims process that is intended to reduce processing time and increase accuracy. Further, the department has an initiative under way that provides services, such as health care, housing assistance, and job training, to end veteran homelessness. Toward this end, VA is working with other agencies, such as the Department of Health and Human Services, to implement more coordinated data entry systems to streamline and facilitate access to appropriate housing and services. VA reported spending about $3.9 billion to improve and maintain its IT resources in fiscal year 2015. Specifically, the department reported spending approximately $548 million on new systems development efforts, approximately $2.3 billion on maintaining existing systems, and approximately $1 billion on payroll and administration. For fiscal year 2016, the department received appropriations of about $4.1 billion for IT. Further, for fiscal year 2017, the department’s budget request included nearly $4.3 billion for IT. The department requested approximately $471 million for new systems development efforts, approximately $2.5 billion for maintaining existing systems, and approximately $1.3 billion for payroll and administration. In addition, in its 2017 budget submission, the department requested appropriations to make improvements in a number of areas, including: veterans’ access to health care, to include enhancing health care- related systems, standardizing immunization data, and expanding telehealth services ($186.7 million); veterans’ access to benefits by modernizing systems supporting benefits delivery, such as VBMS and the Veterans Services Network ($236.3 million); veterans’ experiences with VA by focusing on integrated service delivery and streamlined identification processes ($171.3 million); VA employees’ experiences by enhancing internal IT systems ($13 information security, including implementing strong authentication, ensuring repeatable processes and procedures, adopting modern technology, and enhancing the detection of cyber vulnerabilities and protection from cyber threats ($370.1 million). VA’s CIO has recently initiated an effort to transform the focus and functions of the Office of Information and Technology (OI&T), in response to the Secretary’s goal of achieving a more veteran-focused organization. The CIO’s transformation strategy, initiated in January 2016, calls for OI&T to focus on stabilizing and streamlining processes, mitigating weaknesses highlighted in GAO assessments, and improving outcomes by institutionalizing a new set of IT management capabilities. As part of this transformation, the CIO began transitioning the oversight and accountability of IT projects to a new project management process called the Veteran-focused Integration Process in January 2016, in an effort to streamline systems development and the delivery of new IT capabilities. The CIO also intends to establish five new functions within OI&T: The enterprise program management office is to serve as OI&T’s portfolio management and project tracking organization. The account management function is to be responsible for managing the IT needs of VA’s major components. The quality and compliance function is to be responsible for establishing policy governance and standards and ensuring adherence to them. The data management organization is expected to improve both service delivery and the veteran experience by engaging with data stewards to ensure the accuracy and security of the information collected by VA. The strategic sourcing function is to be responsible for establishing an approach to fulfilling the agency’s requirements with vendors that provide solutions to those requirements, managing vendor selection, tracking vendor performance and contract deliverables, and sharing insights on new technologies and capabilities to improve the workforce knowledge base. According to the CIO, the transformation strategy is expected to be completed by the first quarter of fiscal year 2017, although the vast majority of the plan, including establishing the five new functions, is to be executed by the end of fiscal year 2016. In February 2015, we designated VA health care as a high-risk area. Among the five broad areas contributing to our determination was the department’s IT challenges. Of particular concern was the failed modernization of a system, suspended development of another system, and the extent of system interoperability—the ability to exchange information—with DOD, which present risks to the timeliness, quality, and safety of VA health care. We have reported on the department’s failed attempts to modernize its outpatient appointment scheduling system, which is about 30 years old. Among the problems cited by VA staff responsible for scheduling appointments are that the system requires them to use commands requiring many keystrokes and that it does not allow them to view multiple screens at once. Schedulers must open and close multiple screens to check a provider’s or a clinic’s full availability when scheduling a medical appointment, which is time-consuming and can lead to errors. In addition, we reported in May 2010 that after spending an estimated $127 million over 9 years on its outpatient scheduling system project, VA had not implemented any of the planned system’s capabilities and was essentially starting over by beginning a new initiative to build or purchase another scheduling system. We also noted that VA had not developed a project plan or schedule for the new initiative, stating that it intended to do so after determining whether to build or purchase the new application. We recommended that the department take six actions to improve key systems development and acquisition processes essential to the second outpatient scheduling system effort. The department generally concurred with our recommendations, but as of May 2016, had not addressed four of the six recommendations. Further, in January 2014, we reported that the inability to electronically share data across facilities had led VA to suspend the development of a system that would have allowed it to electronically store and retrieve information about surgical implants (including tissue products) and the veterans who receive them nationwide. Having this capability would be particularly important in the event that a manufacturer or the Food and Drug Administration ordered a recall on a medical device or tissue product because of safety concerns. In the absence of a centralized system, at the time of our report, VA clinicians tracked information about implanted items using stand-alone systems or spreadsheets that were not shared across VA facilities, which made it difficult for the department to quickly determine which patients may have received an implant that was subject to a safety recall. Additionally, we reported in February 2014 that VA and DOD lacked electronic health record systems that permit the efficient electronic exchange of patient health information as military service members transition from DOD to VA health care systems. Since 1998, VA and DOD have undertaken a patchwork of initiatives intended to allow their health information systems to exchange information and increase interoperability. Among others, these have included initiatives to share viewable data in existing (legacy) systems, link and share computable data between the departments’ updated heath data repositories, and jointly develop a single integrated system. In March 2011, the secretaries of the two departments announced that they would develop a new, joint integrated electronic health record system (referred to as iEHR). This was intended to replace the departments’ separate systems with a single common system, thus sidestepping many of the challenges they had previously encountered in trying to achieve interoperability. However, in February 2013, about 2 years after initiating iEHR, the secretaries announced that the departments were abandoning plans to develop a joint system, due to concerns about the program’s cost, schedule, and ability to meet deadlines. The Interagency Program Office (IPO) reported spending about $564 million on iEHR between October 2011 and June 2013. In place of the iEHR initiative, VA stated that it would modernize VistA, while DOD planned to buy a commercially available system. The departments stated that they would ensure interoperability between these updated systems, as well as with other public and private health care providers. Our February 2014 report noted that the departments did not substantiate their claims that it would be less expensive and faster than developing a single, joint system. We have also noted that the departments’ plans to modernize their two separate systems were duplicative and stressed that their decisions should be justified by comparing the costs and schedules of alternate approaches. We therefore recommended that the departments should develop cost and schedule estimates that would include all elements of their approach (i.e., modernizing both departments’ health information systems and establishing interoperability between them) and compare them with estimates of the cost and schedule for the single-system approach. If the planned approach were projected to cost more or take longer, we recommended that they provide a rationale for pursuing such an approach. VA and DOD agreed with our prior recommendations and stated that initial comparison indicated that the current approach would be more cost effective. However, as of June 2016, the departments have not provided us with a comparison of the estimated costs of their current and previous approaches. Moreover, with respect to their assertions that separate systems could be achieved faster, both departments have developed schedules that indicate their separate modernizations are not expected to be completed until after the 2017 planned completion date for the previous single-system approach. To further highlight the department’s IT challenges, our most recent report in August 2015 on VA’s efforts to achieve electronic health record interoperability with DOD noted that the departments have engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. For example, the departments analyzed data related to 25 “domains” identified by the Interagency Clinical Informatics Board and mapped health data in their existing systems to standards identified by the IPO. The departments also expanded the functionality of their Joint Legacy Viewer—a tool that allows clinicians to view certain health care data from both departments in a single interface. In addition, VA and DOD have moved forward with plans to modernize their respective electronic health record systems. For its part, VA has developed a number of plans for its VistA modernization effort (known as VistA Evolution), including an interoperability plan and a road map describing functional capabilities to be deployed through fiscal year 2018. According to the road map, the first set of capabilities was to be delivered in September 2014, and was to include access to the Joint Legacy Viewer, among other things. VA’s CIO has asserted that the department has continued to improve VistA. However, the CIO also recently indicated that the department is taking a step back in reconsidering how best to meet VA’s future electronic health record system needs and has not determined whether to modernize VistA or to replace it with an off-the- shelf system. Nevertheless, a significant concern that we identified is that VA (and DOD) had not identified outcome-oriented goals and metrics that would more clearly define what they aim to achieve from their interoperability efforts and the value and benefits these efforts are intended to yield. As we have stressed in our prior work, assessing the performance of a program should include measuring its outcomes in terms of the results of products or services. In this case, such outcomes could include improvements in the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is delivering value. In our August 2015 report, we stressed that using an effective outcome- based approach could provide VA with a more accurate picture of its progress toward achieving interoperability with DOD and the value and benefits generated. Accordingly, we recommended that the departments, working with the IPO, establish a time frame for identifying outcome- oriented metrics, define related goals as a basis for determining the extent to which the departments’ modernized electronic health record systems are achieving interoperability, and update IPO guidance accordingly. VA concurred with our recommendations and has told us that it has initiated actions in response to them. In September 2015, we reported that VBA had made progress in developing and implementing VBMS, its system that is to be used for processing disability benefit claims. Specifically, it had deployed the initial version of the system to all of its regional offices as of June 2013. Further, after initial deployment, VBA continued developing and implementing additional system functionality and enhancements to support the electronic processing of disability compensation claims. As a result, 95 percent of records related to veterans’ disability claims are electronic and reside in the system. Nevertheless, we found that VBMS was not able to fully support disability and pension claims, as well as appeals processing. Specifically, while the Under Secretary for Benefits stated in March 2013 that the development of the system was expected to be completed in 2015, implementation of functionality to fully support electronic claims processing was delayed beyond 2015. In addition, VBA had not produced a plan that identified when the system will be completed. Accordingly, holding VA management accountable for meeting a time frame and for demonstrating progress was difficult. As VA continues its efforts to complete the development and implementation of VBMS, we reported in September 2015 that three areas could benefit from increased management attention. Cost estimating: The program office did not have a reliable estimate of the cost for completing the system. Without such an estimate, VA management and the department’s stakeholders had a limited view of the system’s future resource needs, and the program risked not having sufficient funding to complete development and implementation of the system. System availability: Although VBA had improved its performance regarding system availability to users, it had not established system response time goals. Without such goals, users did not have an expectation of the system response times they could anticipate and management did not have an indication of how well the system performs relative to performance goals. System defects: While the program had actively managed system defects, a recent system release included unresolved defects that impacted system performance and users’ experiences. Continuing to deploy releases with large numbers of defects that reduce system functionality could adversely affect users’ ability to process disability claims in an efficient manner. We also found in our September 2015 report that VA had not conducted a customer satisfaction survey that would allow the department to compile data on how users view the system’s performance, and ultimately, to develop goals for improving the system. GAO’s 2014 survey of VBMS users found that a majority of them were satisfied with the system, but decision review officers were considerably less satisfied. Although the results of our survey provided VBA with data about users’ satisfaction with VBMS, the absence of user satisfaction goals limited the utility of survey results. Specifically, without having established goals to define user satisfaction, VBA did not have a basis for gauging the success of its efforts to promote satisfaction with the system, or for identifying areas where its efforts to complete development and implementation of the system might need attention. In our September 2015 report, we recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidence of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. As we stressed in our report, attention to these issues can improve VA’s efforts to effectively complete the development and implementation of VBMS. Fully addressing our recommendations, as VA agreed to do, should help the department give appropriate attention to these issues. As we reported in May 2016, VA’s expenditures for its care in the community programs, the number of veterans for whom VA has purchased care, and the number of claims processed by VHA have all grown considerably in recent years. The substantial increase in utilization of VA care in the community programs poses staffing and workload challenges for VHA, which has had ongoing difficulty processing claims from community providers in a timely manner. VHA officials and staff at three of the four claims processing locations we visited told us that limitations of the existing IT systems, including the Fee Basis Claims System (FBCS) that VHA uses for claims processing, have delayed processing and payment of claims for VA care in the community services. Officials at the sites we visited described the following limitations. VHA cannot accept medical documentation electronically. Authorizations for VA care in the community services are not always readily available in FBCS. FBCS cannot automatically adjudicate claims. System weaknesses have delayed claims payments. The officials we interviewed said that if the agency is to dramatically improve its claims processing timeliness, comprehensive and technologically advanced solutions must be developed and implemented, such as modernizing and upgrading VHA’s existing claims processing system or contracting out the claims processing function. In October 2015, VHA submitted a plan to address these issues as part of a broader effort to consolidate VA care in the community programs. The agency estimated that it would take at least 2 years to implement solutions that would fully address all of the challenges now faced by its claims processing staff and by providers of VA care in the community services. However, VHA has not yet provided to Congress or other external stakeholders a plan for modernizing its claims processing system. In particular, VHA has not provided (1) a detailed schedule for developing and implementing each aspect of its new claims processing system; (2) the estimated costs for developing and implementing each aspect of the system; and (3) performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. That VHA has not yet provided a detailed plan but has stated that it expects to deploy a modernized claims processing system as early as fiscal year 2018 is cause for concern. Thus, to help provide reasonable assurance that VHA achieves its long-term goal of modernizing its claims processing system, we recommended in May 2016 that the Secretary of Veterans Affairs direct the Under Secretary for Health to ensure that the agency develops a sound written plan that includes: a detailed schedule for when VHA intends to complete development and implementation of each major aspect of its new claims processing system; the estimated costs for implementing each major aspect of the system; and the performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. The department concurred with our recommendation and said that VHA plans to address the recommendation when the agency develops an implementation strategy for the future consolidation of its VA care in the community programs. In conclusion, effective IT management is critical to the performance of VA’s mission. The department faces challenges in key areas, including the development of new systems, modernization of existing systems, and increasing interoperability with DOD. While we recognize that the transformation of VA’s IT organization is intended, among other things, to mitigate the IT weaknesses we have identified, sustained management attention and organizational commitment will be essential to ensuring that the transformation is successful and that the weaknesses are fully addressed. Chairman Isakson, Ranking Member Blumenthal, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have. If you or your staff have any questions about this testimony, please contact Valerie C. Melvin at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony statement. GAO staff who made key contributions to this statement are Mark T. Bird (Assistant Director), Jennifer Stavros-Turner (Analyst in Charge), Kara Epperson, Rebecca Eyler, and Jacqueline Mai. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

VA relies on IT to meet its mission and effectively serve the nation's veterans. Over the past several years, the department has expended billions of dollars to manage and modernize its information systems. However, VA has experienced challenges in managing its IT, raising questions about the effectiveness of its IT operations. GAO has previously reported on a number of the department's IT initiatives. This statement summarizes results from key GAO reports issued between 2010 and 2014 highlighting IT challenges that have contributed to GAO's designation of VA health care as a high risk area. It also describes additional challenges that GAO more recently identified in 2015 and 2016 that are related to increasing the electronic exchange of VA's health records with those of DOD, development and use of VBMS, and the department's modernization of its health care claims processing system. In February 2015, GAO designated Veterans Affairs (VA) health care as a high-risk area based on its concerns about the department's ability to ensure the quality and safety of veterans' health care in five broad areas, one of which was information technology (IT) challenges. Of particular concern at that time was the failed modernization of an outpatient appointment scheduling system, suspended development of a system that was to electronically store and retrieve information about surgical implants, and the extent of system interoperability—the ability to exchange information—with the Department of Defense (DOD), which present risks to the timeliness, quality, and safety of VA health care. Subsequent to the designation of VA health care as high risk, GAO completed evaluations that identified additional IT management challenges at VA. In August 2015, GAO reported on VA's efforts to achieve electronic health record interoperability with DOD and noted that (1) the two departments had engaged in several near-term efforts to expand interoperability and (2) VA and DOD had moved forward with plans to separately modernize their electronic health record systems. However, of significant concern was that VA (and DOD) had not identified outcome-oriented goals and metrics that would clearly define what it aims to achieve from its efforts. GAO recommended that VA develop goals and metrics, among other things. VA concurred with the recommendations and stated that it has initiated actions in response. VA had made progress in developing and implementing its Veterans Benefits Management System (VBMS), with deployment of the initial version of the system. However, in September 2015, GAO reported that the development and implementation of the system was ongoing and noted three areas that could benefit from increased management attention: cost estimating, system availability, and system defects. The report also noted that VA had neither conducted a customer satisfaction survey nor developed goals for improving the system. GAO recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidences of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. VA agreed with the recommendations and noted steps it was taking to address them. Due to recent increases in utilization of VA care in the community, the department has had difficulty processing claims in a timely manner. In May 2016, GAO reported that VA officials and claims processing staff indicated that IT limitations, manual processes, and staffing challenges had delayed claims processing. The department had implemented interim measures to address some of the system's challenges, but did not expect to deploy solutions to address all challenges, including those related to IT, until fiscal year 2018 or later. Further, VA did not have a sound plan for modernizing its claims processing system, which GAO recommended it develop. The department concurred with this recommendation and stated that it intended to address the recommendation through the planned consolidation of its care in the community programs. GAO has made numerous recommendations to VA to improve the modernization of its IT systems. Among other things, GAO has recommended that VA address challenges associated with its efforts to modernize its electronic health record system to increase interoperability with DOD, develop goals and metrics as a basis for determining the extent to which VA's and DOD's modernized electronic health records systems are achieving interoperability, address shortcomings with VBMS planning and implementation, and develop a sound written plan for deploying its modernized claims processing system. VA has concurred with these recommendations and has some actions ongoing.

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The size and nature of the Medicare program make HCFA unique in authority and responsibility among health care payers. Fee-for-service Medicare serves about 33 million beneficiaries and processes a high volume of claims—an estimated 900 million in fiscal year 1997—from hundreds of thousands of providers, such as physicians, hospitals, skilled nursing facilities, home health agencies, and medical equipment suppliers. HCFA is also responsible for paying and monitoring more than 400 managed care health plans that serve more than 5 million beneficiaries. Enrollment in these plans has been growing by about 85,000 beneficiaries monthly. The Medicare statute divides benefits into two parts: (1) “hospital insurance,” or part A, which covers inpatient hospital, skilled nursing facility, hospice, and certain home health care services, and (2) “supplementary medical insurance,” or part B, which covers physician and outpatient hospital services, diagnostic tests, and ambulance and other medical services and supplies. In fiscal year 1997, part A covered an estimated 39 million aged and disabled beneficiaries, while a slightly smaller number were covered by part B, which requires payment of a monthly premium. currently consists mostly of risk contract health maintenance organizations (HMO). Medicare pays these HMOs a monthly amount, fixed in advance, for all the services provided to each beneficiary enrolled. HCFA, an agency within HHS, has slightly less than 4,000 full-time employees, 65 percent of whom work in the agency’s headquarters offices; the rest work in the agency’s 10 regional offices across the country. In addition to the agency’s workforce, HCFA oversees more than 60 claims processing contractors that are insurance companies—like Blue Cross and Blue Shield plans, Mutual of Omaha, and CIGNA. In fiscal year 1997, the contractors employed an estimated 22,200 people to perform Medicare claims processing and review functions. Two recent acts grant HCFA substantial authority and responsibility to reform Medicare. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), P.L. 104-191, provides the opportunity to enhance Medicare’s anti-fraud-and-abuse activities. The Balanced Budget Act of 1997 (BBA), P.L. 105-33, introduces new health plan options and major payment reforms. In correspondence to this Subcommittee last October, we noted that these two pieces of legislation addressed in large measure our concerns and those of the HHS Inspector General regarding the tools needed to combat fraud and abuse. They also address many of the weaknesses discussed in our High-Risk Series report on Medicare. network to perform payment safeguard functions while avoiding conflicts of interest. HIPAA also adds new civil and criminal penalties to heretofore little-used enforcement powers. BBA provides for a dramatic expansion of health plan choices available to Medicare beneficiaries and makes reforms to payment methods in traditional fee-for-service Medicare and managed care. Under the act’s new Medicare+Choice program, beneficiaries will have new health plan options, including preferred provider organizations (PPO), provider sponsored organizations (PSO), and private fee-for-service plans. Medicare+Choice introduces new consumer information and protection provisions, including a requirement to disseminate comparative information on Medicare+Choice plans in beneficiaries’ communities and a requirement that all Medicare+Choice plans obtain external review from an independent quality assurance organization. These provisions address problems we have worked to correct with this committee and others in the Congress. BBA also provided for revamping many of Medicare’s decades-old payment systems to contain the unbridled growth in certain program components. Specifically, the act mandated prospective payment systems for services provided by about 1,100 inpatient rehabilitation facilities, 14,000 skilled nursing facilities, 5,000 hospital outpatient departments, and 8,900 home health agencies. In addition, it made changes to the payment methods for hospitals, including payments for direct and indirect medical education costs. It also adjusted fee schedule payments for physicians and durable medical equipment and authorized the conversion of the remaining reasonable charge payment systems to fee schedules. Finally, the act granted the authority to conduct demonstrations on the cost-effectiveness of purchasing items and services through competitive bids from suppliers and providers. While legislative reforms are dramatically reshaping Medicare, other changes are occurring, thus compounding difficult management challenges. For example, HCFA is rethinking its strategy to develop, modernize, or otherwise improve the agency’s multiple automated claims processing and other information systems. This will involve preparing systems for the year 2000, repairing the deteriorating managed care enrollment systems, and making the necessary modifications to existing systems. HCFA plans to make these changes as an interim measure until, consistent with the Information Technology Management Reform Act of 1996 (P.L. 104-106), comprehensive reengineering can take place, such as making claims processing systems and payment mechanisms more efficient, programming BBA payment changes, and modernizing the anti-fraud-and-abuse system software. HCFA is also confronting transition problems resulting from the recent loss of large-volume claims processing contractors and the need for remaining contractors to absorb the workload. Finally, HCFA recently restructured its organizational units to better focus on its mission and is experiencing the kind of disruptions common to organizational transitions. Against this backdrop, the themes that emerged from our individual interviews and focus groups with HCFA managers centered on (1) distribution of agency resources, (2) need for specialized expertise, (3) loss of institutional experience, and (4) reorganization issues. “Robbing Peter to pay Paul” was the expression used to characterize one of the major themes from our focus groups. Specifically, managers were concerned that because of the concentrated efforts to implement BBA and solve computer problems that could arise in the year 2000, the quality of other work might be compromised or tasks might be neglected altogether. However, managers also noted that whereas some BBA-related tasks are completely new—such as conducting an open enrollment period for Medicare+Choice plans—and therefore add to the workload, others merely formalize work that was already underway but impose deadlines for completion, such as developing prospective payment methods for reimbursing several types of health care providers. staff members dedicated to contractor oversight currently has two; the others, they said, had been reassigned to work on managed care issues. This concerns us in light of our work on Medicare program management. Over the past several years, we have reported that HCFA has not adequately ensured that contractors are paying only medically necessary or otherwise appropriate claims. Similarly, the HHS Inspector General’s fiscal year 1996 financial audit found contractor oversight weaknesses. For example, some contractors selected for audit could not readily verify total Medicare expenditures, including paid claim amounts, to ensure that amounts were accurate, supported, and properly classified; did not adequately document accounts receivable; and did not have adequate internal controls over the receipt and disbursement of cash. Further, HCFA does not have a method for estimating the amount of improper Medicare payments; for fiscal year 1996, the Inspector General estimated that HCFA made about $23 billion in inappropriate payments. Managers also expressed a common concern about the staff’s mix and level of skills. They noted that HCFA’s traditional approach of hiring generalist staff and training them largely on the job is no longer well suited to the agency’s need to implement recent reforms expeditiously. Instead, managers are beginning to identify the need for staff with specialized technical expertise, such as computer system analysts, survey statisticians, data analysts, market researchers, information management specialists, managed care experts, and health educators. In our discussions, several managers placed “appropriate skill sets” at the top of their wish lists. As an illustration, the Medicare+Choice program introduces new health plan types and requires the dissemination of information about the plans to beneficiaries in 1998. Called the Medicare+Choice Information Fair, this nationwide educational and publicity campaign will be the first effort of its kind for HCFA. Managers were concerned that staff without prior experience will need to pull together information that describes and evaluates the merits of various plans. data systems. They also cited the need for specialists in contracting, facilities management, and telecommunications. Many senior and midlevel managers and experienced technical staff have retired in recent years or are eligible to retire soon. Almost 40 percent of the organization has turned over in the past 5 years. Many were said to have spent their entire careers focused on a particular aspect of the Medicare program. A common concern in our discussions was the erosion of experienced staff to perform a variety of tasks, such as writing regulations and developing payment systems. Managers cited the loss of experienced staff as a problem for developing and implementing the various prospective payment systems mandated by BBA. They also noted that developing one new payment system would have been manageable, but losses of expert staff make it difficult to implement multiple new payment systems concurrently. For example, experienced staff are needed to perform such technical tasks as those we mentioned in our October statement before this Subcommittee, including collecting reliable cost and utilization data to compute the new prospective payment rates, developing case mix adjusters, auditing cost reports to avoid incorporating inflated costs into the base rates, and monitoring to guard against providers’ skimping on services to increase profits. Our focus group participants emphasized that it will be difficult to replace its experienced staff in the short term. Although HCFA is planning to hire new people, the time typically needed for recruiting, hiring, and orienting new employees is considerable. Managers commented that new employees, although highly educated and motivated, sometimes need extensive on-the-job training to replace lost expertise. In July 1997, HCFA restructured its entire organization. The new design reflected the agency’s intent to, among other things, (1) combine activities to redirect additional resources to the growing managed care side of the program, (2) acknowledge a shift from HCFA’s traditional role as claims payer to a more active role as purchaser of health care services, and (3) establish three components focused on beneficiaries, health plans and providers, and Medicaid and other activities conducted at the state level. It also established technical and support offices to assist these components. (See HCFA’s organization chart in app. I.) In announcing the planned reorganization, the Administrator explained that as Medicare has evolved over the years, new programs and projects were layered onto existing structures. Over time, he noted, this became cumbersome and confusing. Many managers we spoke with considered the reorganization to be theoretically sound. Some also told us that it was long overdue, because HCFA’s structure encouraged work on narrow issues within self-contained groups—an approach that did not benefit from the expertise existing across the agency. However, a consensus of focus group participants and high-level officials believed that the timing of the reorganization’s implementation is unfortunate. They explained that they are currently facing full agendas with tight deadlines, which add to the stresses associated with any organizational change. Managers described their difficulties in establishing new communication and coordination links within units as well as across the agency. For some, new efforts to coordinate have proved time-consuming to the point of being counterproductive. Managers commented that sign-off sheets formalizing coordination have enough names to take on the appearance of a staff roster. They noted that the situation was particularly acute in light of the fact that people have not yet moved to the actual location of their new units. Managers in one division said staff were scattered in as many as seven places around HCFA’s building. HCFA now hopes to have staff relocated by late spring, although this plan appears to be optimistic. We observed that managers appeared to be clear on top management’s expectations for completing BBA-related activities and for making sure that contractors’ claims processing systems would comply with the millennium changes. They were less certain, however, about the agency’s strategy for meeting other mission-related work. of its workload that would enable the agency’s senior decisionmakers to consider whether resources are, in fact, adequate or properly distributed and which activities could be at risk of being neglected. One example that came to our attention concerned the legislative mandates for reporting to the Congress on specific activities and programs. Currently, neither top management nor the Office of Legislation compiles a list of reports due and their deadlines. Unit managers are concerned because, although they are aware that certain reports for which they are responsible will be late, there is no systematic way to keep top management informed. Top management, in turn, cannot decide to heighten the priority for a particular report or develop a strategy to mitigate the consequences of others being late. The illustration above and our discussions with agency officials suggest that while HCFA may be ready to assert its BBA-related resource needs, it is not likely to be in a position to adequately justify the resources it seeks to carry out its other Medicare program objectives. This observation calls to mind our July 1997 report on the adequacy of HHS’s draft strategic plan under the Government Performance and Results Act. We noted that the plan failed to address certain major management challenges, including Medicare-related problems. Specifically, the plan did not address long-standing concerns about Medicare’s existing claims processing systems or HCFA’s efforts to acquire a billion-dollar integrated database system. In addition, it did not address the issue of information security that was identified in the fiscal year 1996 financial statement audit of HCFA, specifying that systems weaknesses created the risk of unauthorized access to sensitive medical history and claims data. HCFA is an agency facing many challenges. Even before BBA made major changes, Medicare was a vast and complex program. Volumes of reports by us and others demonstrate, in numerous areas, HCFA’s need to address program vulnerabilities. Because of the risks associated with a program of Medicare’s magnitude, the need for HCFA to be vigilant cannot be overstated. struggling to carry out Medicare’s numerous and challenging activities. In addition, they assert that the loss of experienced staff has further diminished HCFA’s capacity. Nevertheless, senior managers do not appear to be adequately informed about the status of the full range of Medicare activities or associated resource needs. Under these circumstances, HCFA seems to be focusing most of its energy on important deadlines and pressures, but other critical functions may be receiving back-burner attention. We have work underway to assess the status of HCFA’s efforts to implement aspects of HIPAA and BBA and modernize the agency’s information systems. We will also continue to monitor the progress of HCFA’s reorganization efforts. Mr. Chairman, this concludes my statement. I will be happy to answer your questions. Medicare: Effective Implementation of New Legislation Is Key to Reducing Fraud and Abuse (GAO/HEHS-98-59R, Dec. 3, 1997). Medicare Fraud and Abuse: Summary and Analysis of Reforms in the Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997) and related testimony entitled Recent Legislation to Minimize Fraud and Abuse Requires Effective Implementation (GAO/T-HEHS-98-9, Oct. 9, 1997). Medicare Automated Systems: Weaknesses in Managing Information Technology Hinder Fight Against Fraud and Abuse (GAO/T-AIMD-97-176, Sept. 29, 1997). Medicare Home Health Agencies: Certification Process Is Ineffective in Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997). Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). Medicare Managed Care: HMO Rates, Other Factors Create Uneven Availability of Benefits (GAO/HEHS-97-133, May 19, 1997). Medicare (GAO/HR-97-10) and related testimony entitled Medicare: Inherent Program Risks and Management Challenges Require Continued Federal Attention (GAO/T-HEHS-97-89, Mar. 4, 1997). Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance (GAO/HEHS-97-23, Oct. 22, 1996). Medicare: Millions Can Be Saved by Screening Claims for Overused Services (GAO/HEHS-96-49, Jan. 30, 1996). Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements (GAO/HEHS-95-171, Aug. 8, 1995). Medicare: Increased HMO Oversight Could Improve Quality and Access to Care (GAO/HEHS-95-155, Aug. 3, 1995). Medicare: Inadequate Review of Claims Payments Limits Ability to Control Spending (GAO/HEHS-94-42, Apr. 28, 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the Health Care Financing Administration's (HCFA) ability to meet growing program management challenges, focusing on: (1) HCFA's new authorities under recent Medicare legislation; (2) HCFA managers' views on the agency's capacity to carry out various Medicare-related functions; and (3) the actions HCFA needs to take to accomplish its objectives over the next several years. GAO noted that: (1) substantial program growth and greater responsibilities appear to be outstripping HCFA's capacity to manage its existing workload; (2) legislative reforms have increased HCFA's authority to manage the Medicare program; (3) simultaneously, however, other factors have increased the challenges HCFA faces, including the need to make year 2000 computer adjustments and develop a new, comprehensive information management strategy; manage transitions in its network of claims processing contractors; and implement a major agency reorganization; (4) in addition, officials report that the expertise to carry out HCFA's new functions is not yet in place and that HCFA has experienced a loss of institutional knowledge through attrition; (5) in this environment, agency managers are concerned that some of their responsibilities might be compromised or neglected altogether because of higher-priority work; (6) HCFA's approach for dealing with its considerable workload is incomplete; (7) heretofore, the agency lacked an approach--consistent with the requirement of the Government Performance and Results Act of 1993 to develop a strategic plan--that specified the full range of program objectives to be accomplished; (8) HCFA has developed a schedule for responding to recent legislative reforms but is still in the process of detailing the staffing and skill levels required to meet reform implementation deadlines; and (9) while addressing new mandates, the agency also needs to specify how it will continue to carry out its ongoing critical functions.

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Although there have been fluctuations in its funding sources, FAA is primarily supported by the Trust Fund (82 percent), which receives revenues from a series of excise taxes paid by users of the NAS. These excise taxes are associated with purchases of airline tickets and aviation fuel, as well as the shipment of cargo. These Trust Fund revenues are then available for use subject to appropriations. In addition to these revenues, in most years, General Fund revenues have been used to fund FAA. About $2.6 billion was appropriated for fiscal year 2006 from the General Fund for FAA’s operations. This amount represents about 18 percent of FAA’s total appropriation. The Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system. The Trust Fund provides funding for FAA’s two capital accounts—the Airport Improvement Program (AIP) and the Facilities and Equipment (F&E) account—which provide grants to airports and funds for modernizing the air traffic control system, respectively. The Trust Fund also provides funding for the Research, Engineering, and Development (RE&D) account and supports part of FAA’s Operations account. To fund these accounts, the Trust Fund is credited with revenues collected from system users through the dedicated excise taxes. In fiscal year 2005, the ticket tax was the largest single source of Trust Fund revenue, followed by the international departure and arrival tax, the passenger segment tax, and fuel taxes (see table 1 for a description of current taxes). The administration’s reauthorization proposal would change FAA’s financing system from one based mainly on excise taxes to one based more on cost-based charges. Under the proposed system, funding for ATO would come primarily from user charges on commercial aircraft and fuel taxes on general aviation aircraft. In addition, contributions from the General Fund would be appropriated to FAA to cover ATO costs of providing services to military and other public aircraft, flight service stations, and a few other services. Funding for AIP, EAS, and part of RE&D would come from an equal fuel tax on both general and commercial aviation and a tax on arriving and departing international passengers. Funding for Safety and Operations would include some fees, but mostly General Fund contributions. The reauthorization proposal would also create an advisory board and give FAA limited borrowing authority. Table 1 compares elements of the current and proposed funding structure for FAA. The administration’s proposal also calls for changing FAA’s budget structure by establishing two new budget accounts—(1) Air Traffic Organization and (2) Safety and Operations—to align with FAA’s lines of business and proposed funding. These two new accounts would replace the Operations and F&E accounts. The proposal retains the AIP and RE&D accounts. See table 2 for a comparison of the current and proposed FAA budget structure. In January 2007, FAA released a new cost allocation study. This report sets forth a methodology for assigning air traffic costs to user groups on the basis of aircraft type. The two principal user groups are the high- performance group, which includes all fixed-wing turbine engine aircraft operations, and the piston aircraft group, which includes piston engine fixed-wing aircraft operations and helicopters. According to FAA, this cost allocation methodology is based on the assumption that high-performance users generally compete for the same air traffic control resources and their operations are more time-sensitive than piston aircraft operations, requiring more complex air traffic equipment and procedures. Piston aircraft operations, on the other hand, tend to be less time-sensitive and typically rely on less complex equipment. Differences in the speed and cruising altitudes of the two aircraft types also affect their en route costs. The current funding structure, with some modifications to the excise taxes and tax rates and changes in the levels of General Fund contributions, has successfully funded a growing FAA budget. Trust Fund revenues are projected to increase substantially at current excise tax rates. If, to fund the additional costs of NextGen or for other reasons, Congress chooses to increase spending on aviation beyond what can be paid for at current excise tax rates, it can obtain additional revenue through the current funding structure by increasing excise tax rates, the General Fund contribution, or both, although the nation’s fiscal imbalance could make such an increase difficult. Nonetheless, because some factors that drive tax revenues, such as ticket prices, are not well linked to FAA’s workload and costs, FAA has been concerned about the long-run revenue adequacy, equity, and efficiency of its funding. Some of the administration’s proposed changes for funding FAA, such as establishing direct user charges for commercial aviation and substantially increasing fuel taxes for general aviation are intended to link FAA’s revenues more closely with its costs. For other elements of FAA’s budget, however, it is not possible to establish a direct link between revenues and costs. For example, because AIP expenditures are not the direct result of costs imposed by users of the NAS, the proposal to fund AIP through equal fuel taxes on all aircraft operators can best be evaluated on equity grounds. Better alignment of FAA’s revenues and costs can address some of the concerns about the current funding system that derive from the lack of connection between some key drivers of current FAA revenues, such as ticket prices, and FAA’s workload and costs. However, the effectiveness of the proposed funding structure in linking costs with revenues depends critically on how well FAA’s new cost allocation method assigns costs to users and on how closely the proposed funding structure adheres to the principle of cost-based funding, and questions remain about both considerations. Furthermore, FAA’s method for estimating the fuel tax rates needed to collect its intended level of fuel tax revenue may have underestimated the tax rates needed by not accounting for possible reductions in fuel consumption due to the higher tax rates. The implications of some of the other proposed changes, including one creating an advisory board that can make recommendations on fee setting and another authorizing limited authority for FAA to use debt financing, are uncertain. Congress has used the current funding structure—excise taxes plus a General Fund contribution—to fund FAA for many years. As the number of air travelers has grown, so have excise tax revenues. Even though revenues fell during the early years of this decade as the demand for air travel fell, they began to rise again in fiscal year 2004, and FAA estimates that if the current taxes remain in effect at their current rates, revenues will continue to increase. While retaining the basic structure for funding FAA, Congress has at times changed the mix of excise taxes and some of the tax rates. For example, when the taxes were most recently reauthorized in 1997, Congress added the passenger segment tax while reducing the passenger ticket tax rate from 10 percent to 7.5 percent. Congress has also appropriated varying amounts of General Fund revenues for FAA during the past 25 years, ranging from 0 to 59 percent of FAA’s budget and averaging around 20 percent since fiscal year 1997. The fluctuation in the amount of the General Fund contribution occurs because the contribution is based on the incoming Trust Fund revenues that are available to fund the Operations account after revenues have been allocated to fund the F&E, AIP, RE&D accounts. Therefore, fluctuations in the Trust Fund revenues and FAA expenditures require different levels of General Fund contributions. As air traffic grows and FAA embarks on modernization through NextGen, Congress may appropriate additional funds to FAA to fund new investment and to maintain a safe and efficient airspace system, although there is considerable uncertainty about how much NextGen will cost. FAA estimates that NextGen will cost between $15 billion to $22 billion through 2025. However, funding NextGen does not mean that the current funding structure needs to be changed. According to projections prepared by the Congressional Budget Office (CBO), revenues obtained from the existing funding structure are projected to increase substantially. Assuming that the General Fund provides about 19 percent of FAA’s budget, CBO estimates that through 2016 the Trust Fund can support about $19 billion in additional spending over the baseline FAA spending levels CBO has calculated for FAA (the 2006 funding level, growing with inflation) provided that most of that spending occurs after 2010. How far this money will go to fund modernization is subject to a number of uncertainties— including the future cost of NextGen investments, the volume of air traffic, the future costs of operating the NAS, and the levels of future appropriations for AIP, all of which may influence funding for FAA. However, if the desired level of spending exceeded what was likely to be available from the Trust Fund at current tax rates, Congress could make further changes within the current structure that would provide FAA with additional revenue if Congress believed that larger FAA appropriations were appropriate—for example, if FAA experienced increased workload demands as a result of increased demand for air traffic services. Congress could raise more revenue from airspace system users for NAS modernization or for other purposes by raising the rates on one or more of the current excise taxes. Congress could also provide more General Fund revenues for FAA, although the nation’s fiscal imbalance may make a larger contribution from this source difficult. Thus, it is necessary to look at factors other than a need for more revenues to justify a major change in FAA’s funding structure. FAA has expressed concern that revenues from the current funding structure depend heavily on factors, such as ticket prices, that are not connected to FAA’s workload and costs. According to FAA, under the current structure, increases in the agency’s workload may not be accompanied by revenue increases because users are not directly charged for the costs that they impose on FAA for their use of the NAS. Revenues collected from excise taxes are primarily dependent on the price of tickets and the number of passengers on planes, while workload is driven by flight control and safety activities. This disconnect raises three key concerns about the current funding structure—its long-term revenue adequacy, equity, and efficiency. Moreover, these three concerns are supported by long-term industry trends and FAA forecasts of declines in inflation- adjusted air fares, the growing use of smaller aircraft, and FAA’s 2007 cost allocation study. The administration has used these concerns as its rationale for proposing major changes in FAA’s funding. Many of the proposed changes for funding FAA contained in the administration’s reauthorization proposal are intended to address the concerns about revenue adequacy, equity, and efficiency by linking FAA’s revenues more closely with its costs. The proposal calls for a combination of methods for funding FAA, which we previously reported might best address concerns with the current system by providing a better link between revenues and costs than any option used separately. For example, the proposal would eliminate all the excise taxes except the taxes on fuel and the tax on arriving and departing international passengers. The ATO, the largest part of FAA’s budget, would then be funded by direct user charges on commercial aircraft—including air taxis, fractionally owned aircraft, and aircraft providing charter service—that use the NAS, fuel taxes paid by general aviation users of the NAS (both turbine and piston), and General Fund revenues to cover the costs of exempt aircraft such as military and other state aircraft and flight service stations. The proposal would also allow FAA to establish a fee for all aircraft using the nation’s most congested airports. Based on the time of day or day of the week, the fee would be designed to increase efficient use of the NAS by discouraging peak-period traffic at congested airports and, thus, reducing delays. Under such a fee, cargo carriers could pay lower fees by operating at night than they would pay by operating at peak periods of the day, creating an incentive for some cargo carriers to switch daytime operations to nighttime. The fee could also create incentives for general aviation aircraft flying to and from metropolitan areas with congested airports to use other nearby airports instead. The shares of ATO costs to be recovered from commercial and general aviation aircraft, respectively, and the General Fund contribution to cover the costs of exempt aircraft would be based on the results of FAA’s cost allocation study. In addition, the proposal would authorize FAA to impose fees to pay for costs related to certain aircraft certification and registration activities that it conducts. Basing cost recovery for ATO only on cost allocation is a policy choice. In many other countries, cost recovery is based in part on cost allocation and in part on other principles, such as ability to pay. For example, some countries charge a fee for en route services based on weight and distance; weight is included as a factor in charging formulas because many believe that it reflects an aircraft operator’s ability to pay. Using additional principles for cost recovery could result in different distributions of the funding burden among user groups. For one large area of FAA’s budget, AIP, it is not possible to establish a direct link between revenues and costs because AIP expenditures are not the direct result of costs imposed by users of the NAS. FAA distributes AIP grants on the basis of congressional priorities established in authorizations and appropriations. Accordingly, equity would appear to be the best criterion to use in evaluating the administration’s proposal to fund AIP through a fuel tax of 13.6 cents per gallon on commercial and general aviation operators and a tax of $6.39 per passenger on the use of international travel facilities. According to an FAA official, the decision to establish equal tax rates for commercial and general aviation operators was made to achieve fairness and simplicity. One way to evaluate the fairness or equity of funding AIP in this way would be to compare the distribution of the funding burden among user groups with the distribution of the grants funded by AIP. With all aircraft being charged the same fuel tax rate, according to FAA forecasts for fiscal year 2009, commercial aircraft operators would pay about 88 percent of the fuel tax revenues collected primarily to fund AIP, while general aviation operators would pay 12 percent. However, under the current AIP program, about one-third of AIP grants would go to airports with no commercial service, and some additional grants would go to airports where general aviation traffic makes up a substantial share of the aircraft operations. Thus, under the administration’s proposal, commercial aviation users would appear to be paying for a large share of the benefits that come from capital spending at general aviation airports. This result is no different from what happens today; commercial aviation users currently pay for a large share of these benefits, since the largest share of the Trust Fund comes from passenger ticket taxes. Some portion of these benefits may accrue to commercial aviation users if capital spending at general aviation airports keeps general aviation traffic from using congested commercial airports. However, most of the benefits from capital spending at general aviation airports would likely go to users of those airports or their surrounding communities—or to the general public to the extent a national system of airports that includes general aviation airports creates public benefits. In that case, funding those benefits by fuel taxes paid by commercial aircraft may raise equity issues. An alternative approach that would be consistent with a policy choice to charge general aviation users less than the cost of the benefits they receive from AIP grants would be to use General Fund revenues to fund part of AIP. A better alignment of FAA’s revenues and costs can address revenue adequacy, equity and efficiency concerns, but the ability of the proposed funding structure to link revenues and costs to address these concerns depends critically on two things—first, the soundness of FAA’s cost allocation system in allocating costs to users and, second, how closely the proposed funding structure adheres to the principle of cost-based funding. FAA’s new cost allocation study was released at the end of January, so we and others have had only a short time to review it. However, we, as well as industry stakeholders, have raised a number of concerns about the study and its cost allocation methodology. For example, FAA divides NAS users into two groups: high-performance aircraft, such as jets and turboprop aircraft, and piston aircraft. According to FAA, dividing users this way creates two principal groups whose flights impose substantially different costs on FAA. High-performance aircraft which fly at higher altitudes and speeds, and normally use Instrument Flight Rules, are “controlled” through en route airspace and for landings and takeoffs by air traffic controllers. Therefore, they impose higher costs on FAA than piston aircraft which fly at lower altitudes and often use Visual Flight Rules, under which they are not “controlled” through en route airspace but can use air traffic control services for landings and takeoffs. However, FAA did not conduct a statistical cost analysis to determine whether high-performance aircraft of different types might impose sufficiently different costs on the system to warrant dividing NAS users into more than two groups. For example, differences in aircraft weight could affect terminal airspace costs even though they may not affect en route costs. Although there may be no effect of aircraft weight on en route costs, FAA officials told us that the administration’s reauthorization proposal requests authority to set terminal airspace user fees based in part on weight because they believe that larger aircraft require greater separation, thus imposing greater terminal airspace costs. Under FAA’s cost allocation methodology, fixed costs are assigned to the group that is the primary user of the air traffic control services that generate those costs. Accordingly, it might be more consistent to divide high-performance aircraft into subgroups before FAA allocated the fixed costs of air traffic control services used by aircraft in all groups to the group that is the primary user of that service. Creating only two principal groups resulted in the allocation of some portion of the fixed costs to general aviation jet aircraft, because the high- performance group, which FAA defines to include general aviation jet aircraft, is the primary user of services that are responsible for most fixed costs. If instead, for example, FAA had created three principal aircraft groups—piston, heavy high-performance, and light high-performance— and if the heavy high-performance group was the primary user of services that are responsible for most fixed costs, then the fixed costs would have been allocated only to that group. The effect of this change in methodology would likely have been that general aviation turbine users would have been allocated a smaller share of total ATO costs and a lower fuel tax rate would have been needed to collect their share of FAA’s revenues. Because a sound cost allocation methodology is central to the successful application of cost-based funding, more time may be needed for FAA to further analyze the differences among aircraft types that lead to differences in the costs they impose on the NAS. More time may also be needed for a fuller analysis and discussion of FAA’s cost allocation methodology, after which, perhaps, a wider consensus might be reached on FAA’s cost allocation methodology. At the request of this Committee, we are continuing to review FAA’s cost allocation methodology. In addition to our concerns about the cost allocation methodology, we have identified some instances in which the reauthorization proposal does not strictly adhere to the principle of cost-based funding. For example, FAA has made what it terms a policy decision to not apply the congestion charge for using terminal airspace near large, busy airports to all aircraft that fly through that airspace. Aircraft flying near busy airports and using the same airspace but not taking off or landing at these airports would not be charged, even though such flights would use air traffic control services provided by the same approach control centers. FAA officials told us that they made this decision because the approach control centers would not exist if they were not serving traffic at the busy airports. In addition, they said, FAA wanted to create incentives for general aviation aircraft to avoid flying to or from the busy airports and to use other nearby airports instead. Although that rationale could provide a justification for allocating the fixed costs of such centers to users of the busy airports, allocating all of the variable costs to users at those airports is a deviation from a cost- based approach. While such policy decisions on pricing may be appropriate in some instances for various reasons, but they create deviations from the principle of cost-based funding that may limit the ability of the administration’s proposal to address concerns about the disconnect between revenues and costs associated with the current funding structure. The proposed fuel tax rates, although much higher than current rates, may not yield the revenue that FAA expects to collect from fuel taxes. FAA estimated the tax rates necessary to collect from general aviation operators the share of ATO costs allocated to them and from both commercial and general aviation operators the revenue needed to fund the proposed level of $2.75 billion for AIP, EAS, and the portion of the RE&D account to be funded through fuel taxes (less the share paid by international passengers). FAA officials confirmed for us that in performing these estimates they did not take into account possible reductions in fuel purchases due to the increase in the tax rates. Although we do not know by how much such purchases would decline, conventional economic reasoning, supported by the opinions of industry stakeholders, suggests that some decline would take place. Therefore, the tax rate should be set taking into consideration effects on use and the resulting impact on revenue. FAA officials told us that they believe that these effects would be small because the increased tax burden is a small share of aircraft operating costs and therefore there was no need to take its impact into account. Representatives of general aviation, however, have said that the impact could be more substantial. Even if there is no change in fuel purchases due to higher tax rates, FAA’s forecasts suggest that fuel tax revenues might be less than the proposed spending to be funded by those tax revenues. Furthermore, we observe that the administration’s proposed spending for AIP is substantially below the levels at which Congress funded the program in recent years. If Congress were to adopt the proposed funding structure but fund AIP at the same level as this year, fuel tax rates would need to be raised above the proposed level to obtain enough revenue to fully fund AIP without resorting to alternative funding sources, such as the General Fund or drawing down the Trust Fund balance. The proposed creation of an advisory board raises questions about the influence that NAS users would have on fee setting and the impact that such a board would have on congressional oversight. According to the reauthorization proposal, the advisory board would be able to recommend user fee amounts to the FAA Administrator, who would have the final decision in setting fees. If the advisory board objected to the fee, the Administrator would be required to publish a written explanation in the Federal Register. Aviation stakeholders could appeal the fee to the Secretary of Transportation but there would be no judicial review of the Secretary’s appeal decision. According to a recent report by the Congressional Research Service, the FAA Administrator would have substantial discretion in how much to use the advisory board’s expertise. Congress would have no role in setting fees, whereas under the current system, Congress sets the tax rates. The combination of these elements raises the issue of how to ensure the appropriate level of congressional oversight. With a user fee, Congress would set the total amount to collect and spend from the fees through the appropriations process. The authorization of limited borrowing authority (up to $5 billion) for FAA in the administration’s proposal seems unlikely to have a major effect on FAA’s ability to pay for capital investment associated with moving to NextGen, because the payback period is relatively short. With a maximum payback period of 5 years, the advantage of matching the time period for paying for a capital investment with the time period in which the benefits of that investment are realized is unlikely to be achieved. As a result, the advantage of this type of borrowing compared to appropriations also funded by Treasury debt is less clear. In either case, user fee collections could offset the borrowing. However, it is possible that having FAA borrow from the Treasury with a relatively short time period for repayment could serve as a way to tighten and make more explicit the link between the borrowing and the fees that are the source of repayment— and could ensure that the fees were set at a level sufficient to provide the needed funds. Limiting FAA’s authority to borrow from the Treasury and collecting revenue from user fees, as proposed, is preferable to giving FAA direct access to capital markets or repaying debt with appropriations or new borrowing. The Treasury can borrow at lower interest rates than FAA could achieve by going to the capital markets because Treasury securities are considered risk-free, since they are backed by the federal government. We have recommended that only those agencies that would be able to repay their borrowing through revenue collections be granted authority to borrow. In addition, we have reported that debt financing raises issues about borrowing costs that are particularly important in light of the federal government’s long-term structural fiscal imbalance. Mandatory federal commitments to health and retirement programs will consume an ever- increasing share of the nation’s gross domestic product and federal budgetary resources. Accordingly, any program or policy change that may increase costs requires sound justification and careful consideration before adoption. The reauthorization proposal to align FAA’s budget accounts with FAA’s lines of business has advantages and disadvantages. Such a restructuring is consistent with FAA’s emphasis on aligning revenues and costs and could allow FAA to more specifically distinguish those funding options that provide a better links between costs and revenues. For example, an ATO account dedicated to the operation, maintenance, and upgrade of the NAS could better enable the agency to charge for direct usage of the NAS. In addition, such a system could show the costs attributable to each line of business, thereby supporting the agency’s internal financial management. However, some FAA activities may not be clearly divisible into discrete categories. For example, one new account—the Safety and Operations account—includes safety-related activities. Nonetheless, there could be some ambiguity in how safety activities are defined and in how their costs should be allocated between aviation users which benefit directly from a safe air traffic control system and the public which receives general safety benefits. Linking the General Fund contribution to FAA’s budget, as the administration is proposing, would explicitly recognize that users of the system are not the only beneficiaries of it. Such an approach allows for a “bottom up” calculation of the General Fund contribution that is based on the different public benefits that FAA provides, such as safety and use of the NAS by federal agencies. This approach is different from the current one, which bases the General Fund contribution on how much money is left in the Trust Fund to fund the Operations account after Trust Fund revenues for that particular year have been allocated to fund the F&E, AIP, and RE&D accounts. An approach that links a General Fund contribution to public benefits is consistent with the principle of public finance that public benefits should come from the General Fund and not from user contributions. This should not, however, be viewed as a precise determination. Some aviation activities, such as safety, benefit both users and the nonuser public. Others, such as a national airport system that includes small airports that receive federal grants, may be seen as a benefit solely to the users of those airports, to their communities, or to the broader public. In addition, such a change in the method of determining the General Fund contribution may result in an increase or a decrease in that contribution, which would have implications for how aviation activities are funded. The administration has introduced a complex proposal for funding FAA, and we believe that it deserves serious and thoughtful consideration. Adopting this proposal is not necessary to provide more money to FAA if Congress thinks that additional spending on aviation is needed to address air traffic increases and new investment demands, including NextGen, because additional funding can be provided within the current structure. However, given the current federal fiscal imbalance, appropriating additional funds to aviation may be difficult. Furthermore, the proposal may address some of the concerns that FAA and other stakeholders have raised with the current funding structure, such as equity, but only if the cost allocation from which the cost-based funding is derived is sound. FAA’s cost allocation methodology is new and has raised issues, suggesting that further analysis and more time may be needed to reach a consensus as to whether it is sufficiently sound to support a cost-based funding structure for FAA. In the meantime, the taxes that currently provide most of the revenue for FAA are scheduled to expire at the end of the current fiscal year. Given the relatively low uncommitted balance in the Trust Fund, a lapse in tax revenues could affect the funding of most FAA activities. Thus, timely reauthorization of the current tax revenues to avoid a tax lapse is critical even if Congress chooses to continue its consideration of the administration’s proposal or other alternatives for funding FAA beyond this fiscal year. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the subcommittee might have. For further information about this testimony, please contact Gerald L. Dillingham at (202) 512-2834. Other key contributors to this testimony include Jay Cherlow, Ed Laughlin, Maureen Luna-Long, Maren McAvoy, Jennifer Kim, and Elizabeth Eisenstadt. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Recently, the administration submitted a proposal for reauthorizing the Federal Aviation Administration (FAA) and the excise taxes that fund most of its budget. FAA's current authorization expires in 6 months. The proposal calls for major changes to FAA's funding and budget structure that are intended to address concerns about the long-term revenue adequacy, equity, and efficiency of FAA's current funding structure and to provide a more stable, reliable basis for funding a new air traffic control system that FAA is developing (at an estimated cost of $15 billion to 22 billion through 2025) to meet forecasted increases in air travel demand. The proposal would introduce cost-based charges for commercial users of air traffic control services, eliminate many current taxes, substantially raise fuel taxes for general aviation users, charge commercial and general aviation users a fuel tax to pay primarily for airport capital improvements, modify FAA's budget accounts to align with specific FAA activities, and link the portion of FAA's budget that comes from the Treasury's General Fund with public benefits FAA provides. This statement offers GAO's observations on the proposed changes in FAA's (1) funding and (2) budget structure and is based on GAO's analysis of FAA's proposal and a recent GAO report on FAA funding options. Funding Structure: The current funding structure has supported FAA as FAA's budget has grown, and it can continue to do so to fund planned modernization. Excise tax revenues are forecasted to increase if the current taxes are reauthorized without change and thus could support additional spending. If necessary, Congress can obtain more revenue by increasing the excise tax rates or the General Fund contribution to FAA's budget, although the nation's fiscal imbalance could make such an increase difficult. FAA is concerned because revenues from the current funding structure depend primarily on ticket prices and passenger numbers, which are not well linked to FAA's workload and costs. The proposed new funding structure would link revenues more closely with costs to ensure that revenues rise with increases in FAA's air traffic control and safety activities. According to FAA, cost-based user charges would also be more equitable and could create incentives for more efficient use of the system by aircraft operators. How well FAA's proposed funding structure, if enacted, would achieve these goals is uncertain because it depends on two unknowns--the soundness of a new FAA cost allocation methodology and the extent to which the proposed structure links revenues to costs. Also uncertain are the adequacy of FAA's proposed fuel tax rate to collect anticipated revenues, the implications of a proposed advisory board, and the impact of a proposal to give FAA limited debt-financing authority. Furthermore, GAO notes, user charges would reduce Congress's role in setting revenues. Budget Structure: Modifying FAA's budget accounts is consistent with FAA's emphasis on aligning revenues and costs, but may present implementation issues, in that some FAA activities may be difficult to categorize. More specifically, the proposed restructuring could allow FAA to better identify funding options that link revenues and costs and may improve transparency by showing how much is being spent on specific FAA activities. However, some activities, such as those related to safety, may not lend themselves to placement in discrete categories. Linking the General Fund contribution to public benefits is appropriate, but since some activities may provide both public and private benefits, judgment rather than a precise calculation may determine the contribution. Concluding Observations: The administration has introduced a complex proposal for funding FAA that GAO believes deserves serious and thoughtful consideration. While not necessary to provide more money for FAA, the proposed structure may address some of the concerns raised by the current structure if its cost allocation is sound. Because FAA's cost allocation model is new, further analysis and more time may be needed to determine whether it can adequately support a cost-based funding structure for FAA. Timely reauthorization of funding for FAA for at least the next year is, however, critical to prevent a lapse in funding for most FAA activities, regardless of the action taken on the proposed changes.

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According to GSA, its Federal Technology Service, in conjunction with the IMC, is responsible for ensuring that federal agencies have access to the telecommunications services and solutions needed to meet mission requirements. Its current program to provide long- distance telecommunications services—FTS2001—has two goals: to ensure the best service and price for the government, and to maximize competition for services. In implementing this program strategy, GSA awarded two contracts for long-distance services—one to Sprint in December 1998 and one to MCI WorldCom in January 1999. Under the terms of these contracts, each firm was guaranteed minimum revenues of $750 million over the life of the contracts, which run for four base years and have four 1-year-extension options. If all contract options are exercised, those contracts will expire in December 2006 and January 2007, respectively. According to GSA, federal agencies spent approximately $614 million on FTS2001 services during fiscal year 2003 alone. Related governmentwide telecommunications services are provided by other GSA contracts: the Federal Wireless Telecommunications Service contract and the FTS Satellite Service contracts. The wireless contract was awarded in 1996 to provide wireless telecommunications products and services to all federal agencies, authorized federal contractors, and other users. The satellite services contracts are a series of contracts for a variety of commercial off-the-shelf satellite communications products and services, including mobile, fixed, and broadcast services. According to GSA, these contracts will expire in late 2004 and in 2007, respectively. We have periodically reviewed the development and implementation of the FTS2001 program and assessed its progress. In March 2001 we reported to you on the delays encountered during the government’s efforts to transition from the previous FTS 2000 to the FTS2001 contracts, the reasons for those delays, and the effects of the delays on meeting FTS2001 program goals of maximizing competition for services and ensuring best service and price. We recommended that GSA take numerous actions to facilitate those transition efforts. In April 2001 in testimony before you, we reiterated those recommendations and noted that the process of planning and managing future telecommunications service acquisition would benefit from an accurate and robust inventory of existing telecommunications services. Ultimately, GSA acted on our recommendations and the transitions were successfully completed. GSA is now planning its FTS Networx acquisition program, including the awarding of new governmentwide contracts for a broad range of long distance and international voice and data communications services, wireless services, and satellite telecommunications services. These contracts are intended to replace the existing FTS2001, Federal Wireless Telecommunications Service, and FTS Satellite Service contracts. GSA and the IMC has identified five goals for the Networx acquisition program: Meet agency needs for a comprehensive acquisition that provides continuity of current telecommunications services and solutions. Obtain best value (lowest prices while maintaining quality of service levels) for all services and solutions. Encourage strong competition for the initial contract award(s), and ensure continuous competition throughout the life of the program. Respond to the changing marketplace by providing agency access to a broad range of services and service providers. Provide expanded opportunities for small businesses. To achieve those goals, the program calls for two acquisitions—Networx Universal and Networx Select. The Networx Universal contracts are expected to satisfy requirements for a full range of national and international network services. According to GSA, Networx Universal seeks to ensure the continuity of services and prices found under expiring contracts that provide broad-ranging service with global geographic coverage. GSA expects all Networx Universal offerors to provide a full range of voice and data network services, managed networking services and solutions, and network access, wireless, and satellite communications services. This acquisition is expected to result in multiple contract awards to relatively few offerors because few are expected to be able to satisfy the geographic coverage and comprehensive service requirements. GSA also intends to apply competitive incentives to obtain best value for its customer agencies, although those incentives are not yet defined. Further, GSA expects to establish minimum revenue guarantees for these contracts. In contrast, GSA plans to award multiple contracts for a more geographically limited set of services under Network Select. GSA generally describes these Select contracts as providing agencies with leading edge services and solutions with less extensive geographic and service coverage than that required by Networx Universal; specific Networx Select service requirements have not yet, however, been defined. Details of pricing structures and Select service delivery mechanisms are planned to be provided in the Networx Select request for proposals, which GSA intends to release in the summer of 2005. GSA anticipates awarding both the Networx Universal and the Networx Select contracts well before the expiration of the FTS2001 contracts. Notwithstanding the acquisition planning activities completed by GSA and the IMC to date, these entities face significant challenges in finalizing their program strategy to ensure that Networx is appropriately defined, structured, and managed to deliver those telecommunications services and solutions that will enable federal agencies to most efficiently and effectively meet their mission needs. Specifically, these challenges include: Ensuring that adequate inventory information is available to planners to provide an informed understanding of governmentwide requirements. Establishing measures of success to aid acquisition decision-making and enable effective program management. Structuring and scheduling the Networx contracts to ensure that federal agencies have available to them the competitively priced telecommunications services they need to support their mission objectives. Initiating the implementation planning actions needed to ensure a smooth transition from current contracts to Networx. It is important that GSA and its customer agencies have a clear understanding of agency service requirements in order to make properly informed acquisition planning decisions. According to our ongoing research on best practices in telecommunications acquisition and management, clear understanding comes at least in part from having an accurate baseline inventory of existing services and assets. More specifically, an inventory allows planners to make informed judgments based on an accurate analysis of current requirements and capabilities, emerging needs that must be considered, and the current cost of services. Although leading organizations acknowledge that establishing and maintaining such an inventory may be difficult, they view this baseline as an essential first step to high-quality telecommunications requirements analysis, and subsequent sourcing decisions associated with meeting those requirements. Despite this importance, it is not clear whether GSA and federal agencies have yet established the comprehensive, accurate inventories needed to support Networx planning. Mr. Chairman, you followed up on this issue in your December 17, 2003, letter to GSA asking to what extent such detailed inventories were currently being maintained and kept accurate and up-to- date for use both in acquisition planning and future contract transitions. In his response, the Administrator of General Services identified sources of information provided by GSA and the FTS2001 vendors—for example, monthly billing information—that would be helpful to agencies in developing inventories of existing services. In addition, the Administrator noted that GSA is examining methods of incorporating better billing and inventory data into the Networx program where practical. However, the Administrator did not provide specific information on the extent to which these inventories exist, or whether agencies are periodically validating that information to ensure that it is accurate and complete. Further, the Administrator acknowledged that the accuracy and completeness of telecommunications service inventories varies among agencies. As a result, without a clear understanding by GSA and its customer agencies of the FTS2001 services used today and the applications they support, it is unclear how properly informed Networx acquisition planning decisions can be made. Our research into recommended program and project measurement practices, which we affirmed in discussions with private-sector telecommunications managers, highlights the importance of establishing clear measures of success to aid acquisition decision making as well as to provide the foundation for accountable program management. Such measures define what must be done for a project to be acceptable to the stakeholders and users affected by it, and in so doing enables measurement of progress and effectiveness in meeting objectives. Although GSA has established program goals, it has not yet defined a comprehensive set of corresponding performance measures for the Networx acquisition program. According to GSA’s Assistant Commissioner for Service Delivery/Development, one of the criteria for measuring Networx success will be identical to that used for FTS2001—that is, savings as measured by contract service costs compared with best commercial pricing. Further, according to this official, this was the sole measure reported to the Office of Management and Budget for FTS2001. While low pricing is an important criterion reflected in program goals, GSA has not yet defined measures about how well its final acquisition plan will deliver the value (service plus price) that agencies need to improve their operations and meet their mission needs. For example, GSA’s Networx environmental assessment indicates that agencies want this program to support network planning and optimization, include simple and understandable fees, provide management of contracts and contractors on the agencies’ behalf, and include other elements of value. GSA’s Assistant Commissioner for Service Delivery/Development recognizes the importance of having such measures, and told us that GSA would be establishing such measures coincident with its actions to finalize the Networx Universal RFP in the coming months. It will be important that GSA follow through on this commitment to establish that appropriate set of measures to evaluate the intended business value of the Networx program and enable the effective management of this significant program over time. Once agency requirements are adequately understood and measures of success defined, structuring and scheduling the Networx contracts to successfully encourage industry competition to obtain low prices and high-quality, innovative services becomes the next challenge. The varying views of industry representatives commenting on the request for information raised fundamental questions about the soundness of the proposed acquisition approach for accomplishing this. For example, large, interexchange carriers, like those that hold the current FTS2001 contracts, generally agreed with the broad scope of the Universal contracts. They further suggested that services offered under Networx Select and Universal should be mutually exclusive, and that all carriers should be allowed to compete for both. In contrast, other carriers criticized the approach. These carriers asserted that some major telecommunications providers might be precluded from bidding on the Networx Universal contracts because of the broad service and ubiquitous geographic coverage requirements described in the request for information. For example, one vendor stated that it was quite possible that only traditional long distance carriers could effectively bid for Universal, thus denying many players in the industry a realistic chance to compete for major portions of the federal long distance business. One carrier noted that, based on the procurement timetable, the timing of the award for the Select contracts would minimize the opportunity to compete for long-distance telecommunications services. Because of the 9-month lag between the Universal and Select acquisitions indicated in the proposed acquisition schedule, agencies could be asked to make decisions regarding their use of awarded Universal service contracts before information is available regarding Select leading edge services and solutions that may be more suitable for their needs. Defining an acquisition strategy that appropriately balances the need to ensure the continuation of existing telecommunications services in all current government locations with encouraging strong competition to obtain best value is a daunting challenge. However, proceeding from a clear understanding of requirements and measures of success—as I previously discussed—should aid in meeting this challenge by providing guideposts for a decision that strikes an appropriate balance on contract scope, program structure, and acquisition schedules that can deliver to agencies competitively priced solutions that meet their mission needs. Further, continuing to solicit and effectively implement feedback from stakeholders should help GSA achieve this goal. As we reported to you in March 2001, the current FTS2001 contracts got off to a rocky start as significant delays in transitioning to the new contracts hindered timely achievement of program goals. Factors contributing to those delays included a lack of data needed to accurately measure and effectively manage the transitions, inadequate resources, and other process and procedural issues. Ultimately, GSA did take action on all of our recommendations and the transition to the FTS2001 contracts was finally completed. In subsequent testimony before you in April 2001 we noted the importance of incorporating the lessons learned from this transition into future procurements. Specifically, we stated that “the process of planning and managing future telecommunications service acquisitions—both by GSA and by the agencies themselves—will benefit from an accurate and robust inventory of current telecommunications services. Further, the value of this critical program to customer agencies will be improved through the application of lessons learned in streamlining and prioritizing the contract modification process, in effectively and expeditiously resolving billing problems, and in holding contractors accountable for meeting agency requirements in a timely manner.” Those in industry who commented on the Networx request for information also noted the need for strong and comprehensive program management to ensure successful transition, including not only the availability of accurate inventories but also defined contractor and government responsibilities. While GSA recognizes the importance of transition planning, it has not yet fully addressed these issues. GSA has emphasized that its development of the Networx program included an analysis of lessons learned from existing programs and previous acquisitions. Further, in his February 11 letter in response to your inquiry about agency inventories, the Administrator outlined the proactive steps GSA plans to take, including actions to establish a working group and to improve the availability of accurate inventory information to support the transition. According to the GSA’s Associate Commissioner Service Delivery/Development, these actions will also include developing processes and procedures, identifying funding needs, and training agency personnel in order to support a smooth contract transition. As acquisition plans are finalized in the coming months, it will be important that GSA follow through on these initial steps to ensure that the transition to the new contracts proceeds efficiently and seamlessly, and that a repeat of the FTS2001 transition difficulties is avoided. In summary, Mr. Chairman, Networx represents a critical opportunity to leverage the strength and creativity of the telecommunications marketplace to make the vision of delivering to agencies the telecommunications business solutions they need to perform their missions better and more cost-effectively a reality, and in so doing to carry the federal government forward well into the 21st century. To accomplish this, however, GSA will need to overcome significant challenges and demonstrate solid leadership. Likewise critical will be stakeholder commitment. Actions taken and decisions reached in the coming months to more fully define the Networx program and finalize an appropriate acquisition strategy will significantly influence the telecommunications choices federal agencies will have for the next several years. Unless GSA follows through to resolve the challenges outlined today, the potential of Networx may well not be realized. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have at this time. Should you have any questions about this testimony, please contact me by e-mail at [email protected] or Kevin Conway, Assistant Director, at [email protected]. We can also be reached at (202) 512-6240 and (202) 512-6340, respectively. Another major contributor to this testimony was Michael P. Fruitman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Genera1 Services Administration (GSA) has initiated planning for its next-generation telecommunications acquisition program, known as Networx, which will replace the current Federal Telecommunications System (FTS) 2001 for longdistance and international services. It will also replace contracts for wireless and satellite communications products and services. Planning for this acquisition is occurring within an environment of tremendous change--in the industry, in underlying services and technology, and potentially in the regulatory environment. In this context, Networx can offer a significant opportunity for the federal government to flexibly acquire telecommunications services at competitive rates and apply innovative solutions to improving agency operations. At the request of the Chairman of the House Committee on Government Reform, GAO is providing an overview of acquisition planning steps completed to date, along with its assessment of challenges facing GSA and federal agencies as this acquisition proceeds. Over the past year, GSA has acted to ensure that all interested parties-- including industry and agency users--have had a chance to comment on the development of the successor to FTS2001 and associated contracts. In its planning for the Networx acquisition, GSA cited five goals for the program: (1) continuity of telecommunications services, (2) best value, (3) strong competition, (4) a broad range of services and providers in a changing marketplace, and (5) expanded opportunities for small businesses. To achieve this, GSA plans two acquisitions: Networx Universal--broadranging services with global coverage, and Networx Select--leading-edge services but more geographically limited. To take full advantage of the opportunities offered in these new contracts, GSA will need to address four key challenges: (1) ensuring that an adequate inventory of information about existing telecommunications services and assets is available, to give planners an informed understanding of governmentwide requirements; (2) establishing specific measures of success to aid acquisition decision making and effective program management; (3) structuring and scheduling the contracts to ensure timely delivery of competitively priced telecommunications services that meet agency mission needs; and (4) ensuring a smooth transition from the current contracts by initiating appropriate implementation planning actions. Both leadership from GSA and commitment from stakeholders in resolving these issues will be essential to establishing efficient, cost-effective, and secure telecommunications services. If this can be achieved, the Networx contracts will be optimally positioned to leverage the power and creativity of today's telecommunications marketplace to carry the federal government forward well into the 21st century.

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FSA manages and administers student financial assistance programs authorized under title IV of the Higher Education Act of 1965 (HEA), as amended. These postsecondary programs include the William D. Ford Federal Direct Loan Program (often referred to as the “Direct Loan”), the Federal Family Education Loan Program (often referred to as the “Guaranteed Loan”), the Federal Pell Grant Program, and campus-based programs. Annually, these programs provide more than $50 billion in student aid to approximately 8 million students and their families. As a consequence, the student financial aid environment is large and complex. It involves about 5,300 schools authorized to participate in the title IV program, 4,100 lenders, and 36 guaranty agencies. Currently, FSA oversees or directly manages approximately $200 billion in outstanding loans representing about 100 million borrowers. Congress has recognized the need to make federal agencies more results- oriented by shifting from a focus on adherence to required processes to a focus on achieving program results and customer satisfaction. Toward this end, Congress established PBOs, which are discrete management units remaining in their current department under the policy guidance of the department secretary. PBOs are to commit to clear management objectives and specific targets for improved performance. These clearly defined performance goals, coupled with flexibility in managing operations and direct ties between the achievement of performance goals and the pay and tenure of the head of the PBO and other senior managers are intended to lead to improved performance. In October 1998, Congress established FSA as the government’s first PBO. As defined in the legislation, the specific purposes of the PBO are to improve service in the student financial assistance programs; reduce costs of administering the programs; increase accountability of officials; provide a greater flexibility in management; integrate information systems; implement an open, common, integrated delivery system; and develop and maintain a system containing complete, accurate and timely data to ensure program integrity. FSA’s enabling legislation also, among other things, requires the appointment of a chief operating officer; requires the development of 5-year and annual performance plans; requires the PBO, through the secretary, to report annually on the performance of the PBO; requires the PBO to have performance agreements for the COO and other senior managers; requires the COO in consultation with the secretary to appoint a student loan ombudsman; allows for the payment of performance bonuses to the COO and other senior managers; allows FSA to make use of certain personnel and procurement flexibilities. We have reported on selected agencies’ use of performance agreements, including FSA, the Department of Transportation, and the Veterans Health Administration. Although these three agencies developed and implemented agreements that reflected their specific organizational priorities, structures and cultures, we identified five common emerging benefits from each agency’s use of the agreements. These emerging benefits include: strengthened alignments of results-oriented goals with daily operations, collaboration across organizational boundaries, enhanced opportunities to discuss and routinely use performance information to make program improvements, results-oriented basis for individual accountability, and continuity of program goals during leadership transitions. In addition to FSA, other PBOs include the U.S. Patent and Trademark Office (USPTO), established as a PBO in March 2000, and the Federal Aviation Administration’s Air Traffic Organization (ATO), in December 2000. Similar to FSA, USPTO, and ATO are subject to the policy direction of their parent departments and are to have the flexibility and independence to operate more like a business, with greater autonomy over their budget, hiring, and procurements in carrying out their functions. Further, USPTO and ATO are also required to designate an individual responsible for operational improvements, develop multiyear and annual performance plans, implement performance agreements, and provide for performance bonuses. The British Next Steps initiative was used as a model in crafting the PBO concept in the United States. The Next Steps agencies—now known as executive agencies—are still the predominant form of service delivery in the United Kingdom. As of December 2001, there were over 130 executive agencies covering more than three-quarters of the British civil service. FSA has taken several steps toward developing and implementing a strategic direction—its plan for achieving the purposes Congress specified for it in the PBO legislation—but, even though these efforts have shown promising results, additional actions are needed. FSA’s performance plan discusses its three strategic goals—increase customer and employee satisfaction while decreasing unit cost—and the annual goals and strategies it will use to accomplish these three goals. The performance plan, however, could be more useful to congressional decision makers with respect to systems integration and program integrity. FSA has also begun to implement a balanced scorecard—a report that links employees’ day-to-day activities with the organization’s progress toward its strategic goals, but even with the scorecard, some employees have found it difficult to make this link. Finally, FSA and the department have not met its requirement to report annually to Congress on its progress in meeting the goals laid out in its performance plan, along with other requirements specified in the PBO legislation. FSA’s performance plan discusses strategic goals for increasing customer and employee satisfaction and reducing unit costs. In addition, it includes measures for gauging FSA progress in meeting each of these strategic goals. (See table 1.) FSA’s management uses these goals and associated performance measures to determine areas for quality improvement, monitor changes in customer perceptions, and evaluate the success of ongoing quality improvement efforts in its student aid delivery. To measure customer and employee satisfaction, FSA uses the American Customer Satisfaction Index (ACSI) and the Gallup Q12, respectively. Both measures are used by the private sector and other government entities, and, as a result, FSA can compare its own scores with those of others. FSA’s scores on both the ACSI and Gallup Q12 increased from fiscal year 1999 through fiscal year 2001, suggesting improvement in both areas. Indeed, comments from representatives from several higher education associations we interviewed and who work closely with FSA also suggest that customer satisfaction has improved. For example, an association official noted the willingness of FSA managers to listen and learn from students, schools, and lending institutions. To track reductions in costs, FSA has developed a unit cost measure. FSA uses the measure to demonstrate how it is reducing the cost of administering the student aid programs. However, FSA’s current calculation has some limitations in this regard. First, in calculating unit cost, FSA divides budget obligations (an obligation reserves funds for an eventual cash payment for goods and services) by the total number of people who received aid. This means that FSA’s unit cost does not measure costs, per se. Further, the unit cost calculation does not include obligations FSA sees as beyond its control—obligations for services shared with the department (e.g., telecommunications) and obligations associated with loan consolidation, which is influenced by demand, for example. Obligations FSA considers as fully under its control include those for salaries and benefits, operations and modernization contracts, and general operations, such as travel, training, printing, and equipment. This means that unit cost does not measure total obligations per person receiving aid. Second, the way FSA currently calculates unit cost is a change from the way it calculated it in the past. This change makes comparing unit cost across years difficult. In 1998 through 2000, FSA calculated unit cost by dividing the actual cost (those it considered under its control) of administering student aid (instead of budget obligations) by the total number of people who had received aid. According to FSA officials, FSA changed the calculation of unit cost to make it more useful as a management tool, in part because actual costs for a particular year are sometimes not known until well into the next fiscal year and because managers are more accustomed to using budget obligations, in part because of their experience in using obligations in budget formulation and execution. Using actual cost in the calculation, the unit cost in fiscal year 2000 was $19.08. When FSA recalculated unit cost for fiscal year 2000 using budget obligations instead, the amount changed to $20.14. FSA officials told us that they believe the unit cost measure is a useful tool for internal management information purposes, allowing managers to gauge the efficiency of their operations and to highlight, for its employees, the importance of reducing costs. Although these are important objectives, FSA’s unit cost measure is less useful to congressional decision makers because, among other things, FSA does not include all program obligations in the measure nor explain the basis of its measure in reporting on its performance. According to the Federal Accounting Standards Advisory Board (FASAB), decision makers in Congress as well as the public should be provided with information on the full costs of programs and their outputs. The FASAB has also stated that agencies should develop and report cost information on consistent bases and that using different accounting bases and measurement methods can confuse users of cost information. Because FSA does not relate its unit cost measures to total program costs and because it has changed its method for calculating it, it is difficult to discern whether changes in the measure are indicative of changes in total program costs. In addressing systems integration and program integrity, FSA’s performance plan has several limitations. It is not always obvious how the goals and strategies included in the plan relate to systems integration, or how FSA can effectively assess systems integration by relying on measures for its strategic goals. Moreover, the performance plan provides only limited information regarding FSA’s strategies for achieving program integrity. Congress designated FSA as a PBO, in part, to encourage the integration of the many, disparate information systems used to deliver student financial aid. In 1997, we reported that Education would likely be unable to correct longstanding problems resulting from a lack of integration across its student financial aid systems until a sound systems architecture was established and effectively implemented. FSA subsequently devised an enterprise-wide systems architecture in response to our conclusion that such an architecture was needed, and in response to our related recommendations. As part of its continuing systems integration efforts, FSA recently initiated a new approach, commonly referred to as middleware, to provide users with a more complete and integrated view of information contained in multiple databases. We recently reported that in selecting middleware, FSA adopted a viable, industry-accepted means for integrating and using its existing data on student loans and grants. FSA’s implementation of the middleware technology remains in its early stages. FSA now needs to properly implement and manage its strategy. If implemented and managed properly, this new technology should help ameliorate FSA’s longstanding database integration problems. While FSA’s strategy for integrating its many computer systems shows promise, both we and Education’s IG have found that neither its performance plans nor its subsequent annual reports readily provide information about its progress in integrating systems. As a step toward providing this information, the IG recommended that FSA include an overall systems integration goal that was objective, quantifiable, and measurable. The IG stated that an overall systems integration goal would help to inform Congress and others of FSA’s progress in integrating systems. However, FSA’s COO disagreed with this recommendation, arguing that FSA could not achieve its strategic goals without integrating its systems and therefore a distinct systems integration goal was unnecessary. While FSA’s performance plans included numerous goals and strategies, it is not always obvious how they relate to systems integration. For example, the performance plan identifies one of FSA’s strategies as “create the data mart.” However, what the data mart is or how completing it would bring FSA closer toward integrating its systems is never explained. Similarly, in an earlier performance plan, FSA referred readers to its Modernization Blueprint— its plan for integrating and modernizing its student aid information systems—for additional information on its goals and strategies. However, Education’s IG characterized the Modernization Blueprint as lengthy, complex and lacking clear performance goals and measures. FSA relies on the measures for its strategic goals to reflect the results of its system integration effort, even though they were not specifically designed to do so. Many factors unrelated to FSA’s systems integration efforts influence these measures. FSA’s technical assistance activities, for example, may result in increased customer satisfaction even though these activities do not involve systems integration. On the other hand, FSA could make technological progress in integrating its systems that would not be evident to the customer. For example, before implementing systems to integrate databases, FSA spends considerable time developing the databases. Measures of customer satisfaction would not capture these initial efforts. As a result, FSA’s customer satisfaction measure may not fully reflect progress made or lack of progress with regard to systems integration. Another goal Congress prescribed for FSA was to enhance program integrity. FSA had no strategic goal for program integrity in its fiscal year 2001 and earlier performance plans, but draft documents FSA provided to us suggest that its fiscal year 2002 plan may include such a goal. It is unclear from these draft documents, however, how FSA will define measurable outcomes to demonstrate its progress in enhancing program integrity. FSA works to ensure program integrity in many ways, including providing technical assistance to schools to increase compliance with regulations, working to prevent defaults, and collecting on defaulted loans. FSA’s draft fiscal year 2002 performance plan reflects its increasing reliance on providing technical assistance to schools as a way to ensure their compliance with financial aid rules and regulations. In the past, FSA relied much more extensively on conducting on-site program reviews to assess schools’ compliance with rules and regulations. The following list, taken from FSA’s fiscal year 2002 performance plan, shows the technical assistance strategies FSA plans to implement during fiscal year 2002: Develop and deliver a series of services to new schools, which includes assistance during the first 12 months of their participation in Title IV programs. Identify trends in risk areas and provide targeted technical assistance to schools. Conduct at least three national conferences for schools. Develop a “How To” guide with our oversight partners on processing school closures that focuses on reducing the impact to students. Promote the Title IV schools’ quality performance by providing them with tools for understanding and improving management practices, program requirements, and verification outcomes. Identify areas for improving compliance effectiveness and take the appropriate steps to fix them. While FSA has developed strategies intended to improve schools’ regulatory compliance, it is not clear how FSA will know whether its strategies are effective. First, FSA has not developed an indicator of schools’ compliance. Second, while FSA’s fiscal year 2002 performance plan defines success for the strategies shown above, the definitions may not be appropriate. For example, FSA plans to conduct at least three national conferences for schools to disseminate information about student financial aid programs and processes including program integrity. FSA states that high scores on participant evaluations of these national conferences will indicate its success in disseminating this information. While participant evaluations may reflect the quality of presentations, they will not indicate whether the information helped institutions comply with applicable laws, regulations, and procedures. Another way that FSA ensures program integrity is through its efforts to collect and prevent defaulted student loans. FSA’s draft fiscal year 2002 performance plan specifies the goals it has for default management; however, it includes only limited information about the strategies it will use to achieve those goals. For example, in its fiscal year 2002 plan, FSA includes the following goals for default management: increase the fiscal year 2002 default recovery rate to 15 percent, ensure that the defaults recovered exceed the total default claims for the fiscal year, demonstrate the pursuit of improved default management and prevention strategies, and keep the default rate under 8 percent. FSA’s plan, however, only includes one strategy to address these goals—expand the use of the National Directory of New Hires—a database matching program—to recover $200 million in defaulted student loans. As the result of not giving details on its strategies for default recovery and prevention, it is not clear how FSA will achieve its goals relating to default management and how its efforts help ensure program integrity. In order to help employees connect the work of individual teams to the FSA-wide strategic goals, FSA’s management has adopted the “balanced scorecard.” The scorecard is intended to provide a simple, one-page presentation of FSA’s performance on its three strategic goals. The scorecard also reports on team-specific contributions towards achieving the three strategic goals. Because the balanced scorecard approach is a new initiative (about one quarter of FSA’s teams are using it), FSA has not yet resolved some of the difficulties that staff have in linking scorecard results to their work. Some staff reported that it was difficult to understand how they could influence scores for customer satisfaction and unit cost measures. For example, one FSA manager told us that she thought the ACSI data was too complicated and at too high a level for it to be useful to front-line staff while others said their staff did not understand the unit cost calculation and how they could affect it. The PBO’s enabling legislation requires the COO, through the secretary, to report annually on the performance of the PBO to Congress based on its previous year’s performance plan. For fiscal year 2000, although FSA prepared an annual report, it was not submitted to Congress as required by the legislation. FSA submitted a draft fiscal year 2000 report to the department in March 2001; however, the draft was incomplete and not in compliance with the PBO legislation, according to a senior Education official. Despite attempts to finalize the report, Education, in a subsequent review of the draft late in the year, still found that the report did not comply with statutory requirements. Given the late date and in light of the fact that the subsequent year’s performance report would soon be due, Education decided not to submit the fiscal year 2000 report at that time. Instead, according to the official, Education and FSA plan to issue a combined report for fiscal years 2000 and 2001. The department has not yet received the combined report from FSA. In transmitting the report through the secretary, FSA is required to submit specific information related to the performance of the PBO, but FSA’s reports have been incomplete. The annual report must include, among other things, the evaluation rating of the performance of the COO and other senior managers including the amounts of bonus compensation awarded to these individuals, and recommendations for legislative and regulatory changes to improve service to students and their families, and to improve program efficiency and integrity. In the documents FSA submitted for fiscal year 1999 and in its draft report for fiscal year 2000, did not include required information such as recommendations for legislative and regulatory changes. In addition, while FSA included information about the amounts of bonus awarded to the COO and senior managers, it did not include the evaluation rating for them as required. FSA has begun to better organize its services and manage its employees, but gaps exist in its human capital strategy and it has not yet implemented performance management initiatives to fully develop and assess its employees. To better serve its customers and improve employee performance, FSA reorganized its operations, hired senior managers accountable for specific strategic goals, and encouraged accountability among all employees. However, FSA’s human capital senior manager has not been an active participant in setting FSA’s strategic direction. Also, FSA still faces challenges in planning for the succession, deployment, and training of staff. Moreover, FSA has not yet implemented a performance management system though its enabling legislation requires it to do so. Sound human capital principles state that organizations should be structured on the basis of their strategic goals, have a strategic vision, and ensure accountability for commitment to those goals and vision. FSA has taken steps to adopt these practices. Since being established as a PBO, FSA has restructured itself into three customer-oriented “channels”—one for students, schools, and financial partners (guaranty agencies and lenders)—-each led by a channel general manager. According to FSA officials, the realignment was intended to improve the organization’s performance and increase coordination of mission-critical activities. FSA also created a number of “enterprise” units to support the channels by focusing on internal customer or stakeholder needs. These units, each with its own enterprise director, focus on activities such as analysis, communications, and human resources. The operations of the chief financial officer (CFO) and chief information officer (CIO) are considered support organizations responsible for technical and financial management practices and infrastructure. Figure 1 shows how FSA’s total workforce of about 1,200 employees is organized and how the COO positioned his office in the middle of FSA’s official organization chart to stress the importance of the three customer-oriented channels. In addition to changing the way its staff is organized, FSA also created a management council to steer the organization strategically and ensure communication among the channels. The council is comprised of the COO, CIO, CFO, each of the channel general managers, and representatives from FSA’s primary contractors responsible for modernizing information systems. To hold FSA accountable for achieving results, FSA’s enabling legislation requires the COO and each senior manager to enter into an annual performance agreement that sets forth measurable organizational and individual goals. According to FSA officials, the organization’s annual performance plan serves as the basis of these agreements. The annual goals and strategies for which each manager has responsibility serve as his or her agreement. Since the annual goals and strategies contribute to one or more of FSA’s three strategic goals, the performance agreements ensure that managers are responsible for contributing to the organization’s overall performance. For example, a channel manager may be responsible for increasing the number of aid applications filed electronically and, in so doing, help FSA achieve its strategic goals of increasing employee and customer satisfaction and reducing unit cost. Each fall, senior managers submit to the COO a document indicating how their work over the prior year has led to the accomplishment of the annual goals and strategies in their performance agreements. If they achieve their goals, they are awarded bonuses—50 percent of the bonus is based on the COO’s evaluation of the managers’ overall contribution; the remaining 50 percent is based on the extent to which FSA reached its three strategic goals. The COO is also eligible for a bonus based on the secretary’s evaluation of the COO’s performance. The COO and FSA senior managers who have performance agreements with the COO are also subject to removal for failing to achieve sufficient progress toward performance goals. In fiscal year 2001, the COO received a bonus of $60,165 and 17 other senior managers received bonuses ranging from $10,277 to $30,082. FSA has also tried to encourage and reward high performance throughout the organization by awarding bonuses to all staff based on the COO’s assessment of FSA’s success in meeting its strategic goals. For fiscal year 2001, staff received a bonus equivalent to 90 percent of their pay for one biweekly period. An FSA employee making $1,000 per biweekly period would receive a bonus of $900, for example. FSA has taken important steps towards developing its human capital, but gaps remain in its overall human capital approach. In its fiscal year 2002 performance plan and human capital plan FSA laid out its human capital priorities, such as seeking to implement employee incentive and recognition programs, but it did not discuss its strategy for using its human capital resources to drive the organization toward achievement of its three strategic goals. Our work on human capital management has shown that sound human capital practices require agencies to transform their traditional human resources function from a support office to a partner in setting the organization’s strategic direction, preparing for future needs by identifying pending retirements and anticipating hiring needs, and linking training and development activities to employee skill sets and expectations for job performance. FSA’s efforts in these areas, however, have fallen short because it has not fully addressed these critical elements of human capital management. The position of human resources unit director—the designated human capital senior manager—was not permanently staffed until May 2000—in part, because it was thought of as “second tier,” according to one official. Further, the existing human resources director does not have an active role on FSA’s Management Council. While some of the members of the Management Council may have human capital responsibilities for their particular offices, no one person on the council has overall responsibility for FSA’s human capital planning and management. The strategic role of human capital staff is vital if FSA is to increase the effectiveness of its current human capital management practices. However, nothing in the performance plan or FSA’s recently proposed human capital plan suggests that the human capital function will be elevated in stature within FSA and hold “a place at the table” among senior management in decision making. In the high-performing organizations that we studied, human capital staff participated as full members of management teams and ensured that those teams proactively addressed human capital issues. For example, several organizations we studied told us that they involved their human capital staff as decisionmakers and internal consultants by having leaders of their human capital staff serve on senior executive planning committees similar to FSA’s Management Council. In addition, while FSA, in its draft human capital plan, has proposed expanding the role of its human capital unit to include serving as a liaison to the department in carrying out agency-wide programs and policies, and overseeing specific human capital initiatives within FSA, it proposed a similarly expanded role in a September 2000 plan that was never approved by the department. As of September 2001, about 38 percent of FSA’s workforce was eligible for retirement, yet FSA does not have a formal plan to address pending retirements. Should those eligible to retire do so, FSA will be faced with a substantial loss of institutional knowledge. FSA’s draft human capital plan begins to address attrition by discussing how it will work to retain and reward top performers, get rid of poor performers, use contractors to complete appropriate business functions, but FSA has no hiring plans that address such factors as how many staff are needed and the skills they should possess. Having a plan that addresses such factors is important even though FSA cannot immediately hire individuals for key positions due to departmental hiring restrictions. According to several FSA officials, hiring has been problematic in light of special departmental procedures that have affected FSA’s ability to fill about 300 vacancies. These procedures—effective since January 24, 2001—restrict certain personnel selections, reassignments, and promotions at FSA and a number of other offices within the department. Currently, FSA can only reassign or detail its staff within the PBO, and it must request exemptions to these procedures for all other decisions related to hiring, promoting, or detailing staff. Decisions related to posting employment opportunities and extending employment offers, for example, must first be approved by the department. Between February 7 and December 7, 2001, FSA requested 73 exemptions to these procedures. Of these, 33 were approved, while the remaining have been denied or have not yet been acted upon. We found that concerns over hiring and the deployment of existing staff were particularly prominent in the Case Management and Oversight (CMO) unit in the schools channel, which performs functions critical to ensuring the integrity of FSA’s financial aid programs. Among other things, CMO staff certify schools’ eligibility to participate in student aid programs and enforce programmatic requirements. To more effectively use its staff and fulfill its responsibilities, CMO has instituted a variety of strategies. For example, CMO has recently implemented an assessment tool to identify schools with the greatest likelihood of noncompliance with financial aid regulations. Using this tool, CMO believes it can better target its staff’s enforcement activities. However, in three of the five regional offices we visited, CMO officials told us that these efforts were not enough. These officials expressed concern that, without sufficient staff, institutional oversight and technical assistance activities could decrease, potentially compromising the integrity of the financial aid programs. FSA has expanded the training opportunities available to its staff since its PBO designation. Table 2 provides a description of current training programs. Even though FSA has expanded the courses it offers, it has yet to implement tools that would allow it to assess its employees’ training needs. FSA has proposed what it calls the “performance development process” (PDP). The PDP has two core components—improving employee performance by introducing Individual Development Plans (IDP) to the workforce and documenting employee skills through a comprehensive skills catalogue—intended to identify employees’ training needs. IDPs would allow all staff to link their professional goals to the goals of FSA by developing work plans in collaboration with their supervisors. FSA managers would appraise employees’ job performance by determining whether they’ve met, exceeded, or failed to reach the goals they have self- assigned in their IDP. The second part of the PDP, the skills catalogue, will attempt to allow FSA managers to identify employees’ training needs by ascertaining the skills they already have. FSA proposed the PDP not only as a sound human capital management tool, but also in order to meet legislative requirements. The PBO legislation requires FSA to establish a performance management system that creates goals for the performance of employees, groups, and the organization consistent with the PBO’s performance plan. Despite the steps discussed above, FSA’s relationship with its union has made implementation of many of these initiatives difficult. Both FSA and union officials have had difficulty negotiating on related proposals. According to its collective bargaining agreement, the union has the opportunity to review actions affecting any aspect of employee working conditions, including those related to training, development, and appraisals. According to an FSA official, because FSA and the union could not reach agreement on the proposed PDP, due to unresolved differences regarding the appraisal component of the PDP, FSA has recently withdrawn the proposal from negotiations, leaving the status of an integral component of its human capital plans undecided. Education continues to take steps to clarify FSA’s level of independence and its relationship with other Education offices. The legislation establishing FSA as a PBO provided that, subject to the secretary’s direction, FSA would exercise independent control with respect to certain functions. To address this issue, Education and FSA, under the previous administration, developed and signed memorandums of understanding (MOU) to specify the authorities provided to FSA and procedures concerning how FSA would interact with other Education offices. With the arrival of the current administration in January 2001, Education established special interim procedures for all its department units, including FSA, that were intended to ensure that personnel and financial resources are managed effectively and efficiently throughout the department while long term management plans are being developed. As a result of the interim procedures, Education now provides greater direction and oversight of FSA than did the previous administration. Education is currently reviewing FSA’s role and responsibilities as part of that overall departmentwide management planning effort. The results of this planning effort will be used to make future decisions concerning FSA’s level of independence and its relationship to other Education offices, according to Education officials. The legislation establishing FSA as a PBO provided that, subject to the secretary’s direction, FSA would exercise independent control with respect to certain functions. In addition, the secretary in agreement with the COO, is authorized to allocate to the PBO such other functions that they determine necessary to achieve the purposes of the PBO. Interviews with FSA and former Education officials indicated that together they struggled with balancing the PBO’s independence and identifying how the organization fit into the structure of the department. For example, issues of service duplication with other Education offices in areas like human resources and information technology had to be balanced with FSA’s desire to mold these functions to meet its mission. To address such issues, the department and FSA, under the previous administration, developed and signed memorandums of understanding (MOUs) for human resource management, acquisition and contracting, and information technology. These documents delegated certain authorities to the COO and set out policies and guidelines to be followed because FSA’s operations in these areas interacted with the rest of the department. For example, in the area of human resources, the MOU delegated authority for, among other things, establishing the performance management system and hiring to FSA. Because some of these human capital functions required union involvement to complete, the MOU required FSA to work in consultation with the department to finalize any changes that impact the terms of the department’s collective bargaining agreement. Since the change in administration in January 2001, the department has been reassessing the MOUs and FSA’s relationship with the department. In contrast to the past, FSA is currently subject to special interim procedures established by the department for all of its units in January 2001 and updated in September 2001. According to a departmental memo, the special procedures were put into place to allow the department to manage its personnel and financial resources in the most effective and efficient ways possible and in accordance with the President’s Management Agenda. An overall strategy for improving the management and performance of the federal government, the Agenda specifically includes taking actions that result in FSA’s student financial aid programs no longer being designated as high risk by GAO. The special procedures, for principal offices with senior political appointees in place, require prior departmental approval to (1) advertise and fill positions at the senior level, (2) reassign employees, (3) hire or continue the services of any consultant, or (4) award any new contracts above $100,000. The special procedures pertaining to FSA are stricter and the same as those applicable to principal offices with vacancies at the senior political level. These procedures require department-level officials to review and act on all administrative, management, and policy issues. As a result of these changes, FSA’s independence has lessened. As previously discussed, for example, hiring has been problematic in light of the special departmental procedures and has affected FSA’s ability to fill about 300 vacancies, according to several FSA officials. Education responded to the President’s Management Agenda by developing its Blueprint for Management Excellence. The Blueprint specifies the steps it will take to have GAO’s high-risk designation removed from its student financial aid programs and addresses other longstanding management challenges facing the department. As noted in its Blueprint, the department is reviewing the prior MOUs to “determine what is and is not working as intended.” The Blueprint also provides that after consultation with the community and members of Congress, the department will resolve relationship issues between FSA and other department offices. To help develop comprehensive strategies to implement its Blueprint, the department is currently working with the National Academy of Public Administration (NAPA) and the Private Sector Council(PSC). According to Education officials, decisions concerning FSA as well as plans to address departmental management challenges will be based on the results of these efforts. Education expects its work with NAPA and PSC to result in a final report, scheduled to be issued in June 2002. Congress established FSA as a PBO in hopes that doing so would result in long sought operational changes in its programs. As we have discussed, elements of PBO reform include an expectation for results in exchange for flexibility. Although established as a PBO for a relatively short time, FSA has made important progress in undertaking reforms and its performance to date, as reflected in gains in customer and employee satisfaction, shows promise. Despite these gains, FSA needs to make additional improvements. As a PBO, FSA must ensure that it meets its obligation to report the progress it is making towards the goals Congress established for it. Key to reporting results is submitting complete, useful, and timely information to Congress. Because of the longstanding concerns over FSA’s lack of the financial and management information needed to ensure the integrity of the student financial aid programs, FSA needs to clearly inform Congress and the public of its progress in addressing this issue. In particular, FSA needs to improve its reporting of the progress it is making with regard to implementing its plans for integrating its student financial aid data systems and enhancing the integrity of its student loan and grant programs. In addition, in light of the complexity of FSA’s unit cost calculation as well as recent changes in how it calculates costs, it will be important for FSA to disclose these issues in future performance plans and reports. FSA also needs to ensure it makes human capital management an integral part of its strategic approach for accomplishing its mission. Without doing so, FSA cannot ensure that its workforce is adequately prepared to meet future challenges and accomplish its mission. In particular, FSA needs to address critical issues including workforce planning and development. To ensure that congressional decision makers and the public understand the measure FSA uses to gauge its performance with respect to the costs of administering student financial aid programs, we recommend that the secretary of education direct FSA’s COO to fully disclose in its performance plans and subsequent performance reports the bases of its unit cost calculation and to clarify what costs are included and excluded from the calculation. To ensure accountability for making continued progress toward its legislative mandate to integrate systems, we recommend that the secretary of education direct FSA’s COO, in collaboration with the secretary, to develop and include clear goals, strategies, and measures to better demonstrate in FSA’s performance plans and subsequent performance reports its progress in implementing plans for integrating its financial aid systems. To ensure accountability for enhancing the integrity of its programs, we recommend that the secretary of education direct FSA’s COO, in collaboration with the secretary, to develop performance strategies and measures that better demonstrate in its performance plans and subsequent performance reports its progress in enhancing the integrity of its student loan and grant programs. In particular, FSA should develop measures that better demonstrate whether its technical assistance activities result in improved compliance among schools and additional strategies for achieving its default management goals. To inform Congress about FSA’s performance and to comply with statutory requirements, we recommend that the secretary of education and FSA’s COO work collaboratively to take the steps necessary to ensure that complete and timely annual performance reports are submitted to Congress. To ensure that FSA’s workforce is adequately prepared to meet future challenges and accomplish its mission, we recommend that the secretary of education and FSA’s COO coordinate closely to develop and implement a comprehensive human capital strategy that incorporates succession planning and addresses staff development. In written comments on our draft report, Education agreed with our reported findings and recommendations and discussed its efforts to address longer term and structural issues that hinder the efficient and effective performance of FSA and the department. In response to our recommendation regarding FSA’s unit cost calculation, Education told us that it is in the process of working with FSA senior management to refine the measure and will stop using the current measure in the mid-year amendment to the FSA 2002 performance plan. In addition, Education said that it would include a detailed explanation of how unit costs are calculated in the upcoming annual performance report. Moreover, FSA’s performance plan will be revised to establish measurable goals and milestones for systems integration efforts to provide both direction to FSA and enhance its accountability. In response to our recommendation regarding program integrity issues, Education said that it is examining new performance measures that focus on compliance and risk. Also, Education said that it is working with FSA to finalize the 2000-2001 annual performance report and told us that it will submit a report that meets all statutory requirements to Congress soon. Finally, Education said that it is developing comprehensive strategies integrating human capital management, competitive sourcing, and restructuring for the entire Department. As part of this effort, Education said that it would direct FSA’s COO to implement and execute the steps in these strategies that are applicable to FSA’s goals and objectives. Education also provided technical clarification, which we incorporated when appropriate. Education’s written comments appear in appendix I. We are sending copies of this report to the secretary of education and other interested parties. We will also make copies available to others upon request. This report is available at GAO’s homepage, http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-8403 or Jeff Appel at (202) 512-9915. Other contacts and acknowledgments are listed in appendix II. In addition to those named above, the following people made significant contributions to this report: Jonathan Barker, Patricia Bundy, Patrick DiBattista, Joy Gambino, Simin Ho, and Judith Kordahl.

The Department of Education's Office of Federal Student Aid (FSA) administers more than $53 billion in financial aid for more than 8.1 million students. Since 1990, GAO has included student financial aid on its high-risk list. To address these and other long-standing management weaknesses, Congress established FSA as a performance-based organization (PBO) within Education in 1998. To develop and implement a strategic direction, FSA set three strategic goals, created indicators to measure progress toward these goals, and developed a tool to link employees' day-to-day activities to these goals. The goals are to (1) increase customer satisfaction, (2) increase employee satisfaction, and (3) reduce unit cost. FSA's efforts have generally improved customer and employee satisfaction scores. FSA has begun to implement some human capital practices to better organize its services and manage its employees. But gaps exist, and FSA has not yet implemented performance management initiatives to develop and assess its employees. To better serve customers, FSA reorganized to reflect its different customers--students, schools, and financial partners. To encourage accountability, FSA is linking staff bonuses to FSA's strategic goals. Education continues to clarify FSA's level of independence and is now reviewing FSA's role and responsibilities as part of the departmentwide management planning effort.

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As of September 30, 2010—the end of the 2 fiscal years during which Recovery Act awards were made—NIH made more than 21,500 grant awards using Recovery Act funds. In August 2010, we reported that NIH used standard review processes—peer review or administrative review— and standard criteria to award extramural scientific research grants with Recovery Act funding. These NIH Recovery Act grant awards were made to three grant categories. The grants varied in award size, geographic distribution, award duration, and research methods, consistent with scientific research grants funded with annual appropriations. The act required that these funds be obligated by NIH within a 2-year window—specifically, in fiscal years 2009 and 2010, though the activities funded by the grant may occur after fiscal year 2010. OMB guidance requires recipients of Recovery Act funding—including NIH Recovery Act grantees—to report on the number of jobs supported by the Recovery Act on a quarterly basis to the nationwide data collection system. OMB developed recipient reporting guidance and deployed a nationwide data collection system at www.federalreporting.gov. According to OMB guidance, a grantee’s estimate of the number of jobs supported by the Recovery Act each quarter must be expressed in terms of FTEs, which are calculated as the total number of hours worked and funded by the Recovery Act within a reporting quarter divided by the quarterly hours in a full-time schedule, as defined by the recipient. According to the OMB guidance, federal agencies that award Recovery Act funds should establish internal controls to ensure data quality, completeness, accuracy, and timely reports to the www.federalreporting.gov Web site. In reviewing a selection of the reports submitted to www.federalreporting.gov by grantees of agencies across the Department of Health and Human Services (HHS), the HHS Office of Inspector General found that HHS had processes in place for reporting the use of Recovery Act funds. NIH officials also reported that HHS assesses the quality of reports filed by NIH Recovery Act grantees. For example, using data assessments performed by NIH, HHS assesses the quality of the data reported by Recovery Act grantees. NIH and NIH Recovery Act grantees collect information about the FTEs supported by NIH Recovery Act funding as well as information on the other impacts of this funding from a variety of sources. Specifically, NIH collects information about FTEs supported by the Recovery Act from the www.federalreporting.gov Web site. NIH grantees, including NIH Recovery Act grantees, also submit annual progress reports to NIH that include information such as the goals and progress of their research. NIH is also participating in the development of a multiagency collaboration (called Star Metrics) to track the employment, scientific, and economic impacts of its funded research projects—including Recovery Act grants. In addition, NIH gathers information from principal investigators working on priority research areas and prepares publicly available reports (known as Investment Reports) about the potential scientific impacts of NIH- funded research. NIH Institutes and Centers (IC) select the topics featured in these reports based on (1) the importance of the topic area within the body of research funded by the IC, (2) the level of funding provided by the IC to the topic area, and (3) the level of public interest in the topic area. NIH grantees also collect information about the jobs as well as other impacts of NIH grants, including those funded by the Recovery Act, using payroll records, and effort reporting systems—such as time cards, other internal accounting records, and publications. Data reported by all NIH Recovery Act grantee institutions to the nationwide data collection system and available to NIH indicate that the number of FTEs supported by NIH Recovery Act funds generally increased from December 2009 through September 2010, then generally remained steady from December 2010 through June 2011—the most recent quarters for which data are available. As shown in figure 1, the number of FTEs supported by NIH Recovery Act funding ranged from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. According to NIH officials, Recovery Act funds could eventually support a total of approximately 54,000 FTEs. This figure represents NIH’s estimated total of FTEs that could be supported throughout the Recovery Act. According to NIH officials, this estimate is projected based on the quarterly expenditure of funds reported by grantee institutions and the projected number of FTEs that NIH expects that these funds could support over the life of the Recovery Act. NIH expects that the Star Metrics program will provide additional information about the number and types of jobs funded by the Recovery Act. NIH officials reported that the Star Metrics program is an ongoing initiative and that the program is expected to release preliminary results regarding jobs in 2012. Like other NIH Recovery Act grantee institutions, data reported by our five grantee institutions also showed a general increase in FTEs. Specifically, the five institutions combined reported almost 1,000 FTEs in the quarter ending in December 2009, increasing to almost 2,000 supported FTEs in the most recent quarter for which data are available that ended in June 2011. (See fig. 2). Through responses to our data collection instrument 50 selected principal investigators at five grantee institutions provided additional information explaining how the Recovery Act funding supported FTEs. Nearly 30 percent of the 50 selected principal investigators reported that the NIH funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in the number of employees at their institution or avoid a reduction in the number of hours worked by current employees. For example, according to the selected principal investigators, 29 percent of the jobs supported by NIH Recovery Act funding at the five grantee institutions were new employees hired by the institution using Recovery Act funding, and 54 percent were current employees. One principal investigator reported using NIH Recovery Act funding to hire more than 10 employees, many of whom had recently been laid off or had been out of work for several months. According to selected principal investigators, a majority (54 percent) of the job positions supported by NIH Recovery Act funds were parttime and the mean number of hours worked per week for all supported positions was about 20, including for example, a mean of 9 hours per week for professors and 35 hours per week for students pursuing postgraduate degrees. (See app. II for more descriptive information about the FTEs supported by NIH Recovery Act funding.) NIH officials currently receive some information reported by NIH grantees about other impacts of NIH’s Recovery Act funding, and NIH is participating in a program that NIH officials expect could help track these other impacts. In response to our data collection instrument, two-thirds of our 50 selected principal investigators—who direct research at the grantee institutions—reported that the Recovery Act funding received in fiscal years 2009 and 2010 was used to purchase research supplies and equipment and lab testing services. In addition, the majority of our 50 selected principal investigators and NIH also reported preliminary results from research projects funded by the Recovery Act. NIH officials we interviewed said that principal investigators—who direct research at the grantee institutions—including those which received Recovery Act funding—currently report some information to NIH about the other impacts of NIH-funded research. This information generally includes purchases made by the principal investigators, as well as preliminary research results submitted to NIH in their annual progress reports. NIH is participating in the Star Metrics program—a multiagency collaboration currently involving about 77 grantee institutions—to track, among other things, the scientific and nonscientific impacts of its funded research grants, including social and workforce outcomes and economic growth. NIH officials expect that the Star Metrics program could provide more information about these other impacts. Officials told us that Star Metrics is currently developing an approach to capture this information, and that they expect to pilot the approach in 2012. However, at this time there is no expected completion date for reporting this information. In their responses to our data collection instrument, many of our 50 selected principal investigators reported that they used the Recovery Act funding they received from fiscal years 2009 through 2010 to purchase supplies, equipment, and testing services used in research. Some of the principal investigators also reported that in the course of conducting some of their Recovery Act-funded research, they were able to provide scientific training to health care professionals. The selected principal investigators provided anecdotal information about the other impacts of the selected grants. Recipients of Recovery Act funding, such as grantee institutions, do not systematically track these other impacts; however, they are not required by the Recovery Act to do so. In previous work on the Recovery Act, GAO identified difficulties in assessing other impacts, particularly in instances when data on the other impacts are not readily available. (See app. III for more details of the other impacts of NIH Recovery Act funding as reported by selected principal investigators.) Purchasing Supplies and Equipment. In their responses to our data collection instrument, two-thirds of our 50 selected principal investigators reported that they used the Recovery Act funding they received from NIH to purchase or lease laboratory equipment and supplies needed to conduct research. These transactions, which we corroborated by conducting a selected review of NIH Annual Progress Reports and Recovery Act recipient reports, could translate into additional sales and revenues for the vendors. According to the principal investigators, their transactions included biomedical equipment and supplies, office supplies, computer equipment, and software licenses. For example, one principal investigator reported purchasing highly specialized imaging equipment for $27,000, as well as other medical, laboratory, and office supplies. Purchasing Specialized Services. Over a quarter of our 50 selected principal investigators reported that they used NIH’s Recovery Act funding to purchase certain laboratory testing services—such as genetic sequencing—from other research facilities that were better equipped to perform the testing and analyses. For example, one principal investigator reported contracting with a small local research company to perform specialized DNA analysis needed to determine the causes of immune deficiency disorders. In addition, a couple of principal investigators reported that they used NIH’s Recovery Act funding to contract for consultations services, such as statistical analyses and the design of models needed for their research. Some principal investigators also purchased ancillary services that they said were needed to support clinical trials, such as services providing patient transportation, recruitment, and care. Scientific Training for Health Care Professionals. Nine of our 50 selected principal investigators also reported in our data collection instrument that in the course of conducting their Recovery Act-funded research they were able to provide scientific training to health care professionals. Some of these principal investigators cited the importance of exposing current and future physicians to research-based approaches for diagnosing and treating patients. For example, one principal investigator reported that while researching how to select treatments for cancer patients, new oncology researchers—fellows and junior faculty—were trained about the effects of human genetics on care delivery for cancer patients. According to this principal investigator, understanding the effects of genetics on cancer allows physicians to personalize the treatment options they offer to patients. The principal investigator also noted that the next generation of physicians needs to be knowledgeable about genomic approaches to cancer care, while developing the foundation for their research careers. According to another principal investigator, as part of research to determine why certain genes contribute to Alzheimer’s disease, health care professionals were trained to analyze complex genetic datasets and to develop software packages needed to efficiently perform the analysis. In responses to our data collection instrument, a majority of our 50 selected principal investigators who direct research at the grantee institutions reported on the preliminary results from their research projects supported with Recovery Act funds. According to the majority of our selected principal investigators these preliminary results could contribute to future scientific developments in preventive medicine, the early detection of diseases, and medical therapies. Additionally, one principal investigator reported that some of the results of their research could lead to the development of research capabilities to be used by other researchers. A few principal investigators, however, stated that it was premature to report any preliminary results from their NIH Recovery Act- funded research, because they were still conducting clinical trials and analyzing data. In general, scientific research—including NIH-funded projects—can be lengthy and complex, and take years to obtain results. Grantee institutions and principal investigators in our review and NIH officials we interviewed reported that they track the scientific impact of NIH research—including preliminary results from research funded through the Recovery Act—primarily through peer-reviewed publications. NIH officials also reported that they track certain priority research areas and communicate potential scientific impacts through its Investment Reports. According to NIH, when a sufficiently large body of research results have accumulated the agency plans to prepare reports (similar to its Investment Reports) that highlight the impact of its Recovery Act- funded research. Other metrics used to track scientific impacts—including for Recovery Act-funded research—as reported by principal investigators in our review include the filing and approval of patent applications, the ability to secure future grant funding, presentations at professional meetings, utilization of products produced from their research, and changes to health care policies and clinical practices implemented as a result of their research. As noted earlier, the majority of our selected principal investigators provided preliminary results from their research projects supported with Recovery Act funds. The following are examples of these preliminary results:  Prevention of Diseases. One principal investigator reported that their Recovery Act-supported research on coronary heart disease indicated that high levels of calcified and noncalcified plaque, which can clog arteries and contribute to heart disease, is present in young healthy people who have a family history of premature coronary disease. According to this principal investigator, the results of this research could be used to identify persons who would benefit from heart imaging tests and preventative therapy for coronary heart disease.  Early Detection of Diseases. One principal investigator reported that their Recovery Act-supported research resulted in the identification of several hundred proteins that are associated with chronic pancreatitis. According to this principal investigator, this research could contribute towards creating new blood tests for detecting chronic pancreatitis. Another principal investigator reported identifying the symptoms that are the most important and efficient for making a diagnosis of autism in young children. Improvements in Medical Therapies. One principal investigator reported that data collected for their Recovery Act grant has yielded results in developing personalized therapeutic approaches for patients with idiopathic pulmonary fibrosis, a fatal disorder. This principal investigator noted that these results could help to simplify decision making regarding therapeutic interventions, such as for patients undergoing an organ transplant. Another principal investigator cited progress toward overcoming the resistance of colon cancer to existing treatment therapies, and another assessed two alternative therapies for coronary heart disease. A principal investigator also reported that their Recovery Act-supported research contributed to the development of a kidney dialysis monitoring device that could be less invasive and more cost-effective than the current surgically implanted monitoring systems. Improved Research Capabilities. One principal investigator reported that their Recovery Act-supported research contributed to the development of a new approach that is being utilized by other researchers studying the connections between different genes and traits, such as those that may lead to heart disease. A draft of this report was provided to HHS for review and comment. HHS provided technical comments that were incorporated as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Health and Human Services, and the Director of the National Institutes of Health. This report will also be available on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact Linda T. Kohn at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. To obtain the information National Institutes of Health (NIH) and selected NIH Recovery Act grantees have on the jobs supported with NIH Recovery Act funding, we interviewed NIH officials about the information they have on the full-time-equivalents (FTE) supported by the Recovery Act, and reviewed (1) NIH data containing information reported by grantee institutions to a nationwide data collection system at www.federalreporting.gov on the FTEs supported by NIH Recovery Act funding, (2) annual progress reports for fiscal year 2010 that NIH Recovery Act grantees are required to submit to NIH, and (3) other jobs information that NIH gathers from other sources. To assess the reliability of the data provided by NIH, we obtained information from agency officials knowledgeable about (1) NIH grant award data, (2) NIH Recovery Act grantee recipient reports, and (3) the jobs information that NIH gathers from other sources. We also performed data quality checks to assess the reliability of the Recovery Act grants data file received from NIH. These data quality checks involved an assessment to identify incorrect and erroneous entries or outliers. Based on the information we obtained and analyses we conducted, we determined that the data were sufficiently reliable for the purposes of this report. In addition, we selected five grantee institutions, which were universities that employ principal investigators who received NIH Recovery Act funding. The five selected grantee institutions met the following criteria: (1) received the largest portion of Recovery Act funds from NIH, (2) received the largest number of grants, and (3) reported the highest number of FTEs supported by NIH Recovery Act funds. The selected institutions were Johns Hopkins University, University of Michigan, University of Washington, University of Pennsylvania, and Duke University. The selected grantee institutions are not representative of all institutions that received Recovery Act funding. (See table 1 for more information about the five selected grantee institutions.) To gather more specific information about individual grants, we created a Web-based data collection instrument (DCI) and disseminated it to 50 selected principal investigators—10 principal investigators at each of the same five grantee institutions. The Web-based DCI contained questions about the types and number of jobs supported by the Recovery Act funding received from NIH. The selected principal investigators received grant awards that met the following criteria: (1) the grant was a new grant award and not a supplement to an existing grant, (2) the grant award was for $500,000 or greater (see table 2 for more details), and (3) the grant award was made on or before December 1, 2009. We reviewed the abstracts for all the grants that met the above criteria and made a judgmental selection of the final 50 grants—making sure to include a variety of grant types such as Challenge grants and Grand Opportunity (GO) grants that were developed for the Recovery Act. The 50 selected grant awards ranged in size from $500,000 to about $11,000,000. The principal investigators for these selected grants are not representative of all principal investigators who received NIH Recovery Act funding. To gather information about the grants from an institutional perspective, we also created a second Web-based DCI and disseminated it to an official involved in coordinating Recovery Act reporting at each of the five selected grantee institutions. We performed follow-up information gathering from selected principal investigators and administrators at grantee institutions that completed the DCI to supplement the information provided in the DCI. We also obtained and reviewed information reported by grantee institutions to the nationwide data collection system at www.federalreporting.gov about the number of jobs supported by the Recovery Act. The information on the number of FTEs supported by NIH Recovery Act funding reported to the nationwide data collection system by recipients of Recovery Act funding has certain limitations. First, the Office of Management and Budget (OMB) guidance requires FTE numbers to be reported quarterly and FTEs should not be added across quarters to obtain a cumulative number of FTEs. In addition, the calculation of FTEs may reflect full-time and/or multiple part-time jobs, therefore FTEs cannot be used to determine the total number of individual jobs. Moreover, because of a change in OMB’s reporting guidelines, FTE data for the first reporting quarter may not be comparable to the data reported for subsequent reporting quarters. The number of FTEs represents only the jobs directly supported by the Recovery Act but does not capture the jobs indirectly supported by the act or other impacts of the spending. To identify the information NIH and selected grantee institutions and principal investigators have on the other impacts of the NIH Recovery Act funding they received, we utilized the Web-based DCI disseminated to the same 50 principal investigators—10 principal investigators at each of the five selected grantee institutions—noted earlier, and interviewed NIH officials. We asked the grantee institution and principal investigators to identify other impacts such as scientific impacts, impacts in the local community, and impacts on the grantee institution and principal investigators. We also asked NIH and principal investigators to identify the metrics they use to measure and track these other impacts. We contacted the State Recovery Act representative in two of the states in which our selected universities are located (North Carolina and Pennsylvania) to identify information on the other impacts of NIH Recovery Act funding in their jurisdictions. Finally, we reviewed relevant NIH Recovery Act grant guidance as well as OMB’s Recovery Act guidance to identify Recovery Act grantee requirements for reporting information on FTEs and on the impacts of the Recovery Act grants to NIH and the nationwide data collection system at www.federalreporting.gov. We disseminated a Web-based data collection instrument (DCI) to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the jobs supported by NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the jobs supported by Recovery Act funding cited in this report are listed below in tables 3-6. For example, information about (1) the number of supported positions that existed before the Recovery Act and (2) the average number of hours worked by each supported job category. Not all totals add to 100 percent because respondents were given multiple answers and asked to check all that apply. We disseminated a Web-based data collection instrument to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the other impacts of NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the other impacts of Recovery Act funding cited in this report are listed in tables 7-10. For example, information about (1) the types of nonscientific impacts reported by selected principal investigators, and (2) the metrics used to track and measure scientific impacts. In addition to the contact named above, Will Simerl, Assistant Director; N. Rotimi Adebonojo; Leonard Brown; Carolyn Garvey; Krister Friday; Daniel S. Ries; and Monica Perez-Nelson made key contributions to this report.

The American Recovery and Reinvestment Act of 2009 (Recovery Act) included $8.2 billion in funding for the National Institutes of Health (NIH) to be used to support additional scientific research-including extramural grants at universities and other research institutions. In 2009, the Acting Director of NIH testified that each extramural grant awarded with Recovery Act funding had the potential of supporting employment--full- or part-time scientific jobs--in addition to other impacts, such as contributing to advances in improving public health. GAO was asked to examine the use of Recovery Act funds by NIH grantees. Specifically, GAO addresses the information available from NIH and its grantees about the extent to which NIH Recovery Act funding (1) supported jobs, and (2) had other impacts. To obtain information on job impacts, GAO reviewed a database containing information NIH Recovery Act grantees reported to the national data collection system and interviewed NIH officials. To obtain more specific jobs information about individual grants, GAO administered a Web-based data collection instrument to 50 selected principal investigators who direct research at grantee institutions--10 principal investigators at each of five selected grantee institutions. The selected principal investigators had generally received awards of $500,000 or more. To obtain information on other Recovery Act impacts, GAO used information from the data collection instrument and interviewed NIH officials. Data reported by all of NIH's Recovery Act grantee institutions to the national data collection system at www.federalreporting.gov and available to NIH indicate that the number of full-time equivalent (FTEs) jobs supported by NIH Recovery Act funds increased from December 2009 through September 2010, and then remained steady from December 2010 through June 2011--the most recent quarter for which data are available. The number of FTEs supported by NIH Recovery Act funds increased from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. The 50 selected principal investigators who direct research at the grantee institutions in GAO's review provided additional information explaining how the Recovery Act funding supported FTEs. Nearly one-third of the selected principal investigators reported that the NIH Recovery Act funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in jobs or avoid a reduction in the number of hours worked by current employees. The selected principal investigators also reported that the Recovery Act funding they received primarily supported scientists and other faculty. NIH officials we interviewed reported that they receive some information from principal investigators about the other impacts of NIH-funded research, such as preliminary research results included in annual progress reports. NIH is also participating in the Star Metrics program--a multiagency venture to monitor the scientific, social, and economic impacts of federally funded science--which NIH officials expect could provide more information about these impacts. While Star Metrics is currently developing an approach to capture information about the other impacts of NIH grant funding, there is no expected completion date for reporting this information. In response to GAO's data collection instrument, selected principal investigators who direct research at the grantee institutions in GAO's review reported that the use of Recovery Act funds resulted in purchases of research supplies, equipment, laboratory testing services, and scientific training of health care professionals. The majority of the 50 selected principal investigators in GAO's review also reported preliminary results from their Recovery Act-funded research that could contribute to future scientific developments in prevention and early detection of disease, improvements in medical therapies, and improved research capabilities. The principal investigators in GAO's review and NIH officials GAO interviewed reported that they track the scientific impact of NIH research--including the impact of research funded through the Recovery Act--primarily through peer-reviewed publications, but also through other metrics such as the filing and approval of patent applications. According to NIH officials, when a sufficiently large body of research results has accumulated, NIH plans to prepare reports--similar to its existing publicly available Investment Reports--that will highlight the impact of its Recovery Act-funded research. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate.

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As we have previously found, there is no single definition of transit- oriented development; however, research generally describes such a development as a compact, mixed-use, and “walkable” neighborhood located near transit. Transit-oriented developments are typically located up to a half-mile from a transit station (usually a fixed guideway rail station), can encompass multiple city blocks, and have pedestrian-friendly environments. Transit-oriented developments can range in both size and scope, with some located in major urban centers while others are located in suburban neighborhoods. Transportation experts believe that transit- oriented development can increase access to employment, educational, cultural, and other opportunities by promoting transportation options to households, resulting in increased transit ridership and reduced road congestion. Figure 1 provides a graphic representation of common features of a notional transit-oriented development. A number of stakeholders play important roles in the planning and implementation of a transit-oriented development. These roles are summarized below. Local transit agencies: These agencies, such as transit authorities or transit operators, are generally responsible for building, maintaining, and operating transit systems. These transit systems can include fixed guideway transit systems—such as rail or bus rapid transit—ferry systems, paratransit services, and local bus service. State and local departments of transportation and metropolitan- planning organizations (MPO):organizations develop transportation plans and improvement programs; they also build, maintain, and operate transportation infrastructure and services. Local governments and regional councils: City and county governments have planning departments with control over land use planning, which includes zoning policies and growth management policies. These entities are also generally responsible for reviewing, engaging local residents on, and granting entitlements for new development projects. Regional councils develop land use plans used by metropolitan-planning organizations for transportation planning. Private developers: Private developers decide on and create developments and build and manage housing units and commercial developments. Lenders: Banks and other financial institutions finance developers to design and construct transit-oriented development projects. Business improvement districts: These districts—and other entities that coordinate local economic interests—have input on community infrastructure upgrades. Although FTA provides funds for transit projects that may spur transit- oriented development, it does not have a discrete program for transit- oriented development. However, the agency has been expanding its role in transit-oriented development in recent years by: Funding transit-oriented development research. Coordinating with the Department of Housing and Urban Development and the Environmental Protection Agency on the Sustainable Communities Partnership. This partnership was formed in 2009 with the goal of coordinating federal housing, transportation, water, and other infrastructure investments to support communities’ development in more environmentally and economically sustainable ways, including transit-oriented development. Implementing a transit-oriented development planning pilot program that is to provide grants to state or local governments for advance planning efforts that support transit-oriented development. FTA plans to distribute $19.98 million in grant funding to state and local agencies in 2015. Since the early 1970s, the federal government has provided a large share of the nation’s transit capital investment through the Capital Investment Grant program. Projects eligible for the program include new fixed- guideway transit lines, extensions to fixed-guideways, and projects that improve core capacity on an existing fixed-guideway system. As we recently reported,Grant projects, local transit agencies typically serve as project sponsors, although FTA provides funding for Capital Investment and design and implement these projects. The project sponsors often coordinate with local MPOs in designing and implementing these projects, and FTA awards funding to project sponsors upon completion of the pre- construction development process. This process includes a range of local policy-development and decision-making activities, including identifying the specific transit corridor and project, refining the project design, and obtaining the necessary funding commitments from state and local partners. Once a project sponsor decides to seek Capital Investment Grant funding, FTA is required by law to rate a project considering a number of evaluation criteria, before it can recommend the project to Congress for funding. While these criteria have changed over time, there are currently six individual criteria: mobility improvements, environmental benefits, congestion relief, cost-effectiveness, economic development, and land use. In addition, FTA considers the availability of federal funds; consideration of project readiness, including sufficient engineering and design to produce a reliable scope, cost figure, and schedule; and sufficient technical capacity of the project sponsor to undertake a major construction project. FTA is also required to evaluate and rate the local financial commitment and the transit agency’s ability to operate the project and continue to operate the existing transit system. See fig. 2. We found a wide range in the amount of new transit-oriented development since transit operations began for our six case study transit lines. Stakeholders in these cities attributed the amount of transit-oriented development to the influence of a variety of factors including conditions that support of transit-oriented development such as a demand for real estate, challenges that hinder transit-oriented development such as high associated construction costs, and local government policies that encourage transit-oriented development, such as transit supportive zoning. During our case study visits, we found a wide range in the amount of transit-oriented development that occurred since the implementation of a federally funded transit project. For each project, we found at least a minimal amount of transit-oriented development near at least one station; however, for each project we also found examples of stations that have had little or no transit-oriented development. For example, in Baltimore, MD, local officials told us that there has been very little development around light rail stations—except near downtown Baltimore’s Penn Station, which also services commuter rail and Amtrak—despite more than 20 years of operations and a significant upgrade in service in 2006. In contrast, local stakeholders in Charlotte, NC, told us that the South End portion of the light rail line has been largely successful in attracting transit-oriented development—although one of these stakeholders acknowledge that stations further down the transit line in Charlotte are more auto-oriented and have generated little transit-oriented development. A more detailed description of examples of our findings from each case study can be found in figures 3 to 8. Stakeholders from across our case studies identified key conditions that can support transit-oriented development, including: demand for real estate, available land for development, supportive local residents, and a transit line that efficiently connects to established job and activity centers. Specifically, we found that the following conditions support transit- oriented development: Market demand for real estate: Market demand for real estate is needed to support transit-oriented development. According to the literature we reviewed and stakeholders we spoke to, demand for real estate is driven in part by the strength of the local economy so cities with strong local economies are more likely to support transit-oriented development. One study has also shown that market demand is the primary factor developers consider when determining whether to build a transit-oriented development. For example, a developer that has built mixed-use development projects in both Washington, DC, and Baltimore told us that developers consider anticipated price growth and existing housing supply when determining locations for new development. This developer told us that consideration of these factors has led to a pipeline of about 30,000 units in Washington, while Baltimore only has a few thousand. Further, we observed many new developments along the light rail in San Francisco, which had the fastest real economic growth of the 10 largest metropolitan areas in 2012, according to the Bureau of Economic Analysis. While a strong economy and demand for real estate are necessary to support transit- oriented development, they may not always be sufficient to lead to transit-oriented development. For example, Houston had a 23 percent job growth rate from 2003 through 2013, according to the Bureau of Labor Statistics. While the United States had a 5 percent job growth rate during the same period, we observed very little transit-oriented development in Houston due to factors such as land speculation and deed restrictions placed on land around transit. Large parcels of land available for development: The availability of large amounts of land such as surface parking lots near transit stations or underutilized industrial land can also support transit- oriented development. We have previously found that many transit agencies view converting surface parking lots at transit stations into a transit-oriented development as an opportunity to accomplish multiple goals, including promoting transit-supportive land use near stations and increasing ridership. In addition, as we have previously found, research has shownincrease with proximity to a transit station. Underutilized industrial land also presents an opportunity for transit-oriented development due to the large size of industrial land parcels and the lack of neighbors to oppose new development. For example, we visited sites in both Charlotte and San Francisco where developers took advantage of large parcels of previously industrial land to build transit-oriented development. that land and housing values generally tend to Resident support for transit and transit-oriented development: Among our case study cities, San Francisco and Washington, DC, have the highest transit ridership—among the top five in the nation according to the 2009 American Community Survey—and both cities also have historically dense development patterns. As noted above, we observed many new developments near transit in both cities. In addition, according to stakeholders, cities with a high concentration of people 18 to 34 years old tend to be more supportive of transit- oriented development than other age cohorts. For example, stakeholders from Houston; Washington, DC; San Francisco; and Charlotte told us younger residents’ desire for neighborhoods close to amenities and their support for transit are signs that this age cohort is supportive of transit-oriented development. These comments conform to a national survey by the Urban Land Institute that found that the majority of this age cohort prefers a shorter commute over a larger home; is attracted to living in neighborhoods close to public transit, with a mix of shops, restaurants, and offices; and shows a preference for living in a neighborhood with a mix of housing types and a mix of incomes. Efficient access to jobs and centers of activity: Transit that efficiently connects people to established job and activity centers provides potential for transit-oriented development. According to planning and transit officials in Santa Clara County, to attract people to transit, transit routes need to move from residential areas to job centers as directly as possible. Specifically, the extent to which transit connects people to anchor institutions,and existing mixed-use neighborhoods supports transit-oriented development. Stakeholders cited Washington, DC’s Metrorail system as an efficient system that has been successful in supporting transit- oriented development because riders can reach a number of job and activity centers (such as downtown Washington, DC; Rosslyn, VA; and the Courthouse district in Arlington, VA). In San Francisco, the first segment of the T-Third Light Rail is close to Caltrain Commuter rail, which provides access to nearby areas with a high concentration of technology-industry jobs. Stakeholders from our case studies identified several factors that can hinder transit-oriented development including: (1) the higher construction cost of transit-oriented developments; (2) lenders’ reluctance to finance transit-oriented developments in some cities; (3) lengthy or discretionary local-development approval processes; (4) an unsupportive local population; and (5) land around transit stations that is unattractive for development. Specifically, we found that the following challenges can hinder transit-oriented development: Construction costs can be higher: Construction of transit-oriented developments can be more costly than for traditional, single-use developments because of the cost of mixed-use buildings and parking garages. According to literature we reviewed and stakeholders we spoke with, aspects of transit-oriented developments such as multiple stories or a mix of uses can make transit-oriented developments more costly to build than traditional developments. For example, one study found that “different functions, appearance, access, and security levels of entrances and exits for different uses can become costly features in mixed-use projects.” A national stakeholder group also told us that the higher construction costs associated with mixed-use buildings can inhibit small construction firms from pursuing mixed-use projects. Some developers, transit, and planning officials noted that transit-oriented joint development on surface parking lots at transit stations could be hindered by the high cost of constructing replacement parking garages. Typically, when transit agencies enter into agreements with developers to use existing surface parking lots for transit-oriented joint development projects, they ask developers to pay for all or for part of a parking garage to replace the surface parking spaces used for the development. In some cases, the cost of constructing a replacement parking garage may hinder the implementation of projects. For example, according to a 2012 study of parking-garage costs in the San Francisco Bay Area, a replacement parking garage may cost about $28,000 per space, or more than $14 million for a 500-space garage. In addition, a developer told us that transit agencies could have design specifications for parking garages that double the cost per parking spot compared to what he would normally construct, cost that exacerbates the challenge of providing replacement parking. Lenders may be reluctant to finance transit-oriented development: According to the transit-oriented development literature we reviewed and developers and others we spoke with, some lenders are reluctant to finance transit-oriented developments because of a perception that transit-oriented developments are riskier than more traditional developments due to higher market risk associated with mixed-use buildings. This reluctance may be heightened in areas with few or no successful transit-oriented development projects. Mixed-use developments can face market challenges because each use must have sufficient market demand to make the project as a whole profitable. For example, a national interest group told us that mixing retail use with residential use adds risk to a project because the market for retail real estate tends to be more volatile than the market for residential use. In areas with no successful examples of transit-oriented development, lenders may view these projects as additionally risky, because lenders do not know if there is local consumer demand for transit-oriented development. Local approval processes may add requirements or delays: Another challenge that can hinder transit-oriented development is a lengthy or discretionary local approval process. For example, two national stakeholders said that developers face higher risk and more uncertainty in developing projects when transit-oriented developments are not in line with the zoning code for the area. In these cases, a zoning variance is typically required from local officials, a requirement that can make the entitlement process lengthier and more discretionary. These stakeholders also said that when entitlement processes are dependent on the discretion of the local officials, developers might be unable to predict when projects will get approved or what requirements local officials will attach to projects as conditions of approval. Three developers in San Francisco and Charlotte told us that if they are uncertain of the length or outcome of the entitlement process, they might choose not to pursue projects. Local residents may not support transit or dense development: Stakeholders in every city we visited told us that transit-oriented development could face challenges when the local population is not in favor of transit or dense residential development. Transit officials in Baltimore and Houston reported that negative perceptions of transit affect transit ridership and consumer demand for transit-oriented development. Stakeholders in Baltimore told us that a social stigma associated with public transit results in low ridership on the light rail system. The Houston transit agency and a local developer told us that Houston’s “car culture”—wherein residents generally prefer to independently travel in their own car rather than on transit—is a factor that can inhibit the appeal of transit and demand for dense living near transit stations. Stakeholders in the San Francisco Bay Area reported that local residents may oppose new development out of concern about issues such as the height of buildings for dense development or perceived decreases in quality of life due to increases in population, traffic, and demand for parking. Physical features surrounding a transit station may be undesirable for development: Stakeholders in all of our case study areas reported that physical features such as highways, vast areas of vacant land, blank walls, driveway entrances, or a lack of pedestrian crossings at streets could hinder transit-oriented development. For example, local officials in Houston told us that many stations along the light rail system have challenges with the last 100 feet. Specifically, there are many areas where sidewalk and ramp improvements are needed to help better access the station. These improvements could increase walkability and make transit-oriented development more attractive. Unsupportive land uses: Land uses around transit stations that are not supportive of high-density, mixed-use development can also hinder transit-oriented development. For example, as discussed previously, vacant industrial parcels of land can support transit- oriented development. However, developers, planning officials, and other stakeholders told us that aspects of this type of land can hinder transit-oriented development if: there is still operating “legacy” industry nearby that would be noxious to residential use; the land requires environmental clean-up; the land requires significant physical-infrastructure investment such as adding sidewalks or upgrading sewer capacity; or the area lacks community infrastructure such as schools and parks. Local governments can use a variety of policies to encourage transit- oriented development including zoning regulations, station area planning, targeted infrastructure investments, and tax incentives. Stakeholders told us that these tools most successfully support transit-oriented development when they align with the local residents’ preferences and market demand for development. The following are examples of local government actions to support transit-oriented development near the projects we selected: Creating zoning and regulations supportive of elements of transit-oriented development: Local governments can support transit-oriented development by designing zoning or other regulations to facilitate more certainty for developers proposing projects near transit stations. According to two stakeholder organizations we spoke with, local governments can help improve developer certainty by developing zoning codes that specifically allow aspects of new developments that are consistent with transit-oriented development. According to a report we reviewed, transit-oriented development zoning districts that allow buildings of greater unit density or fewer parking spaces can facilitate developer certainty because the entitlement process will likely be shorter and projects will not be subject to a discretionary entitlement process. A developer in Charlotte told us that the transit-oriented development district zone made him confident that he would get his project entitled and that absent the zone, he would not have proceeded with the project. In some cases, policies supportive of transit-oriented development can make projects more economically feasible. For example, cities can allow greater height or density and require fewer parking spaces to allow developers to increase revenue or to help offset the property value premium that transit can generate. The City of Houston does not have zoning, which results in a unique regulatory environment in which the City cannot regulate land use or other building features like most cities can. The City allows a reduction in required parking and has implemented an optional transit-corridor ordinance that reduces the legal setback from the street, but few developers have used either option to date. Developing area plans that provide guidance and resolve contentious issues: Local governments can also support transit- oriented development through neighborhood-scale land-use planning activities. Among our case studies, most local governments use some form of these plans to provide detailed direction on land use, transportation, housing, parks and economic growth for the development of city blocks, corridors, or neighborhoods around transit stations. These plans typically identify gaps in city services and resources deployed at the neighborhood level and shape capital investment priorities, among other things. In San Francisco, planning officials told us they not only use neighborhood plans to guide neighborhood growth but also to create a blanket Environmental Impact Review (EIR) that is applicable for the entire neighborhood. According to these officials, this can reduce the cost of EIRs for each development and also manages public participation in the EIR process, which traditionally accounted for much of the entitlement process delay. They noted that the Area Plan also resolves a number of topics that can be contentious (such as density, height, parking, and traffic congestion issues), before developers come in with specific project plans. Developers told us that, as a result, development has concentrated in neighborhoods with Area Plans and entitlement processes for projects in these areas are shorter. According to planning and transit officials in Baltimore, Washington, DC and Charlotte, policies designed to encourage transit-oriented development are most successful when they are tailored to local circumstances such as local residents’ preferences and market demand. The following are examples of such policies in our case studies: Responsiveness to local residents’ preferences: Planning and transit officials in Baltimore, Washington, DC, and Charlotte told us that aligning local policies such as transit-oriented development districts and Area Plans with the scale of the existing community may ensure a higher level of local residents’ support for transit-oriented development. In addition, incorporating input from local residents on issues like land use, parking, density and building height may also help ensure their support. For example, a Baltimore planning official told us that the City of Baltimore held numerous public meetings while drafting their new zoning code. Due to public input, the City changed its plans to have two transit-oriented development districts of different densities and similar uses and instead developed four different transit- oriented development districts with varying density and use. Responsiveness to market demand: Planning and transit officials in Charlotte also told us that it was important for transit-oriented development districts and local government policies to conform to market demand. For example, some local governments would like to cap parking in transit-oriented zones in order to encourage transit- ridership, but city-mandated parking requirements do not always align with consumer demand for parking and therefore the requirements can hinder transit-oriented development. Some local governments would like to encourage mixed-use developments near transit by requiring retail, but two developers told us that setting aside a minimum amount of retail space in residential buildings may not align with demand for retail in that area because encouraging new retail areas is very difficult. For example, a developer in San Francisco built a mixed-use residential and retail development and the retail space remained empty for fifteen years, until it was converted into a live/work loft space. Beyond planning and zoning, local governments can also play a role in improving connections to transit and helping mitigate environmental challenges to transit-oriented development. Actions in these areas may include the following, among others: Targeted investments in infrastructure: Local governments’ efforts to support transit-oriented development through zoning and planning are enhanced when local governments make targeted investments in infrastructure around transit stations. To increase the attractiveness of transit and transit-oriented development, local governments can support the integration of multi-modal transportation choices to take riders to and from the transit stations. Stakeholders in San Francisco reported that shuttle service, car-sharing, bicycle-sharing programs, bicycle lanes, and pedestrian amenities can help move people in and around the transit station area, thus supporting ridership and making transit more attractive (see fig. 9). Tax credits for developers: In order to mitigate some of the challenges associated with transit-oriented development on vacant industrial land, some state governments have created programs that provide tax credits to help developers ameliorate clean-up costs and reduce legal liability. Stakeholders in both Baltimore and Charlotte reported that programs in which developers receive tax credits and reduced legal liability in exchange for providing a certain amount of environmental clean-up on their parcels has made development on vacant industrial land more feasible. FTA assesses several factors that can support transit-oriented development when reviewing transit projects for potential New Starts funding; however, these factors make up only a small percentage of all the factors considered. As mentioned earlier, proposed New Starts projects are evaluated and rated according to criteria set forth in law. In addition to rating the local government’s financial commitment, FTA evaluates and rates a proposed project according to six statutory project justification criteria including mobility improvements, environmental benefits, congestion relief, economic development effects, land use, and cost-effectiveness. Two of the six project-justification criteria—economic development effects and land use—require documentation from project sponsors related to whether current and future land use is supportive of transit. To assign ratings for these criteria, FTA evaluates many of the same factors that we found help support transit-oriented development. The land use criterion includes evaluation of factors such as the development, character (including amenities such as short building setbacks and active facades), pedestrian facilities, parking supply, and the percentage of affordable housing in the existing corridor and station areas compared to the percentage in the surrounding counties. Many of the elements that support high ratings for this criterion are similar to the elements that stakeholders we spoke with identified as supportive of transit-oriented development. Specifically, to receive a higher rating, project sponsors need to show, among other things, that the existing project corridor serves a significant number of employees and densely populated areas; has development with infrastructure such as sidewalks, trees, crosswalks, and other pedestrian amenities; a mix of residential, retail and professional uses; and minimal parking and thereby costly parking (more expensive parking tends to support ridership). The economic development criterion includes evaluation of several factors relating to local government policies. FTA evaluates three sub- factors within the criterion: transit-supportive plans and policies, performance and impacts of policies, and tools to maintain or increase the share of affordable housing in the project corridor. To assign ratings, FTA considers many of the same plans and policies that stakeholders told us can help support transit-oriented development. For example, FTA considers plans and policies to enhance the transit-friendly character of station areas, plans to improve pedestrian facilities, parking policies, zoning ordinances that increase development density and allow for reduced parking, and outreach and efforts to engage the development community in station area planning. FTA also considers whether proposed station areas have land available for development and demonstrated cases of development affected by transit-supportive policies and plans, policies, or incentives the local governments have in place to maintain or increase the share of affordable housing. These two criteria account for one-third of the summary-project justification rating and one-sixth of the project’s overall rating. The remaining two-thirds of the summary project-justification rating are based on four other criteria. While these four criteria could be affected by future transit-oriented development, they do not directly relate to the potential for a project to support transit-oriented development: Mobility Improvements—The total number of “linked trips” using the proposed project, with a weight of two given to trips that transit- dependent persons would make with the project. Environmental Benefits—Based upon the dollar value of the anticipated direct and indirect benefits to human health, safety, energy, and the air-quality environment scaled by the annualized capital and operating cost of the project. FTA computes these benefits based on the change in vehicle miles travelled that would result from implementation of the proposed project. Cost-Effectiveness—For New Starts projects cost-effectiveness is measured by the annual capital and operating and maintenance cost per trip on the project. The number of trips on the project is not an incremental measure but simply total estimated trips on the project. Congestion Relief—A new criterion introduced in MAP-21. Until FTA undertakes a rulemaking process, FTA plans to assign a medium rating to this criterion for all projects seeking New Starts funds. FTA uses either estimated ridership or the change in vehicle miles traveled resulting from a transit project as part of the calculation for mobility improvements, environmental benefits, and cost-effectiveness. As discussed above, the calculation for the congestion relief criterion is not yet defined. Transit ridership can be generated in a number of ways. Riders can approach a transit station by car and park at the station, a feeder bus system, or by walking from transit-oriented development or other location near transit. These ridership forecasts may take into account growth in population and employment in the region. While transit-oriented development may be part of the reason for this growth, growth could also come from broader development in the region. Benefits and high ratings for these criteria could be driven by transit-oriented development, but could also be driven by more auto-oriented uses. While FTA evaluates many of the factors or local policies that we identified that support or hinder transit-oriented development, there are inherent limitations in the extent to which some factors can be fully evaluated. For example, local officials and a developer told us that the strength of the real estate market is critical for transit-oriented development. FTA evaluates real estate market conditions as part of the economic development criterion; however, real estate markets for residential, retail, and office space are cyclical and the life cycle of a transit project planning spans many years into the future. Market conditions could change significantly between FTA’s assessment and the beginning of transit operations. According to a transit official, FTA evaluations are based on a snapshot of a specific moment in time that may not necessarily be predictive of future economic or political cycles. Similarly, development patterns and acceptance for dense, urban living may be influenced by cultural factors that influence local resident support for transit-oriented development. Factors such as Houston’s “car culture” and housing preferences of millennials can be challenging to quantify and evaluate. Among our case studies that were assessed for New Starts funding, we found that the amount of transit-oriented development realized—and the factors that local stakeholders told us supported or hindered transit- oriented development—are generally consistent with FTA’s pre- construction evaluation and rating of factors related to transit-oriented development. For example, we included two light-rail projects as case studies that FTA assessed as high or medium-high for land use and economic development. Both the Charlotte South Corridor light rail and the Third Street light rail in San Francisco were rated highly for transit- supportive land use.projects are now surrounded by several new transit-oriented developments (see figs. 4 and 6). For the Charlotte South Corridor light rail project, in support of the medium-high rating, FTA cited local policies such as the regional centers and corridors’ growth strategy, the transit overlay district, and the 2025 Integrated Land Use/Transit plan. In addition, FTA noted that changes to policies and zoning in the South End neighborhood had led to new buildings’ being built. We observed other transit-oriented development activity, such as new residential and retail establishments oriented towards the light rail (see fig. 10). Among projects we visited, the actual ridership performance of the transit lines when compared to ridership expectations or historical ridership varies. Our case studies provide several examples where ridership has grown over time. For example, when the Columbia Heights Metrorail station in Washington, DC, opened in 1999, several vacant or underutilized lots surrounded it. Ridership at the station in 2000—the first full year it was open—averaged about 4,000 riders per day. Since 2000, many new developments were constructed on the vacant or underutilized lots near the Columbia Heights station. Over the past 10 years, ridership has grown about 93% to more than 12,000 riders per day. The percentage gain in ridership for Columbia Heights has exceeded percentage gains for the other five Green Line stations that also opened in 1999 or 2001. Of the four stations in this group located in Prince George’s county—where local officials told us there has been little or no development—three have lost ridership in the past 10 years (see fig. 11). Similarly, in Charlotte, the projected opening-year average ridership for the Charlotte Light Rail system was about 9,100 riders per day. In 2008, the first full year of operations for the system, ridership averaged 11,678 per weekday, exceeding the opening-year ridership target by about 2,500 riders (28%). As development has occurred along the line, ridership has grown 30% to more than 15,000 riders per average weekday. Other projects, particularly those projects that have not been surrounded by new development, are generally not on track to meet the ridership forecasts specified in the New Stats project’s documentation, specifically: Ridership on the Houston North Corridor light rail averaged about 4,500 passengers per weekday from February to July 2014,than one-third of the expected opening year ridership of 17,400. (see fig. 12). The Baltimore Central Corridor light-rail system attracted an average of 26,647 riders per weekday in 2013. The ridership forecast for 2020 is 44,000 riders per average weekday (see fig. 12). Average weekday ridership at stations built as part of the West Tasman Light Rail Extension in Santa Clara County was 3,125 from July 2012 through January 2013. The ridership forecast for this segment was estimated to be 7,500 by 2005. (see fig. 12). In San Francisco, ridership on the T-Third Light Rail is also below expectations despite the new development project that has been built in Mission Bay. For operating purposes, the T-Third is actually part of the K Ingleside/T-Third Route that runs through downtown San Francisco and into another part of the city. San Francisco Municipal Transportation Agency does not break out ridership on the T-Third, but estimated that in fiscal year 2013 the entire route had about 34,000 riders per average weekday. This is short of the more than 80,000 daily boardings estimated for 2015 during the preliminary engineering phase of the project. However, the average weekday ridership at the nearby San Francisco Caltrain rail station has increased by 58 percent from February 2007 to February 2014. We provided DOT with a draft of this report for review and comment. In its comments DOT stated that the report highlights the multiple challenges faced by local governments in guiding development around transit. DOT reiterated FTA’s long-standing commitment to encourage local land use actions near major transit capital investment. DOT also stated that authorizing statutes have increased the prominence of land use and economic development for the FTA’s Capital Investment Grant evaluation process and that FTA has long believed transit supportive land use plans and policies indicate good regional planning. We are sending copies of this report to interested congressional committees and the Secretary of the Department of Transportation. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions or would like to discuss this work, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix II. In this we report we identify: (1) the extent to which transit-oriented development has occurred near select transit lines that received federal funds and which factors or local government policies support transit- oriented development and which factors hinder transit-oriented development, and (2) the extent to which FTA considers factors related to the potential for transit-oriented development when assessing proposed projects, and the extent to which FTA’s assessment of these factors is consistent with the factors that local stakeholders told us affect project’s results. To respond to both of our objectives, we selected six transit lines that received federal funds to serve as illustrative case studies. We selected these cases based on the existence of previously implemented and planned or in-construction federally funded transit lines in the same city or county; diversity in the existence of state and local programs and grants supportive of transit-oriented development; diversity in the current strength of the local real estate market; and geographical breadth. The results of these six case studies are not generalizable to all federally funded transit lines. While we focused on a specific transit line in each city, we discussed the greater city’s experience with transit and transit- oriented development with local officials to provide context for our cases. The case studies we selected were: Central Corridor Light Rail in Baltimore, MD; South Corridor Light Rail in Charlotte, NC; North Corridor Light Rail in Houston; TX; Third Street Light Rail, Phase 1 in San Francisco, CA; Tasman West Light Rail Extension in Santa Clara County, CA; and Green Line Metrorail Extensions in Washington, DC, and Prince George’s County, MD. To determine the extent to which transit-oriented development has occurred near these transit projects, we analyzed local land-use data, physically observed development, if any, along these transit lines, and interviewed local planning officials, developers, and other local stakeholders. To identify factors that support or hinder transit-oriented development, we conducted site visits to all of the transit lines and some nearby transit-oriented developments and interviewed a variety of stakeholders. In total, we interviewed with 66 different stakeholders including: twenty-six planning officials from eight local and regional planning entities, sixteen transit officials from eight local and regional transit agencies, fifteen representatives from both national and local-interest non-profit and research organizations with knowledge of transit-oriented development, and nine developers from seven different firms. To identify policies that local governments can use to support transit- oriented development, we reviewed state and local planning regulations, and analyzed relevant land use and transit ridership data from 2005 to 2014. Finally, we reviewed literature on transit-oriented development published within the past 5 years as well as our past reports related to FTA’s Capital Investment Grant Program and transit-oriented development. We assessed the reliability of the land use and by reviewing relevant documentation and either discussing reliability with agency officials or comparing data to corroborating information. We assessed the reliability of transit ridership data by reviewing documentation on the methods used to collect and maintain the data. We deemed the data on land use and transit ridership we collected reliable for the purposes of this report. To determine the extent to which FTA considers factors related to potential transit-oriented development when assessing proposed projects, we reviewed and analyzed relevant laws including Moving Ahead for Progress in the 21st Century Act (MAP-21) and the preceding funding authorization laws. We also reviewed FTA’s Annual Report on Funding Recommendations and New Starts policy guidance. For projects that were assessed for New Starts funding, to determine the extent to which FTA’s assessment is consistent with future land use changes, if any, we reviewed FTA’s project assessments and materials used to support project recommendations. We then compared these assessments with information gathered from our site visits. To determine the extent to which these projects have met ridership projections included in the information provided for New Starts funding assessment, we gathered ridership data from transit agencies and compared this data to the original ridership forecasts. We also interviewed FTA officials. We conducted this performance audit from February 2014 through November 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, John W. Shumann (Assistant Director); Melissa J. Bodeau; Mark Braza; Leia Dickerson; Kathleen Donovan; Terence Lam; Matthew LaTour; Hannah Laufe; Cheryl Peterson; and Kelly Rubin contributed to this report.

From 2004 to 2014, FTA allocated $18.9 billion to build new or expanded transit systems through the Capital Investment Grant program. One of the key goals for many local governments when planning major capital-transit projects is to encourage transit-oriented development as a way to focus future regional population growth along transit corridors. Transit-oriented development is generally described as a compact and “walkable” neighborhood near transit with a mix of residential and commercial uses. GAO was asked to examine transit-oriented development. This report addresses (1) the extent to which transit-oriented development has occurred near select transit lines that received federal funds and the factors and local policies that affect transit-oriented development, and (2) the extent to which FTA considers factors related to the potential for transit-oriented development when assessing proposed projects and the extent to which FTA's assessment of these factors is consistent with the factors that local stakeholders told GAO affect a project's results. To address these issues, GAO reviewed relevant literature and visited six federally funded case study transit projects in Baltimore, MD; Washington, DC; Charlotte, NC; Santa Clara County, CA; San Francisco, CA; and Houston, TX, selected for diversity in local programs, markets, and geography. During these visits, GAO met with stakeholders, such as local officials and developers. GAO also interviewed FTA officials. In commenting on a draft of this report, DOT noted FTA's long-standing commitment to encourage transit-oriented development. GAO found a wide range in the extent of new transit-oriented development that has occurred since transit operations began for GAO's six federally funded case-study transit projects. There are many examples of new transit-oriented development in San Francisco, CA; Washington, DC; and Charlotte, NC, that local officials attribute—at least in part—to transit in the area. However, in other cities GAO visited, local officials said that there has been very little development around transit stations—or that development took as long as 10 years. Stakeholders in these cities attributed transit-oriented development, or lack thereof, near the projects selected to the influence of several factors, including: conditions that support transit-oriented development, such as demand for nearby real estate, land available to develop, residents' support, and a transit system that provides a direct and efficient connection to jobs; challenges that hinder transit-oriented development, such as high associated costs, difficulty in obtaining financing, a difficult local-government review and approval process, an unsupportive local population, and a physical configuration around transit stations unattractive for development; and local government policies that support transit-oriented development, such as supportive zoning, planning, infrastructure investments, and tax incentives. The Federal Transit Administration (FTA) assesses projects for potential New Starts funding by evaluating several of the factors and local government policies GAO identified as supporting transit-oriented development on a five-point scale ranging from low to high. FTA evaluates access to jobs, available land, and transit-supportive plans and polices—among other things—in assessing each project for economic development and land use, which are two evaluation criteria FTA uses to determine whether a project will be funded. Among four case study projects GAO visited that were assessed by FTA for New Starts, two scored medium-high or better, while two scored medium-low or lower. GAO found that many of the factors or local government policies that supported or hindered transit-oriented development are generally consistent with FTA's summary assessment for economic development and land use. Further, GAO found two projects where transit-oriented development resulted in increased ridership, while projects with less transit-oriented development have fewer riders than expected.

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Since the Social Security Act became law in 1935, workers have had the right to review their earnings records on file at SSA to ensure that they are correct. In 1988, SSA introduced the PEBES to better enable workers who requested such information to review their earnings records and obtain benefit estimates. According to SSA, fewer than 2 percent of the workers who pay Social Security taxes request these statements each year. The PEBES legislation requires SSA to begin sending the PEBES to eligible workers who have not requested a statement according to the schedule that appears in table 1. SSA plans to mail some statements even sooner than required and, by fiscal year 2000, will have mailed statements automatically to over 70 million workers. By providing these statements, SSA’s goals are to (1) better inform the public of benefits available under SSA’s programs, (2) assist workers in planning for their financial future, and (3) better ensure that Social Security earnings records are complete and accurate. Accurate earnings records are important because a worker’s eligibility for Social Security benefits and the size of the benefit itself depend on the worker’s earnings record. Early identification and correction of errors in earnings records can benefit both SSA and the public by reducing the time and cost required to correct earnings records years later when an individual files for retirement benefits. Issuing the PEBES is a significant initiative for SSA. The projected cost of $80 million in fiscal year 2000 includes $56 million for production costs, such as printing and mailing the statement, and $24 million for personnel costs. SSA estimates that 608 staff-years will be required to handle the PEBES workload in fiscal year 2000: SSA staff are needed to prepare the statements, investigate discrepancies in workers’ earnings records, and respond to public inquiries (when individuals receive a PEBES, they are instructed to call SSA if they have questions or find errors in the earnings record contained in the statement). The benefit estimates provided in the PEBES are intended to help workers plan for their financial future. To estimate retirement benefits, SSA makes certain assumptions about an individual’s future employment and earnings. SSA assumes, for example, that individuals will continue to work until they retire and that individuals’ future earnings will remain about the same as their most recent earnings. SSA chose this overall approach to calculating benefit estimates because it is consistent with approaches used by private and public pension plan sponsors to prepare benefit estimates, according to SSA officials. The experts we talked with generally agreed that SSA’s approach for estimating future retirement benefits is reasonable. In estimating retirement benefits, SSA does not, however, vary its methodology to take into consideration certain special circumstances that could affect a worker’s actual retirement benefit. As a result, while the PEBES estimates are reasonable for most workers, they may over- or understate benefits for certain individuals. For example, the PEBES estimate is overstated for federal workers who are eligible for both Civil Service Retirement System and Social Security benefits. For these workers, the law requires a reduction in their Social Security retirement or disability benefits according to a specific formula. In 1996, this reduction may be as much as $219 per month; however, the PEBES benefit estimates do not reflect this reduction. SSA officials told us that it would be too difficult and costly to take such special circumstances into consideration when estimating benefits. Rather, SSA has included in the statements descriptions of certain circumstances that may result in workers’ receiving Social Security benefits that are greater or less than the estimated amount. Our work shows that it would be very difficult for SSA to modify its PEBES benefit estimates to reflect these circumstances. Since the PEBES was first developed, SSA has conducted several small-scale and national surveys to assess the general public’s reaction to receiving an unsolicited PEBES. In addition, SSA has conducted a series of focus groups with the public and SSA employees to elicit their opinions of the statement and to determine what parts of it they did and did not understand. In response to this feedback, SSA revised the statement. For example, early statements routinely provided benefit estimates for age 65, the earliest age at which workers could retire and receive their full Social Security retirement benefit, and for delayed retirement at age 70. When SSA learned that many people were interested in the effect of early retirement on their benefits, SSA added an estimate for retirement at age 62. In addition, as it revised the statement, SSA applied a computerized readability formula to it and concluded that the PEBES could be understood by those who read at a seventh grade level, which is consistent with SSA’s standard for agency notices. Overall public reaction to receiving an unsolicited PEBES has been consistently favorable. In a nationally representative survey conducted during a 1994 pilot test, the majority of the respondents indicated they were glad to receive their statements. In addition, 95 percent of the respondents said the information provided was helpful to their families. Overall, older individuals reacted more favorably to receiving a PEBES than did younger individuals. In addition, SSA representatives who answer the toll-free telephone calls from the public have stated that most callers say they are pleased that they received a PEBES and that the information is useful to them for financial planning. Although SSA has taken steps to improve the PEBES, we found that the current statement still provides too much information, which may overwhelm the reader, and it presents the information in a way that undermines its usefulness. These weaknesses are attributable, in part, to the process SSA used to develop the PEBES. Additional information and expanded explanations have made the statement longer, but some explanations still confuse readers. Moreover, SSA has not collected detailed information from its front-line workers on the public’s response to the PEBES. Research suggests that, in general, people find forms, notices, and statements difficult to use and understand. For this reason, many people may approach a PEBES-like statement “with fear, frustration, insecurity, and hesitation.” To overcome this challenge, the design expert we consulted suggested that such statements include the following: An obvious purpose: Readers need to know immediately why they received the statement, what information it contains, and what they are expected to do with the information. An attractive and functional design and organization: The statement should look easy to read, the sections should be clearly labeled, and the organization should be evident at a glance. When readers need explanations to understand complex information, the explanations should appear with the information. Easy-to-understand explanations: Readers need explanations of complex programs and benefits in the simplest and most straightforward language possible. In the 1996 PEBES, the message from the Commissioner of Social Security does not clearly explain why SSA is providing the statement. Although the message does include information on the statement’s contents and the need for individuals to review the earnings recorded by SSA, its presentation is uninviting, according to the design expert we consulted. More specifically, the type is too dense; the lines are too long; white space is lacking; and the key points are not highlighted. On the basis of these findings, SSA officials told us they have revised the Commissioner’s message for the 1997 PEBES to make it shorter and less complex. “The Social Security Board of Trustees projects that the system will continue to have adequate resources to pay benefits in full for more than 30 years. This means that there is time for the Congress to make changes needed to safeguard the program’s financial future. I am confident these actions will result in the continuation of the American public’s widespread support for Social Security.” Some participants in SSA focus groups, however, thought the message suggested that the resources would not necessarily be there after 30 years. For example, one participant in a 1994 focus group who reviewed a similar Commissioner’s message said, “... first thing I think about when I read the message is, is not going to be there for me.” The focus group results suggest that the future solvency of the Social Security system may be too complex a topic to address adequately in the PEBES. Comments from SSA’s public focus groups, SSA employees, and benefit experts indicate that the statement contains too much information and is too complex. In a 1994 focus group summary, for example, SSA reported that younger workers aged 25 to 35 wanted “a much simplified form—a single page—with estimated benefits and how much in taxes they paid into the system with the remainder of the information put in a pamphlet for future reference.” Moreover, given the length and complexity of the current statement, some focus group participants and benefit experts suggested that SSA add an index or a table of contents to help readers navigate the statement. SSA has not used the best layout and design to help the reader identify the most important points and move easily from one section to the next. The structure of the statement is not clear at a glance. Readers cannot immediately grasp what the sections of the statement are and in which order they should read them, according to the design expert with whom we consulted. The statement lacks effective use of features such as bulleting and highlighting, which would make it more user friendly. In addition, the PEBES is disorganized: information does not appear where needed. The statement has a patchwork of explanations scattered throughout, requiring readers to flip from one page to another to find needed information. For example, page two begins by referring the reader to page four, and page three contains six references to information on other pages. Furthermore, to understand how the benefit estimates were developed and any limitations to these estimates, a PEBES recipient must read explanations spread over five pages. SSA representatives who answer the PEBES toll-free telephone number told us that callers frequently fail to realize that the answers to their questions can be found within the document. In fact, we observed the representatives telling callers to turn to a certain page in the statement to answer their questions. With benefit estimate explanations spread over several pages, individuals may miss important information. For example, the PEBES benefit estimate appears on page three; the explanation that the benefit estimate may be overstated for certain federal workers is not found until the bottom of page five. Without fully reviewing this additional information, a reader may not realize that the PEBES benefit estimate could be overstated. In addition, some of the explanations needed to fully understand information in the PEBES are located within the answer to a question that the PEBES recipient may not read. For example, the statement explains that the retirement benefit is reflected in today’s dollars. This explanation, however, is located in the answer to the following question: “When I requested a statement like this several years ago, my retirement benefit was higher. What happened?” Readers skipping the answer to this question would not know key information about the value of their estimate in today’s economy. Because the PEBES addresses complex programs and issues, explaining these points in simple, straightforward language is challenging. Although SSA made changes to improve the explanation of work credits, for example, many people still do not understand what these credits are, the relevance of the credits to their benefits, and how the credits are accumulated. The public also frequently asks questions about the PEBES’ explanation of family benefits. Family benefits are difficult to calculate and explain because their amounts are dependent on a number of factors, such as the age of the spouse and the spouse’s eligibility for benefits on his or her own work record. Informing the public about family benefits, however, is especially important: a 1995 survey revealed that as much as 40 percent of the public is unaware of these benefits. A team of representatives from a cross section of SSA offices governs SSA’s decisions on the PEBES’ development, testing, and implementation. The team has revised and expanded the statement in response to feedback on individual problems. The design expert we consulted observed that the current statement “appears to have been the result of too many authors, without a designated person to review the entire piece from the eyes of the readers. It seems to have developed over time, piecemeal . . ..” Although SSA officials have obtained the public’s feedback, they have missed some key opportunities along the way to improve the statement. While SSA conducted tests to ensure that the PEBES could be read at a seventh grade level, it has not conducted formal comprehension tests.For example, SSA could have administered either oral or written tests to a sample of readers to determine whether they actually understood SSA’s explanations of certain complex issues. These tests would have provided SSA with quantifiable, objective information to use in revising the statement. SSA has also failed to take advantage of information from its workers who answer the public’s questions about the PEBES every day. SSA currently has front-line workers record the reason people call, but the information collected does not provide sufficient detail for SSA to understand the problems people are having with the PEBES. Although the public and benefit experts agree that the current statement contains too much information, a standard benefit statement model does not exist within the public or private sector, and there is no clear consensus on how best to present benefit information. The Canadian government chose to use a two-part document when it began sending out benefit statements in 1985. The Canada Pension Plan’s one-page statement provides specific individual information, including the earnings record and benefit estimates. A separate brochure details the program explanations. The first time the Plan mails the statement, it sends both the one-page individual information and the detailed brochure; subsequent mailings contain only the single page with the individual information. Although some focus group participants and benefit experts prefer a two-part format, others believe that all the information should remain in a single document, fearing that statement recipients will lose or might not read the separate explanations. SSA has twice tested the public’s reaction to receiving two separate documents. On the basis of a 1987 focus group test, SSA concluded that it needed to either redesign the explanatory brochure or incorporate the information into one document. SSA chose the latter approach. In a 1994 test, people indicated that they preferred receiving one document; however, the single document SSA used in the test contained less information and had a more readable format than the current PEBES. SSA, through the Government Printing Office, has awarded a 2-year contract for printing the statements for fiscal years 1997 and 1998. These statements will have the same format as the current PEBES with only a few wording changes. SSA is considering a more extensive redesign of the PEBES for the fiscal year 1999 mailings, which it will implement only if it will save money on printing costs. By focusing on reduced printing costs as the main reason for redesigning the PEBES, SSA is overlooking the hidden costs of the statement’s existing weaknesses. For example, if people do not understand why they got the statement or have questions about information provided in the statement, they may call or visit SSA, creating more work for SSA staff. Furthermore, if the PEBES frustrates or confuses people, it could undermine public confidence in SSA and its programs. Our work suggests, and experts agree, that the PEBES’ value could be enhanced by several changes. Yet SSA’s redesign team is focusing on reducing printing costs without considering all of the factors that would ensure that the PEBES is a cost-effective document. The PEBES initiative is an important step toward better informing the public about SSA’s programs and benefits. However, extensive revisions to the PEBES are needed to ensure that the statement communicates effectively. To best convey information to the public about SSA’s programs and benefits, the PEBES needs an improved layout and design, as well as simplified explanations. SSA will need to start now to complete these changes before its 1999 redesign target date, because revising the PEBES will involve time to collect data and to develop and test alternatives. SSA can help ensure that the changes target the most significant weaknesses by systematically obtaining more detailed feedback from front-line workers. SSA can also ensure that the changes clarify the statement by conducting formal comprehension tests with a sample of future PEBES recipients. In addition, SSA could evaluate alternative formats for communicating the information presented in PEBES. For example, SSA could present the Commissioner’s message in a separate cover letter accompanying the statement; alternatively, SSA could consider a two-part option, similar to the approach of the Canada Pension Plan. To select the most cost-effective option, SSA needs to collect and assess additional cost information on available options and test different PEBES formats. Our work suggests that improving the PEBES will require attention from SSA’s senior leadership. For example, how best to balance the public’s need for information with the problems resulting from providing too much information warrants senior management involvement. In order for the PEBES to better convey information to the public about SSA’s programs and benefits, we recommend that SSA revise the current statement to improve its layout and design and to simplify explanations. We also recommend that SSA evaluate and test alternative formats for communicating the information presented in the PEBES and the accompanying Commissioner’s message. We obtained comments on a draft of this report from SSA. SSA officials agreed with our conclusions and recommendations and provided specific information on the steps they plan to take to improve the PEBES (see app. II). We are sending copies of this report to the Commissioner of Social Security and other interested parties. Copies will also be made available to others on request. If you or your staff have any questions concerning this report, please call me on (202) 512-7215 or Cynthia Fagnoni, Assistant Director, on (202) 512-7202. Other major contributors to this report include Kay Brown, Evaluator-in-Charge; Hans Bredfeldt, Senior Evaluator; and Nora Landgraf and Elizabeth Jones, Evaluators. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed the Social Security Administration's (SSA) overall progress in issuing the Personal Earnings and Benefits Estimate Statement (PEBES), focusing on: (1) whether the PEBES benefit estimates are reasonable; (2) what SSA has done to improve the statement; (3) the extent to which the statement communicates its goals and information clearly; (4) SSA plans to revise the statement further; and (5) actions that GAO believes will improve the statement. GAO found that: (1) the methods and assumptions used by SSA for estimating future retirement benefits are consistent with those used by private and public pension plan sponsors; (2) the public feels that the PEBES can be a valuable tool for retirement planning; (3) although SSA has taken steps to improve PEBES, it fails to communicate clearly the complex information readers need to understand SSA programs and benefits, partly because the design and organization of the statement make it difficult for the reader to locate and understand important information; (4) readers are confused by several important explanations, such as who in their family is eligible for benefits; (5) SSA is considering redesigning PEBES, but only if the redesign results in reduced printing costs; (6) this approach overlooks hidden costs, such as the workload generated by public inquiries when people do not understand the statement, and the possibility that a poorly designed statement will undermine, rather than improve, public confidence; and (7) active leadership from SSA senior managers will be needed to ensure the success of this important initiative.

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SSA administers two programs that provide benefits for individuals who are unable to work because of disability. Although they differ with respect to program purpose and requirements for entitlement, both DI and SSI use the same definition of disability for initial entitlement. Specifically, in order to be found disabled, an individual must have a medically determinable physical or mental impairment that (1) has lasted or is expected to last at least one year or result in death and (2) prevents an individual from engaging in substantial gainful activity. DI was established in 1956 as an insurance program to help replace earnings lost because of disability. To be eligible for benefits, individuals with disabilities must have a specified number of recent work credits under Social Security based on age as of onset of disability. Individuals may also be able to qualify on the work record of a deceased, retired, or disabled parent or a deceased spouse. Benefits are financed by payroll taxes paid by covered workers and their employers, and are linked to the worker’s earnings history. In most cases, individuals who have been entitled to DI benefits for 24 months qualify for Medicare. The SSI program was established in 1972 to provide a standard minimum level of income for individuals with disabilities, as well as aged individuals, who have limited income and assets. Eligibility does not require a past work history. Benefits are paid from general revenues and, in general, most beneficiaries are eligible for the same benefit amount. However, other income counts against this benefit amount, usually resulting in a reduction in that amount. In most states, entitlement to SSI means automatic entitlement to Medicaid. Most beneficiaries qualify for either one program or the other; however, receipt of benefits under one program does not necessarily preclude entitlement under the other program. Beneficiaries who are receiving one benefit may transition to the other benefit or they may receive both benefits concurrently. Receiving an SSI benefit has no bearing on continuing entitlement to DI benefits. However, because SSI is a means- tested program, the amount of the DI benefit must be considered in determining whether an individual with a disability also qualifies for SSI. If the amount of the DI benefit is low and all other income and resource factors are met, a DI beneficiary may also receive an SSI benefit. Concurrent beneficiaries who are covered by Medicaid and who have been entitled to DI long enough to qualify for Medicare may also be eligible for payment of their Medicare premiums and co-payments by their state. The minimum value of these payments would be $54.00 a month. Both programs feature work incentive provisions that are intended to encourage beneficiaries to return to work. However, the provisions of the two programs differ significantly, providing different levels of safeguards for continuing eligibility, income, and medical coverage for DI and SSI beneficiaries. For example, earnings, regardless of the amount, do not affect a DI beneficiary’s cash benefit for a period of time known as the trial work period. However, benefits will eventually stop completely after this period if earnings exceed a specified level. In contrast, earnings can affect an SSI beneficiary’s cash benefit immediately but the reduction in benefits is gradual with a reduction in benefits of $1 for every $2 earned over the first $65. Table 1 highlights each program’s work incentive provisions in effect at the time the Ticket to Work and Work Incentives Improvement Act of 1999 called for this study. Even with the work incentive provisions in the two programs, relatively few disability beneficiaries work and no more than 1 percent leave the DI and SSI beneficiary rolls each year because of their work. DI and SSI beneficiaries who do return to work are responsible for reporting their work activity to SSA as soon as it occurs. SSA has no specific provisions for adjusting benefits for concurrent beneficiaries who work and must apply the work incentive provisions of the two programs independently to determine whether an individual remains entitled to DI and SSI and, if so, the amount of each benefit. Most concurrent beneficiaries interact with SSA through its network of nearly 1,300 field offices. To cope with the complexity of its programs, most of these field offices use employees who specialize in either the Social Security programs, including the DI program, or the SSI program. The remaining offices use generalist employees who are trained in both programs. To supplement the information provided by its staff, SSA also publishes several pamphlets that explain the provisions of the DI and SSI programs. Two of these publications, Red Book on Employment Support and Working While Disabled—How We Can Help, provide information about the effect of work on DI and SSI benefits. Concurrent beneficiaries, who comprised about 14 percent of SSA’s disability population, were likely to have mental impairments and be female. In addition, their average age was 45. About 11 percent of concurrent beneficiaries worked and had a median earned income of about $250 a month. More than three-quarters of those who worked have mental impairments—mental illness and mental retardation. Individuals with mental retardation worked at twice the rate of beneficiaries with mental illness, but earned much less. The median earnings of beneficiaries with mental retardation were nearly half those of beneficiaries with mental illness. Of the more than 6 million working-age adults receiving disability benefits under the DI program and the more than 3.5 million working-age adults receiving SSI, our analysis of the February 2002 SSA data indicates that, approximately 1.2 million—14 percent—received benefits from both programs. These beneficiaries were an average age of 45, with fewer than 15 percent between the ages of 17 and 30. In addition, 53 percent were female. Concurrent beneficiaries received an average DI payment of about $430 per month and an SSI payment of about $150 per month. The majority of concurrent beneficiaries qualified for DI benefits on the basis of their work record. The remainder received benefits on the basis of the work history of a deceased, disabled, or retired parent (25 percent); or their deceased spouse (3 percent). Over half of concurrent beneficiaries had a mental impairment—a third had mental illness and about a quarter had mental retardation. Approximately one-ninth of concurrent beneficiaries had an impairment related to their muscular or skeletal system. The remaining beneficiaries had one of a wide range of impairments as their primary impairment. Of the approximately 142,000 concurrent beneficiaries who worked, almost 80 percent had a mental impairment. Concurrent beneficiaries who worked were more likely to have mental retardation, tended to be younger, and male. As shown in figure 1, while individuals with mental retardation made up only a quarter of the concurrent population, they accounted for over half of the concurrent beneficiaries who worked. Moreover, nearly half may not have had a significant work history. Instead, they qualified for benefits on the basis of the work history of a parent or spouse. Most concurrent beneficiaries who worked earned low wages, but earnings levels varied by impairment categories. While the median earned income of all working concurrent beneficiaries was approximately $250 per month, more than one-quarter earned $65 per month or less. Workers with mental retardation had median monthly earnings of about $200, compared with about $400 for concurrent beneficiaries with mental illness. However, the median earned income for concurrent beneficiaries eligible for DI benefits on the basis of the work history of a deceased, disabled, or retired parent was only $85 per month. A higher proportion of concurrent beneficiaries worked than SSI beneficiaries, but they earned much less. Fewer than 8 percent of SSI beneficiaries worked, but they had median earnings of $400, compared with about $250 for concurrent beneficiaries. More than one-quarter of SSI beneficiaries earned $1,000 per month or more, greater than three times the percentage of concurrent beneficiaries with earnings at that level. Table 2 provides the percentage of concurrent and SSI beneficiaries that were earning at the levels listed. The difference in earnings may be explained, in part, by the higher proportion of working concurrent beneficiaries with mental retardation as compared with SSI beneficiaries. However, this higher incidence of beneficiaries with mental retardation does not completely explain the difference in earnings since the earnings for SSI beneficiaries with mental retardation were higher than those for concurrent beneficiaries with mental retardation. For example, median monthly earnings for SSI beneficiaries with mental retardation were $250 compared with $200 for concurrent beneficiaries with the same impairment. Our analysis of data available on the use of work incentives indicated that, while 11 percent of concurrent beneficiaries worked, they did not take advantage of most of the work incentives available to them under the SSI and/or DI programs. Most concurrent beneficiaries who worked used the earned income exclusion under the SSI program that reduces cash benefits by $1 for every $2 earned, but the other incentives were not widely used. The next most frequently used work incentive was the Impairment Related Work Expenses provision, which allows beneficiaries to exclude the costs of certain impairment-related items and services needed to work. It was used by fewer than 3 percent of concurrent beneficiaries who worked. Concurrent beneficiaries’ use of work incentives was comparable to that of SSI beneficiaries. Because beneficiaries may not meet all the eligibility requirements for work incentives, it may be difficult to determine whether the low rates of use of work incentives were attributable to the inability to meet eligibility factors or lack of understanding of the provisions. There is little coordination between SSI and DI program rules, especially for concurrent beneficiaries who work and, as a result, SSA must apply the complex provisions of the two programs independently. The specialization of most SSA field office staff in either the DI or SSI program makes it difficult to serve concurrent beneficiaries effectively. Specialists in one program lack integrated guidance to readily determine the effect of work on the benefits in the other program. Moreover, because the guidance does not adequately cross reference the DI and SSI rules that pertain to concurrent beneficiaries, these specialists may not recognize the need to communicate information about work to the other program as required by SSA guidance. In addition, SSA has not established formal operating procedures that ensure that this information is collected and communicated nor has it established a monitoring system to ensure that appropriate actions are taken. Because information on the work activities of concurrent beneficiaries may not be exchanged between the two programs or acted on in a timely manner, SSA may be overpaying benefits. SSA took steps recently that have the potential for improving service to concurrent beneficiaries and increasing the accuracy of their payments by better coordinating the administrative process related to work activity. For example, SSA officials have created a new position and new software to handle work-related issues for all beneficiaries, which could provide better integrated service to concurrent beneficiaries. Because these initiatives are still being tested and evaluated, it is too early to know whether they will have the intended effect if implemented nationwide. SSA’s guidance for administering the DI and SSI programs may contribute to the difficulty encountered by staff that specialize in one program but are required to collect information about both programs for concurrent beneficiaries. SSA’s written guidance for both programs is contained in a voluminous document of about 35,000 pages divided into multiple parts. A DI specialist collecting work activity information from a concurrent beneficiary may find it challenging to use the multi-part guidance for DI benefits and even more challenging to use the guidance for SSI that would also be needed for a concurrent beneficiary. SSA guidance does not provide integrated instructions for processing work information reported for concurrent beneficiaries or an integrated explanation of the effect of work on both DI and SSI benefits. Available guidance usually segregates information by program and provides little cross-referencing to issues that may be common to both programs. In addition, the cross-referencing that is provided does not always direct specialists to the specific procedures to follow for the other program. For example, the guidance for dealing with a DI beneficiary who returns to work contains a single cross-reference to an 81 page section of SSI policy and procedural statements. However, this 81 page section does not explain the basic effect of work on benefits. To determine the specific procedures and how work affects the person’s SSI benefits, the DI specialist would need to go to yet another section of SSI guidance without the benefit of a cross-reference to find it. The need for efficient and accessible guidance is particularly important in field offices where heavy workloads and changing priorities often compete for employee attention. The lack of integrated guidance may contribute to SSA not collecting all the required information on concurrent work beneficiaries. In some offices, concurrent beneficiaries report their work activity to either a DI or SSI specialist who collects the information he or she believes necessary to determine the amount of benefits that should be paid under both programs. Some specialists reported that they did not always know when an individual was a concurrent beneficiary and did not always know what information to collect about the other program. In other offices, a concurrent beneficiary reported to a specialist in each program. If the beneficiary is unable to meet with both specialists, SSA may not collect all the information needed to adjust benefits correctly. Even if the information is collected, some field offices lack standard procedures for ensuring that information about the work activity is shared between programs. Some field offices have established local procedures for sharing this information, but these procedures may not always be adequate. For example, in one field office we visited, the SSI specialists who usually collected information about work activity from concurrent beneficiaries would copy and share the information with one designated supervisor who was responsible for taking the actions necessary to adjust DI benefits. Even with this procedure in place, the supervisor told us she was not confident that she was receiving all the information that was being reported by concurrent beneficiaries. SSA’s procedures for determining the appropriate DI benefit amount when concurrent beneficiaries work make it difficult to adjust benefits in a timely manner. When a concurrent beneficiary reports work, the field office handling the case can adjust the SSI benefit, when warranted. In contrast, in most cases, field office employees cannot take immediate actions to adjust DI benefits because they cannot be adjusted until the beneficiary has completed a 9 month trial work period. At the beginning of the trial work period, SSA procedures direct the field office to transfer DI cases to one of seven program service centers (PSC) for documenting the start of this period. At the end of this period, the PSC is supposed to return the case to the field office, which then determines whether the beneficiary will continue to be entitled to benefits. However, SSA does not routinely monitor or have a comprehensive system that tracks actions on cases as they move between SSA components and automatically identifies the cases may be nearing the completion of the trial work period. As a result, the field offices may not be notified immediately upon the completion of a trial work period and, therefore, may not know whether or not to terminate DI benefits. Employees in several field offices told us that they often do not receive the cases back from the PSCs in a timely manner. Their estimates of the time it took the PSC to return these cases for further action ranged from 1 to 10 years. SSA officials could not verify these delays because they told us that they did not systematically collect information about these time frames. These problems occur not only when administering the trial work period for concurrent beneficiaries, but for all DI beneficiaries who return to work. Untimely actions may also occur because the tasks related to adjusting benefits after the end of the trial work period are given a lower priority than other workloads. Several SSA officials told us that many tasks associated with adjusting benefits to account for work activity do not receive workload credits that help maintain or increase field office staffing levels. For this reason, field office managers generally give a higher priority to tasks that do, such as processing initial claims for benefits. However, an SSA headquarters official recently told us that SSA will focus greater attention on the post trial work period workload as it implements the Ticket to Work program. Because SSA employees do not always evaluate and take action related to the work activity in a timely manner, some DI beneficiaries continue to receive benefits that they are no longer due. When DI beneficiaries earn more than a specified amount in any month after completing the trial work period, as of that month, SSA no longer considers the person disabled and should end their DI benefits 2 months later. However, several SSA officials told us about a one-time analysis of SSA disability overpayments based on cessation of disability in calendar year 2000 that revealed that about one-half of the overpayment dollars were made to people who should not have received benefits because of their earnings. Given this analysis, failure to take timely actions when DI beneficiaries work may account for about $350 million dollars in overpayments for calendar year 2001. SSA established a temporary new position in July 2000, the employment support representative, which has the potential to address the challenges it faces in serving concurrent beneficiaries. SSA developed the position, in part, to concentrate on the needs of disability beneficiaries who work and tested it with 32 SSA employees who had responsibility for 54 field offices. These representatives received extensive training in the work incentive provisions of both the DI and SSI programs. This training prepared them to take the necessary actions for both programs without the need to rely on unfamiliar program guidance. Moreover, funneling all work activity cases through a single employee would allow this individual to develop a level of expertise that was not possible in the traditional field structure. Further, combining all duties related to disability beneficiaries who return to work into a single position could eliminate the problem of specialists in one program failing to share information with the other program. In addition, since these representatives do not share responsibility for handling the case with the PSC, they could take actions to adjust DI benefits in a timelier manner. It is unclear whether SSA will make this position permanent, and to what degree. In a November 2001 report, an SSA workgroup recommended that the position be implemented permanently in as many of its 1,300 service locations as feasible. While the 32 employment support representatives continue to perform the duties of this position, the agency has not announced decisions about the ultimate fate of this position. As of July 2002, SSA officials were still evaluating the resource implications of implementing this position in most of its field offices. Without additional resources, some field office managers told us they would have to divert existing staff from their current positions to assume the employment support representative role. SSA has not evaluated the timeliness of actions taken by the employment support representatives to adjust benefits. However, the employment support representatives with whom we spoke thought that the additional costs associated with the new position could be offset by the reduction in overpaid DI benefits from their more timely actions. In addition to testing the employment support representative position, SSA is developing a new computer system that may potentially help to improve the timeliness of actions in response to the work activity of DI beneficiaries. Scheduled for release at the end of calendar year 2002, the new program will allow SSA for the first time, to collect information about the monthly earnings of all DI beneficiaries who are working. This information should provide the basis for a systematic method for SSA to determine whether additional action is needed to determine continuing eligibility for of DI benefits. However, SSA is still deciding what additional information the new system should include and what reports it should produce to monitor all the actions needed to account for the work activity of DI beneficiaries and to adjust benefits in a timely way. Just as SSA has no special procedures for administering the rules for concurrent beneficiaries, it does not provide concurrent beneficiaries with any integrated explanation of the effects of work on both DI and SSI benefits through its public information materials. The numerous publications that SSA has issued explain how work affects one benefit or the other. SSA extends this practice of not integrating their explanations of the effects on benefits by sending beneficiaries two separate letters, one to explain changes in DI benefits and another to explain SSI benefits. In addition, SSA field office specialist employees that lack expertise about both programs may provide incomplete or incorrect information about these effects. While it may be difficult to communicate, it is important for concurrent beneficiaries to understand that work activity affects their benefits at different levels of earnings and at different times, depending on the program. For example, concurrent beneficiaries with relatively low earnings may be able to maintain both benefits while increasing their total income. However, as earnings increase, so does the probability that they will eventually lose one or both benefits. Figure 2 illustrates these effects of work activity at three earnings levels on the DI and SSI benefits. At low earnings, a beneficiary receiving the average DI benefit who starts working in February 2002 retains DI and SSI benefits throughout the 13 month period shown. In contrast, a beneficiary with high earnings—higher than substantial gainful activity—will lose both benefits during the same period. Because the work incentive provisions of the two programs are designed to encourage beneficiaries to test their ability to work without losing their benefits, concurrent beneficiaries who understand the rules of both programs can make decisions that best support their priorities for income, services, and self-sufficiency. Concurrent beneficiaries who wished to become self-sufficient would need to understand that, to maintain an equivalent of their level of benefits and services, they would need to earn enough to make up for the eventual loss of cash benefits and health insurance and benefits and services from other sources. Concurrent beneficiaries who are uncertain about their ability to sustain work can focus on working at a level that preserves enough benefits to support them while they test their ability to work. In determining what level of work they can pursue, these beneficiaries would have to weigh the value of non cash benefits that depend on income and assets such as housing or social services compared with the earnings from increased work activity. For example, a service provider told us about one concurrent beneficiary who was receiving in-home support services from his county that allowed him to live independently. However, he returned to work and was then earning too much to continue to qualify for these services. He determined that he could continue to qualify for the support services by working 1 hour less per week and he negotiated the change with his employer. Concurrent beneficiaries who do not understand the programs’ provisions may make decisions about work that will make them worse off financially. Some concurrent beneficiaries do not work at all because they are afraid of losing their benefits. For example, two social service providers with whom we spoke indicated that some of their clients with mental retardation and the family members who helped them make decisions would avoid any work activity. Even though some earnings would not significantly affect benefits, they feared the loss of any benefit and health insurance and decided to forego the additional income they could have earned. At the other extreme, beneficiaries may inadvertently lose the benefits and health insurance they need by earning more than the allowable limits under one or both of the programs. Concurrent beneficiaries who do not understand the full range of work incentives may not pursue provisions that might ease their transitions to work. For example, one young concurrent beneficiary who was working part-time and attending college told us that SSA employees had never explained two SSI work incentive provisions that would have allowed her to exclude more of her earned income from the total used to determine her benefit. This would have allowed her to have more money for her tuition. Another concurrent beneficiary said that, even though she had expressed a strong desire to work and had returned to work for a short time, SSA had never explained that she could deduct from her countable earnings the cost of any items or services related to her impairments that were necessary for her to continue working. To assist beneficiaries in making better decisions about work activity, as authorized by the Ticket to Work and Work Incentives Improvement Act of 1999, SSA has provided funding since 2000 to community-based organizations. These organizations are funded to provide work incentives planning and assistance to beneficiaries and conduct outreach to individuals who are potentially eligible to participate in work incentive programs. In fiscal year 2002, SSA awarded a total of about $20 million to more than 100 organizations for these activities. The 2001 annual report of this program indicates that, through the end of that calendar year, more than 100 organizations receiving funding provided intensive benefit support services to more than 4,500 beneficiaries, most of whom were working or considering a return to work. In addition, more than 5,000 beneficiaries received less intensive services, such as information and referral. Some disability advocates have recommended making the work incentive rules similar in both the DI and SSI programs to help beneficiaries better understand the effect of work on benefits. They frequently suggest eliminating the 9 month trial work period for DI and replacing it with a gradual reduction in benefits in response to increased earnings, similar to the SSI program. Such a change would require legislative action. The Ticket to Work and Work Incentives Improvement Act requires SSA to conduct a demonstration project to test whether a reduction of $1 in DI benefits for every $2 earned would remove disincentives to return to work. SSA is still in the planning stages for this demonstration, and it is unclear when data will be available. The DI and SSI programs were designed as two separate programs to serve two distinct categories of disability beneficiaries. However, a third category, concurrent beneficiaries—those who qualify for both DI and SSI benefits–has emerged as a sizable disability population. Failure to properly administer the program for this special population could result in benefit overpayments and underpayments and less-than-ideal beneficiary decisions about work. Without taking additional steps, it will be more difficult for SSA to effectively administer the disability program and serve concurrent beneficiaries under the current program. Without improved guidance and procedures, staff that have knowledge only about SSI or DI program rules may not collect and share information needed to make accurate determinations about concurrent beneficiaries’ benefit payments. In addition, without a monitoring system to ensure information about concurrent beneficiaries’ work activity is shared across program components and acted upon within a timely manner, SSA faces an increased risk that concurrent beneficiaries, as well as all DI beneficiaries who return to work, will be overpaid. Moreover, without public information materials that clearly explain the complex interaction of the two programs, the possibility that beneficiaries would make decisions about working that are not in their best interest could increase. Further, a lack of understanding of the work incentive provisions could create a disincentive to work. SSA needs to undertake the necessary steps to ensure it adequately serves concurrent beneficiaries and exercises its stewardship over program funds by avoiding overpayments. We recommend that the Commissioner of SSA: Develop procedures and integrated guidance to ensure information about work activity is collected and shared between the DI and SSI programs. One option would be to improve the cross-references used in its program guidance to more specifically target needed information to take actions to adjust benefits for both programs. Another option would be to require that some staff are knowledgeable about both programs and that they collect and act on work activity information for both programs. Regardless of the option selected, SSA should also consider adding to its guidance explanations and examples of the effect of work activity for individuals receiving both DI and SSI benefits. Develop comprehensive systems to monitor the progress of DI cases as they move between SSA components and set timeliness goals for the entire process for each action and component. In addition, use this information to help ensure timely actions and minimize overpayments of DI benefits when individuals return to work. Develop public information materials targeted to concurrent beneficiaries that explain the complex interaction of the two programs in language that beneficiaries can understand. SSA may wish to consider revising its publication, Working While Disabled—How We Can Help, to include a basic explanation of the effects of work when an individual receives both DI and SSI benefits and examples that illustrate these effects. For more detailed explanations, SSA could direct beneficiaries to contact an SSA representative knowledgeable of both programs. In its comments on a draft of this report, SSA agreed with our conclusions and highlighted the initiatives it has underway or planned that it believes will address our recommendations (see app. II). Concerning our first recommendation, SSA stated that it is developing training for fall 2002 to enhance field office employees’ technical proficiency in both the DI and SSI programs. It is also developing and refining its supportive software systems to print referral forms for use in routing program information. We believe additional training should help to improve the technical proficiency of field office employees in both programs. However, SSA may need to consider the time field employees will need to develop proficiency after completing the training. Reliable, user-friendly program guidance could help reinforce this training as well as be a reference to these and future employees. Therefore, we continue to believe that program guidance should be modified to more completely explain the interactions of the two programs when concurrent beneficiaries work. Further, while the enhancements to software should provide SSA with an additional tool for sharing information between programs, SSA may wish to consider developing procedures to ensure that such available tools are being used appropriately to share information. Concerning our second recommendation, SSA said that the systems it now has under development and scheduled for release in November 2002 will provide the necessary management information capabilities needed to ensure actions related to beneficiaries working are taken on a timely basis. As acknowledged in our report, the new system under development has the potential for improving the timeliness of actions in concurrent cases. However, because the system is still under development, we are unable to determine how effective it will be in identifying and controlling work activity. For example, we cannot confirm at this time whether the databases being developed will contain information about all working beneficiaries nationwide that can be accessed by all field offices or local databases that can only be accessed by the employees in one office, similar to those being tested in a number of field offices. Concerning our third recommendation, SSA stated that it would develop a fact sheet for concurrent beneficiaries that explains the interaction of the two programs in language they can understand. The agency will also modify another publication to make it clear that beneficiaries should contact the agency for an explanation because the interaction of work activity with the two programs is so complex that it requires individualized explanations. We believe a fact sheet that explains the interactions of the DI and SSI programs should be useful for concurrent beneficiaries. In addition, we agree that the interaction of work with DI and SSI benefits is complex and that individualized explanations may provide concurrent beneficiaries with the most complete information. In relying on individualized explanations provided by SSA employees, SSA may wish to consider developing methods to ensure that concurrent beneficiaries have access to employees who are knowledgeable in both programs regardless of the method of contact. For example, given that many beneficiaries may contact SSA through its 800 number teleservice centers, SSA could either deploy knowledgeable staff in the teleservice centers or establish procedures to ensure that these calls are referred to staff who are knowledgeable in both programs. SSA also provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Commissioner of Social Security, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-7215 or Shelia Drake at (202) 512-7172. Key contributors to this report were Beverly Crawford, Amy Bevan, Patrick DiBattista, and Vanessa Taylor. To determine the number and characteristics of concurrent beneficiaries, we used data from the Social Security Administration’s (SSA) monthly 10 Percent Characteristic Extract Record file of the Supplemental Security Record, which contains data from a 10 percent simple random sample of the records of all Supplemental Security Income (SSI) applicants and beneficiaries. We used data from the September 2001 extract to test our analysis and used the February 2002 extract for the final analysis. We first determined the number of working age beneficiaries (both concurrent and SSI only). To do this, we deleted from the sample universe all records that were not active (those that did not have a Record Identification Code of G); showed a date of death in a month prior to the month of the file; showed a master file type other than disabled or blind; showed that the beneficiary was under age 18 or over age 64 as of the month of the file; showed that the claim was denied and no payments had been made on that record; showed entitlement for a veteran under title VIII of the Social Security Act; and showed that the beneficiary was not receiving SSI because of excess income, except for those beneficiaries who continued to be eligible for Medicaid under section 1619b of the Social Security Act and who would be eligible for SSI payments if it were not for their earnings. We then determined which beneficiaries received Disability Insurance (DI) income as well as SSI income—concurrent beneficiaries. To do this, for the records that remained, we identified concurrent beneficiaries as individuals who were currently receiving type A unearned income. Type A unearned income is any Social Security benefit. The remaining records were identified as beneficiaries who received SSI but not DI. We did not eliminate the remaining records for which benefits were suspended, but were not terminated as of February 2002, because, in many cases, these suspensions are temporary and the beneficiary will return to payment status within a relatively short period of time. In addition, our methodology did not allow us to discern whether concurrent beneficiaries ages 62 through 64 were receiving Social Security benefits on the basis of disability or retirement. As a result, we may be slightly overstating the size of the concurrent beneficiary population. All estimates have sampling errors of +/- 5 percent or less of the value of the point estimates offered. We employed standard and widely accepted social science and statistical methods. We did not independently verify the accuracy or completeness of the data provided to us by the SSA. To assess the extent to which SSA coordinates the DI and SSI program rules when individuals are working and receiving benefits from both programs, we reviewed the relevant sections of the Social Security Act, regulations, and SSA policy and procedural guidance to its employees. We also interviewed SSA officials at the headquarters in Baltimore, Maryland, and at several field offices. We visited two SSA field offices each in metropolitan Los Angeles, California; and Chicago, Illinois, and one each in Alexandria, Virginia; Wilmington, Delaware; and Towson, Maryland. We judgmentally selected the locations on the basis of geographic diversity, the presence or absence of an employment support representative pilot, and the use of generalist or specialist claims representatives. To determine the potential effect of applying both DI and SSI program rules on concurrent beneficiaries’ decisions to work and on their benefits, we relied on our review of SSA law, regulations, and policy and procedural guidance as well as our interviews with SSA officials at headquarters and in field offices. We also reviewed the public information materials that SSA developed and used to communicate information about its programs to beneficiaries and other interested parties. In addition, we interviewed academic researchers, advocates for people with disabilities, social service providers for individuals with disabilities, and a small number of concurrent beneficiaries.

In calendar year 2001, the Social Security Administration (SSA) paid cash benefits of $60 billion to more than six million working-age adults with disabilities and eligible family members under its Social Security Disability Insurance (DI) program, and $20 billion to more than 3.5 million working-age adults with disabilities under the Supplemental Security Income (SSI) program. Some beneficiaries, known as concurrent beneficiaries, receive cash and medical benefits from both programs. Concurrent beneficiaries comprised about 14 percent of SSA's disability population; 58 percent have mental impairments, and about 53 percent are female. Eleven percent of concurrent beneficiaries worked and earned a median income of approximately $250 per month. There is little coordination between SSI and DI program rules for individuals who work and receive benefits from both programs concurrently. Because most field office staff specialize in one program, they may not be sufficiently knowledgeable of the procedures for the other program to ensure that concurrent beneficiaries who work are paid the appropriate benefit amount under both programs. Applying both SSI and DI program rules to concurrent beneficiaries may make it difficult for them to make informed decisions about attempting work and could result in an increase or decrease in overall income, depending on the amount of earnings. Concurrent beneficiaries may not receive adequate explanations from SSA staff or published materials about the complete effect work has on their disability benefits. However, because the rules are complex and may be difficult to understand even with a detailed explanation, beneficiaries who do not understand them could possibly make decisions about work that would not meet their needs or improve their situation.

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On August 29, 2005, Hurricane Katrina devastated the Gulf Coast region, causing human casualties and billions of dollars in damage. During major disasters such as this, the Stafford Act authorizes the federal government to assist in saving lives, reducing human suffering, mitigating the effects of lost income, and helping repair or rebuild certain damaged facilities. As of June 2006, nearly $88 billion was appropriated by the Congress through four emergency supplemental appropriations for relief and recovery efforts related to the recent Gulf Coast hurricanes. FEMA, the DHS component statutorily charged with administering the provisions of the Stafford Act, uses appropriations made to the Stafford Act’s Disaster Relief Fund to assist relief and recovery efforts. Initially, in September 2005, the Congress appropriated $62.3 billion for the response and recovery effort related to Hurricane Katrina in two emergency supplemental appropriations acts. Of that amount, (1) FEMA received $60 billion for the Disaster Relief Fund, (2) DOD received $1.9 billion, and (3) the Army Corps of Engineers (COE), a DOD agency, received $400 million. As of late December 2005, FEMA reported that it had obligated about $25 billion, or 42 percent, of the $60 billion it had received. In December 2005, the Congress provided additional funds for the recovery effort related to the 2005 Gulf Coast hurricanes through a third emergency supplemental appropriation act. This legislation provided approximately $29 billion to 20 federal agencies and also rescinded approximately $23.4 billion from the $60 billion appropriated to FEMA’s Disaster Relief Fund in September 2005. The third emergency supplemental appropriation resulted in a net increase of about $5.5 billion in total direct federal funding for hurricane relief and recovery and the fourth resulted in a net increase of approximately $20.1 billion. Table 1 shows the agencies that received direct funding through the four emergency supplemental appropriations acts. FEMA has authority under the Stafford Act to issue an order, called a mission assignment, to other federal agencies. A mission assignment is a tasking issued by FEMA that directs other federal agencies and components of DHS, or “performing agencies,” to support overall federal operations pursuant to, or in anticipation of, a Stafford Act declaration. Once the mission assignment is issued and approved, the mission assignment document is FEMA’s basis for obligating the portion of FEMA’s funds allocated to the assigned relief and recovery effort. From a federal agency standpoint, the mission assignment provides the recipient agency reimbursable budgetary authority, not the actual transfer of funds, to perform the agreed upon work. Among other things, mission assignments include a description of work, an estimate of the dollar amount of work to be performed, completion date for the work, and authorizing signatures. Mission assignments may be issued for a variety of tasks, such as search and rescue missions or debris removal, depending on the performing agencies’ areas of expertise. After the agencies perform work under a mission assignment (e.g., perform directly or pay a contractor), the agencies bill FEMA, and FEMA reimburses them for the work performed using the Intra-Governmental Payment and Collection (IPAC) system. In the case of an IPAC payment to a performing agency, the IPAC funds transfer occurs immediately upon request by the agency seeking reimbursement. After the IPAC is made, FEMA requires that performing agencies provide it documentation supporting the costs incurred while performing the work under the mission assignment. FEMA can also reverse or “charge-back” the payment if it believes the agency did not provide sufficient supporting documentation. The funding and reimbursement process related to mission assignments is shown in figure 1. The federal government is not adequately tracking and reporting on the use of the $88 billion in hurricane relief and recovery funds provided thus far to 23 federal agencies in the four emergency supplemental appropriations acts. First, FEMA does not have mechanisms in place to collect and report on information from the other agencies that are performing work on its behalf through mission assignments. As a result, FEMA’s required weekly reports to the Congress have limited usefulness from a governmentwide perspective. Second, also from a governmentwide perspective, the federal government does not currently have a framework or mechanisms in place to collect and consolidate information from the 22 federal agencies in addition to FEMA that have directly received funding thus far for hurricane relief efforts and report on this information. Although each federal agency is responsible for tracking the funds it received, obligations incurred, and funds expended through it own internal tracking systems, no mechanisms are in place to consolidate this information. Therefore, it will be difficult for decision makers to determine how much federal funding has been spent and by whom, whether more may be needed, or whether too much was provided. FEMA is required to report weekly to the Appropriations Committees on the use of funds it received; however, these reports do not provide timely information from a governmentwide perspective because FEMA does not have a mechanism in place to collect and report on information from other agencies which perform work on its behalf. Specifically, when FEMA tasks another agency through a mission assignment, which is similar to an interagency agreement for goods and services, FEMA records the entire amount upfront as an obligation on its reports to the Congress. The agency performing the task for FEMA does not record an obligation until a later date when it has actually obligated funds to carry out its mission, thereby overstating reported governmentwide obligations. The opposite is true for expenditures. The agency expends the funds, but then has to bill FEMA for reimbursement. This may happen months after the actual payment is made. FEMA does not record the expenditure on its reports to the Congress until it has received the bill from the performing agency, reviewed it, and recorded the expenditure in its accounting system, thereby understating reported governmentwide expenditures. FEMA’s weekly report as of March 29, 2006, shows that of the $36.6 billion received as of that date, it had incurred obligations totaling $29.7 billion and had made expenditures of $15.9 billion related to Hurricanes Katrina, Rita, and Wilma. Of the $29.7 billion in obligations, FEMA issued mission assignments to federal agencies totaling $8.5 billion, or 28.6 percent. The other $21.2 billion includes, for example, obligations that FEMA made for areas such as the individual and household program ($7.0 billion) and manufactured housing ($4.7 billion), which are being reviewed in some respects by other auditors. As of March 29, 2006, FEMA reported approximately $8.5 billion of obligations for mission assignments and approximately $661 million of expenditures for Hurricanes Katrina, Rita, and Wilma as shown in table 2. While FEMA reports obligations based on the dollar amount of the mission assignments it has placed with other federal agencies when they are assigned, these obligation amounts do not represent the amount of funds that the agencies have, in turn, actually obligated to perform disaster relief work on behalf of FEMA. In some cases, the agencies have obligated tens or hundreds of millions of dollars less than the amount reported by FEMA. Our analysis of FEMA’s reported mission assignments to other federal agencies to perform work on behalf of FEMA in the amount of $8.5 billion identified two types of reporting problems, both of which resulted in FEMA’s obligations being overstated from a governmentwide perspective. First, some federal agencies recorded obligations in their internal tracking systems that were much less than the amount of obligations reported by FEMA. This occurred because FEMA’s recorded obligations are based on the dollar amount of the entire mission assignment. In contrast, the amount of obligations recorded by federal agencies is the amount of funds they actually obligated to perform disaster relief work. The performing agency does not incur obligations until it actually performs or contracts for the work. Four examples of this reporting problem follow: On September 28, 2005, FEMA’s report showed that obligations on mission assignments issued to DOD related to Hurricane Katrina totaled about $2.2 billion. As of March 2006, this amount had been substantially reduced twice. On November 3, 2005, FEMA amended the mission assignment and reduced the amount to about $1.7 billion, and it reduced the amount again on March 15, 2006, to about $1.1 billion. While FEMA was reporting obligations as high as $2.2 billion during this 6-month period, DOD’s reports show that it incurred only $481 million of actual obligations as of April 5, 2006—hundreds of millions of dollars less than what FEMA reported over the same 6-month period. According to a DOD official, it is currently reviewing the mission assignments and will be returning obligational authority that was not used to FEMA. On September 28, 2005, FEMA’s report showed that obligations on mission assignments issued to COE related to Hurricane Katrina were about $3.3 billion. Since then, this amount has increased. On October 20, 2005, FEMA amended and increased the mission assignment amounts to about $3.7 billion and on April 5, 2006, to about $4 billion. However, according to COE’s internal records as of April 7, 2006, it had actually obligated about $3 billion for Hurricane Katrina work, a difference of over $1 billion. Based on information provided by the Coast Guard, FEMA had recorded mission assignment obligations related to Hurricanes Katrina and Rita in the amount of nearly $192 million as of April 2006. However, at that time, the Coast Guard had only actually incurred about $85 million in obligations. Thus, the difference between what FEMA reported to the Congress and what Coast Guard information showed it had actually obligated is approximately $107 million. Based on information provided by the Department of Housing and Urban Development (HUD), at the end of March 2006, FEMA had obligated and reported approximately $83 million for HUD mission assignments related to Hurricane Katrina. However, HUD had only incurred about $47 million in obligations for work to be done under mission assignments. While HUD may eventually utilize the full amount obligated by FEMA, at that time, there was an approximately $36 million difference between the amounts FEMA reported as obligated for HUD and what HUD had actually obligated. HUD expects final reconciliation to be completed by December 2006. Second, at least three federal agencies we interviewed did not have mission assignments recorded in their internal tracking systems that were recorded in FEMA’s system. According to the officials from certain federal agencies, this occurred because the agency’s financial management office was not informed of the mission assignments. FEMA officials informed us that this problem likely occurred because, while the agencies’ program offices appropriately received mission assignment information from FEMA, those agencies’ program offices did not properly provide the information to their agencies’ financial management offices. Two examples of this reporting problem follow: At the Department of Health and Human Services, we noted $90 million in mission assignment obligations related to Hurricane Katrina or amendments to those obligations that were reported by FEMA as of January 18, 2006, but not recorded by the department’s financial management office as of February 24, 2006. The department told us that these mission assignments or amendments had been issued by FEMA, but had not been received by the department’s program or financial management offices. After we pointed out the discrepancies, the two agencies reconciled the differences. In another case, the Environmental Protection Agency had a similar situation involving $11.5 million in mission assignments and amendments related to Hurricane Katrina for which it did not record obligations as of March 2006 because the financial management office was unaware the mission assignments had been made by FEMA. According to the Environmental Protection Agency, for $10 million of the $11.5 million in mission assignments, not only was the financial management office unaware but the agency had never been informed that the mission assignment had been issued by FEMA. A different set of issues arises with regard to expenditure data. Because of the nature and timing of payments FEMA makes to performing agencies, FEMA’s reported expenditures from the Disaster Relief Fund do not present an accurate status of federal spending for hurricane relief and recovery from a governmentwide perspective. This is explained in part by problems with the timeliness and adequacy of billings to FEMA by other agencies. As previously explained, FEMA reimburses performing agencies for work they perform on behalf of FEMA in accordance with the mission assignment agreements. FEMA requires that performing agencies (1) bill it within 90 days after completion or upon termination of a mission assignment, and (2) provide a certain level of documentation for its review in order for the billings to be approved. FEMA does not recognize reimbursements to other agencies as expenditures in its accounting system (and therefore in its reports to the Congress) until this approval has occurred. From a governmentwide perspective, this process results in FEMA’s expenditures being understated. As of March 29, 2006, FEMA reported about $661 million of expenditures to agencies performing mission assignments for Hurricanes Katrina, Rita, and Wilma (see table 2). However, performing agencies’ internal tracking systems showed a significantly higher level of expenditures on their mission assignments. The process FEMA uses for reimbursing performing agencies creates timing differences between FEMA’s and the performing agencies’ records. As a result, FEMA’s reported expenditures are less than actual expenditures performing agencies have made in support of FEMA’s hurricane relief and recovery efforts. In the case of a mission assignment, a performing agency would recognize an expenditure when that agency pays costs (liquidates obligations) to employees, contractors, or other outside entities for work performed. However, FEMA does not recognize the reimbursement of these costs as an expenditure until it has reviewed and approved a bill from the performing agency. With the exception of COE, reimbursements to the performing agencies are made using the IPAC system. While the IPAC funds transfer occurs immediately upon request by the agency seeking reimbursement, in FEMA’s accounting records the IPAC transaction would be reflected as a suspense account transaction until FEMA has received and approved the supporting documentation for the IPAC billing. Therefore, by virtue of the timing delays, FEMA’s reported expenditures would be less than expenditures made and reported by performing agencies and a user of FEMA’s report could incorrectly infer that a particular agency has received tasks from FEMA but has not spent any of the funds. Thus, the cost of actual work performed is better reflected by the performing agencies. Two examples follow: FEMA’s report as of March 29, 2006, showed that approved mission assignment expenditures (cash reimbursements) related to Hurricane Katrina were about $210 million for DOD. However, DOD’s report as of April 5, 2006, showed that it had already received $324 million in reimbursement from FEMA for mission assignments related to Hurricane Katrina. The U.S. Forest Service had not billed FEMA for any of its work done under mission assignments even though the agency reported that it had made close to $170 million in expenditures related to its Hurricane Katrina mission assignments as of January 31, 2006. Accordingly, FEMA reported no expenditures for this agency in its weekly report since FEMA had not yet approved any billings. FEMA’s billing instructions state that reimbursement requests can be forwarded to FEMA monthly, regardless of the amount. Also, agencies should submit the final bill no later than 90 days after completion or upon termination of the mission assignment. The Forest Service, however, was not doing this, and as a result, FEMA did not report any expenditures for mission assignment work performed by the Forest Service as of March 29, 2006, even though the Forest Service had spent about $170 million. The Forest Service explained that it billed FEMA in March and June 2006 and planned to issue additional bills in August and September 2006. We noted that there had been some billing activity reported by FEMA subsequent to March 29, 2006. Aside from the timing issues discussed above, some performing agencies have not provided billing documentation that meets FEMA’s requirements to support their reimbursements for work performed on mission assignments. Although performing agencies using the IPAC system receive funds immediately upon requesting reimbursement, if upon review of supporting reimbursement documents, FEMA officials determine that some amounts are incorrect or unsupported, FEMA may retrieve or “charge back” the monies from these agencies through the IPAC system. For example, travel charges should be supported by a breakdown by object class with names, period of performance dates, and amounts. Failure to submit this documentation may result in FEMA charging back the agency for the related mission assignment billing. FEMA’s records as of May 15, 2006, showed that FEMA had “charged back” about $267 million from performing agencies for costs billed to FEMA for mission assignments related to Hurricanes Katrina, Rita, and Wilma. About $260 million, or over 97 percent, of these charge-backs involved five agencies: the Department of Transportation ($102 million), DOD ($57 million), the Environmental Protection Agency ($45 million), the Federal Protective Service within DHS ($32 million), and the Department of Health and Human Services ($24 million). Consistent with its practice of only reporting approved expenditures, these amounts were not recognized as expenditures by FEMA, even though the performing agencies claim they have expended those amounts. In addition, until FEMA requested the charge-backs, the billings would have been in a FEMA suspense account, and would have temporarily depleted monies from the Disaster Relief Fund since the agencies had already received reimbursement through the IPAC system. At least one agency, DOD, has indicated that it is trying to gather additional supporting documentation for the $57 million that FEMA charged back. Therefore, at least part of these charged back funds may be reported as expenditures by FEMA at some point in the future. If the agency cannot provide FEMA the needed supporting documentation, the agency may not be reimbursed and thus will be required to use its own appropriations. FEMA is also experiencing billing problems with COE, which does not use the IPAC system. According to FEMA personnel, COE had billing and documentation problems in the past and was not permitted to use the IPAC system for transactions with DHS. While COE was working on gaining access to using the IPAC system prior to Hurricane Katrina, this process was put on hold, and instead COE must manually submit supporting documentation before FEMA reimburses its mission assignment costs. This allows for a thorough review by FEMA, but has also led to payment delays. As of February 6, 2006, COE’s internal accounts receivable report showed that it had not received reimbursement for about $1.2 billion of bills submitted to FEMA for Hurricane Katrina mission assignments even though COE officials stated that they had sent documentation supporting the majority of the bills. Of that amount, about $610 million, or over half of the total, was over 60 days old. According to FEMA officials, as of April 7, 2006, it had not received documentation supporting about $800 million of the $1.2 billion of outstanding accounts receivable on COE’s records. None of the $1.2 billion has been reported as expenditures by FEMA, although COE reports these amounts as expenditures. From a governmentwide perspective, since Hurricane Katrina made landfall, about $88 billion through four emergency supplemental appropriations has been appropriated to 23 federal agencies. We found that no one agency or central collection point exists to compile and report on how these funds are being spent. Without a framework and mechanisms in place to collect and consolidate information from these agencies and report on a periodic basis, decision makers will not have complete and consistent information on the uses of the funding that has been provided thus far. Information on the amount of obligations and expenditures made on the actual relief and recovery effort would provide decision makers information they can use to determine, for example, if (1) additional funds should be provided for the relief and recovery work, (2) the funds already provided could be deemed excess and used for other disaster relief and recovery work, (3) funds should be rescinded, or (4) duplicate programs are providing similar assistance. As a result, in order to have governmentwide information on actual obligations incurred and expenditures made on the relief and recovery effort, the agencies would have to use their own internal tracking systems to extract this information and provide the information to a central point, where the data could be consolidated and reported. The ability to separately track and report on these funds is important to help ensure better accountability and clearly identify the status of funding provided in direct response to these hurricanes at both the individual federal agency level as well as the governmentwide level and to provide additional transparency so that hurricane victims, affected states, as well as American taxpayers, know how the government is spending these funds. At the same time, we recognize the substantial challenge in balancing the need to get money out quickly to those who are actually in need and sustaining public confidence in disaster programs by taking all possible steps to minimize fraud and abuse. Although each federal agency is responsible for tracking the funds it received, obligations incurred, and funds expended through its own internal tracking systems, no mechanisms are in place to consolidate and report on this information. Of the approximately $88 billion provided as of June 2006, FEMA received about $42.6 billion ($66 billion appropriated less the $23.4 billion rescinded) for the Disaster Relief Fund and 22 other agencies received the remaining $45.4 billion. Once these funds are appropriated, they are merged into, and commingled with existing appropriation accounts. OMB Circular No. A-11 requires agencies to report obligations and outlays on a quarterly basis at the appropriation level; however, those reports on budget execution and budgetary resources do not call for separately identifying amounts on a programmatic basis, such as hurricane relief and recovery efforts. Thus, reporting under this Circular will not provide the information needed to monitor the status of hurricane-related funding. Although FEMA was required to provide weekly reports to the Congress on obligation and expenditure information on the $42.6 billion it received (although with limited usefulness as discussed previously), most of the other 22 agencies that received over $45 billion would only be responsible for tracking this information internally. While there are some reporting requirements included in the emergency supplemental appropriation acts, overall reporting requirements differ greatly. Also, the reporting requirements do not call for consolidating information on obligations and expenditures on a governmentwide basis and, therefore, do not facilitate governmentwide reporting on hurricane- related spending. The reporting requirements that were included for the various agencies ranged from very detailed reporting to no reporting at all. For example, while FEMA was required to report obligations and expenditures, 16 other federal agencies did not have any reporting requirements. See appendix II for more information on the reporting requirements included in the first four emergency supplemental appropriations acts. Given that consolidated governmentwide reporting will require that financial information be compiled from 23 different agencies, an entity that regularly collects and compiles information from different agencies, such as OMB or the Department of the Treasury, would likely be in the best position for requesting this information and preparing consolidated governmentwide reporting on hurricane-related funding. Other options would be for either FEMA or the Office of the Federal Coordinator for Gulf Coast Rebuilding to compile this information. Success in the rebuilding efforts of the Gulf Coast area is critical. The federal government has already invested billions of dollars for this effort with more likely to come. Although FEMA is required to report on obligations and expenditures, these reports do not provide timely information from a governmentwide perspective. In addition, there is no framework or mechanisms in place to collect and consolidate information, and to report on the $88 billion in hurricane relief and recovery funds provided thus far to 23 federal agencies in the four emergency supplemental appropriations acts on a governmentwide basis. The government’s progress in the rebuilding efforts will be difficult to measure if decision makers do not know how much has been spent, what for, how much has been obligated but not yet spent, and how much more is still available. Without consistent, reliable, and timely governmentwide information on the use of this funding, the agencies and the Congress could lose visibility over these funds and not know the extent to which they are being used to support hurricane relief and recovery efforts. With rebuilding efforts likely to take many years, it is important that the federal government fulfill its role as steward of taxpayer funds and provide transparency to the affected states and victims, and account for and report on all funds received for the hurricane-related efforts. To improve the information on the status of hurricane relief and recovery funds provided in FEMA’s weekly reports to the Appropriations Committees from a governmentwide perspective, we recommend that the Secretary of Homeland Security direct the Director of FEMA to take the following four actions: Explain in the weekly reports how FEMA’s reported obligations and expenditures for mission assignments do not reflect the status from a governmentwide perspective. On an established basis (e.g., monthly or quarterly), request and include actual obligation and expenditure data from agencies performing mission assignments. Include in the weekly report amounts reimbursed to other agencies that are in suspense because FEMA has not yet reviewed and approved the documentation supporting the expenditures. Reiterate to agencies performing mission assignments its policies on (1) the detailed information required in supporting documentation for reimbursements, and (2) the timeliness of agency billings. To help ensure better accountability, provide additional transparency, and clearly identify the status of the hurricane-related funding provided by emergency supplemental appropriations at both the individual federal agency level as well as the governmentwide level, we recommend that the Director, Office of Management and Budget, establish a framework for governmentwide reporting on the status of the hurricane-related funding. OMB could either collect and consolidate this information itself or designate another appropriate agency, such as the Department of the Treasury, to do so and report to the Appropriations Committees on a periodic basis. We requested comments on a draft of this report from the Secretary of Homeland Security and the Director of OMB. These comments are reprinted in appendixes III and IV, respectively. While DHS concurred with our recommendations, it also stated that it believes our recommendation to periodically request and include actual obligation and expenditure data from agencies performing mission assignments is subsumed by our recommendation to OMB to establish a framework for governmentwide reporting on the status of hurricane-related funding. We believe our recommendation is still valid for FEMA since, as stated in the agency’s response, its mission assignments are a significant component in the establishment of a framework for governmentwide reporting on the status of hurricane-related funding. However, as the intent of our recommendation is to help ensure the Congress is receiving complete, timely, useful, and reliable reports, we agree that other alternatives could be considered to achieve the same objectives. OMB agreed that there should be clear accountability and transparency on the spending of emergency funds for hurricane relief and indicated it will fully consider our recommendation to establish a new framework for governmentwide reporting on the status of disaster-related funding. We also provided excerpts of the report to those agencies cited in examples for their review. They provided technical comments, and we made revisions as appropriate. We are sending copies of this report to other interested congressional committees and to affected federal agencies. Copies will be made available to others upon request. In addition, this report will also be available at no charge on GAO’s home page at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-9095 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix V. To determine whether the federal government was tracking and reporting on the use of funding provided in the four emergency supplemental appropriations acts, we obtained and analyzed the four emergency supplemental appropriation documents and conference reports. We also obtained the reports prepared by the Federal Emergency Management Agency (FEMA) and the Army Corps of Engineers (COE) in response to the second emergency supplemental appropriation act. We did not obtain the reports required by the third or fourth emergency supplemental appropriations acts since this was a new requirement for the federal agencies. In addition, we obtained and analyzed guidance on reporting of estimates of hurricane-related funding budget authority, outlays, and receipts, issued by the Office of Management and Budget (OMB) in 2005 and discussed this guidance with officials from OMB. To determine whether FEMA’s reports to the Appropriations Committees required by the second emergency supplemental appropriation act provided timely and useful information, we obtained and analyzed the weekly reports prepared by FEMA, specifically focusing on the obligations and expenditures reported for mission assignments to agencies performing disaster relief work related to Hurricane Katrina on behalf of FEMA because they have governmentwide implications. We met with FEMA officials to discuss (1) the definitions of the terms obligations and expenditures used in the report, (2) the process of FEMA issuing mission assignments to agencies and the obligation of FEMA’s funds related to the mission assignments, and (3) the process of agencies seeking reimbursement for goods and services provided in response to the disaster relief work including FEMA’s billing procedures. We also obtained and analyzed certain federal agencies’ reports that provide information on mission assignments, obligations incurred and expenditures made in performing disaster relief work on behalf of FEMA, amount of bills submitted to FEMA, and amount of bills paid by FEMA. Because the majority of FEMA’s mission assignment obligations related to Hurricane Katrina, we focused our review at the agencies on the Hurricane Katrina mission assignments. We met with officials from certain federal agencies to discuss the information contained in these reports. In performing our work, we obtained information from the OMB, Department of the Treasury, FEMA, Department of Defense, COE, Department of Transportation, Environmental Protection Agency, Department of Health and Human Services, U.S. Forest Service, General Services Administration, and Department of Housing and Urban Development. To assess the reliability of the data, we interviewed officials knowledgeable about the data and determined that the data were sufficiently reliable for the purposes of this report. We conducted our work from October 2005 through June 2006 in accordance with generally accepted government auditing standards. We provided a draft of this report to the Department of Homeland Security (DHS) and OMB for comment. DHS and OMB provided written comments, which are presented in the Agency Comments and Our Evaluation section of this report and are reprinted in appendixes III and IV, respectively. We also provided excerpts of the report to those agencies cited in examples for their review. They provided technical comments, and we made revisions as appropriate. The four emergency supplemental appropriations acts enacted as of June 2006 provided funds to 23 federal agencies for the hurricane relief and recovery effort and included different reporting requirements. In addition, of the 23 agencies receiving appropriations in the four emergency supplemental appropriations acts, 16 agencies did not have any reporting requirements. The first two emergency supplemental appropriations acts provided funding to the Federal Emergency Management Agency (FEMA), Department of Defense (DOD), and Army Corps of Engineers (COE), and included the following reporting requirements: The first emergency supplemental appropriation act did not contain any requirements for FEMA to report on the $10 billion it received. The second emergency supplemental appropriation act required the Secretary of Homeland Security to provide, at a minimum, a weekly report to the Appropriations Committees detailing the allocation and obligation of the $50 billion in appropriated funds it received for Hurricane Katrina in the second emergency supplemental appropriation act. The fiscal year 2006 Department of Homeland Security Appropriations Act further explained that this weekly report was to include other information such as obligations, allocations, and expenditures, categorized by agency and state. COE was not provided any funding in the first emergency supplemental appropriation. The second emergency supplemental appropriation act required COE to provide a weekly report to the Appropriations Committees detailing the allocation and obligation of $400 million in appropriated funds it received under that act. There was no requirement for DOD to report on the $1.9 billion it received in the first and second emergency supplemental appropriations acts. The third emergency supplemental appropriation act provided $29 billion directly to 20 individual federal agencies and rescinded approximately $23.4 billion from the amount initially appropriated to FEMA’s Disaster Relief Fund in September 2005. The third emergency supplemental appropriation act included differing reporting requirements for each of the 20 federal agencies ranging from none to very detailed. Illustrative examples from the third emergency supplemental appropriation act and the conference report accompanying this legislation include the following specific reporting requirements: The third emergency supplemental appropriation act required each state receiving monies through the Community Development Fund from the Department of Housing and Urban Development (HUD) to report quarterly to the Appropriations Committees for all awards and uses of funds. The supplemental appropriation language also required some additional reporting from HUD, such as reporting quarterly to the Appropriations Committees with regard to all steps taken to prevent fraud and abuse of funds made available. The conference report accompanying the third emergency supplemental appropriation act directed the Secretary of Defense to submit quarterly reports to the congressional defense committees including, among other things, the expenditures of funds it received for hurricane relief and recovery operations. This did not include retroactive requirements for the first and second emergency supplemental appropriations. The conference report also directed the Secretary of Agriculture to provide quarterly reports including, among other things, the expenditures of funds received for hurricane relief. It also requested the Department of Education to submit a report by March 1, 2006, on the obligation and allocation of funds it received for hurricane relief and provided to assist college students under the Higher Education Act. The reporting requirements for some agencies were more detailed than others. Also, these reporting requirements do not cover funding authority of approximately $8.5 billion that agencies received through FEMA’s mission assignment process for Hurricanes Katrina, Rita, and Wilma as of March 29, 2006. The fourth emergency supplemental appropriation act provided approximately $20.1 billion directly to 22 individual federal agencies. This legislation did not include any new reporting requirements for the agencies receiving funding; however, the act contained reporting requirements for HUD that were consistent with the requirements outlined in the third emergency supplemental appropriation act. In addition to the contact named above, the following individuals also made significant contributions to this report: Christine Bonham, Richard Cambosos, Thomas Dawson, Francine DelVecchio, Heather Dunahoo, Abe Dymond, Gabrielle Fagan, Casey Keplinger, Stephen Lawrence, Greg Pugnetti, Lori Ryza, and Natalie Schneider. Other contributions were made by Felicia Brooks, Eric Essig, Lauren Fassler, Barry Grinnell, John Hong, James Maziasz, Patrick McCray, Shalin Pathak, and Chanetta Reed.

Hurricane Katrina devastated the Gulf Coast region of the United States and caused billions of dollars in damage. Hurricanes Rita and Wilma further exacerbated damage to the region. The Federal Emergency Management Agency (FEMA), within the Department of Homeland Security (DHS), was tasked with the primary role of managing the federal relief and recovery efforts. This review was performed under the Comptroller General's authority because of widespread congressional interest in the response to this disaster. GAO examined whether the federal government was adequately tracking and reporting on the use of the funding provided in the four emergency supplemental appropriations acts enacted as of June 2006. GAO analyzed the emergency supplemental appropriations acts and conference reports, reviewed FEMA's required weekly reports, and interviewed federal agency officials. FEMA's required weekly reports to the Appropriations Committees on the use of funds it received do not provide timely information from a governmentwide perspective because FEMA does not have a mechanism to report on the financial activity of the agencies performing work on its behalf. Specifically, when FEMA tasks another federal agency through a mission assignment, FEMA records the entire amount upfront as an obligation, whereas the performing agency does not record an obligation until a later date, thereby overstating reported governmentwide obligations. The opposite is true for expenditures. The performing agency expends the funds, but then bills FEMA for reimbursement. FEMA does not record the expenditure until it has received the bill and reviewed it, thereby understating reported governmentwide expenditures. As a result, while FEMA is reporting as required, from a governmentwide perspective, FEMA's reported obligations are overstated and expenditures are understated. The federal government also does not have a governmentwide framework or mechanisms in place to collect and consolidate information from the individual federal agencies that received emergency supplemental appropriations for hurricane relief and recovery efforts and report on this information. About $88 billion has been appropriated to 23 different federal agencies through four emergency supplemental appropriations acts; however, no one agency or central collection point exists to compile and report on how these funds are being spent. Decision makers need this consolidated information to determine how much federal funding has been spent and by whom, whether more may be needed, or whether too much has been provided. The ability to separately track and report on these funds is important to help ensure better accountability and clearly identify the status of funding provided in direct response to these hurricanes at both the individual federal agency level as well as the governmentwide level. Also, it is important to provide additional transparency so that hurricane victims, affected states, as well as American taxpayers, know how these funds are being spent.

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FAA has authority to authorize all UAS operations in the national airspace—military; public (academic institutions and federal, state, and local governments including law enforcement organizations); and civil (non-government including commercial). Currently, since a final rulemaking is not completed, FAA only allows UAS access to the national airspace on a case-by-case basis. FAA provides access to the airspace through three different means: Certificates of Waiver or Authorization (COA): Public entities including FAA-designated test sites may apply for COA. A COA is an authorization, generally for up to 2 years, issued by the FAA to a public operator for a specific UAS activity. Between January 1, 2014 and March 19, 2015 FAA had approved 674 public COAs. Special Airworthiness Certificates in the Experimental Category (Experimental Certificate): Civil entities, including commercial interests, may apply for experimental certificates, which may be used for research and development, training, or demonstrations by manufactures. Section 333 exemptions: Since September 2014, commercial entities may apply to FAA for issued exemptions under section 333 of the 2012 Act, Special Rules for Certain Unmanned Aircraft Systems. This exemption requires the Secretary of Transportation to determine if certain UASs may operate safely in the national airspace system prior to the completion of UAS rulemakings. FAA has granted such exemptions to 48 of 684 total applications (7 percent) from companies or other entities applying under section 333. These companies may apply to fly at their own designated sites or the test sites. While limited operations continue through these means of FAA approval, FAA has been planning for further integration. In response to requirements of the 2012 Act, FAA issued the UAS Comprehensive Plan and the UAS Integration Roadmap, which broadly map the responsibilities and plans for the introduction of UAS into the national airspace system. These plans provide a broad framework to guide UAS integration efforts. The UAS Comprehensive Plan described the overarching, interagency goals, and approach and identified six high- level strategic goals for integrating UAS into the national airspace. The FAA Roadmap identified a broad three-phase approach to FAA’s UAS integration plans—Accommodation, Integration, and Evolution—with associated priorities for each phase that provide additional insight into how FAA plans to integrate UAS into the national airspace system. This phased approach has been supported by both academics and industry. FAA plans to use this approach to facilitate further incremental steps toward its goal of seamlessly integrating UAS flight into the national airspace. Accommodation phase: According to the Roadmap, in the accommodation phase, FAA will apply special mitigations and procedures to safely facilitate limited UAS access to the national airspace system in the near-term. Accommodation is to predominate in the near-term with appropriate restrictions and constraints to mitigate any performance shortfalls. UAS operations in the national airspace system are considered on a case-by-case basis. During the near-term, R&D is to continue to identify challenges, validate advanced mitigation strategies, and explore opportunities to progress UAS integration into the national airspace system. Integration phase: The primary objective of the integration phase is establishing performance requirements for UAS that would increase access to the NAS. During the mid- to far-term, FAA is to establish new or revised regulations, policies, procedures, guidance material, training, and understanding of systems and operations to support routine NAS operations. FAA plans for the integration phase to begin in the near- to mid-term with the implementation of the small UAS rule and is to expand the phase further over time (mid- and far-term) to consider wider integration of a broader field of UASs. Evolution phase: In the evolution phase, FAA is to work to routinely update all required policy, regulations, procedures, guidance material, technologies, and training to support UAS operations in the NAS operational environment as it evolves over time. According to the Roadmap, it is important that the UAS community maintains the understanding that the NAS environment is not static and that many improvements are planned for the NAS over the next 13—15 years. To avoid obsolescence, UAS developers are to maintain a dual focus: integration into today’s NAS while maintaining cognizance of how the NAS is evolving. In February 2015, FAA issued a Notice for Proposed Rulemaking for the operations of small UASs—those weighing less than 55 pounds—that could, once finalized, allow greater access to the national airspace. To mitigate risk, the proposed rule would limit small UASs to daylight-only operations, confined areas of operation, and visual-line-of-sight operations. FAAs release of this proposed rule for small UAS operations started the process of addressing additional requirements of the 2012 Act. See table 1 for a summary of the rule’s major provisions. FAA has also met additional requirements outlined in the 2012 Act pertaining to the creation of UAS test sites. In December 2013, FAA selected six UAS test ranges. According to FAA, these sites were chosen based on a number of factors including geography, climate, airspace use, and a proposed research portfolio that was part of the application. All UAS operations at a test site must be authorized by FAA through either the use of a COA or an experimental certificate. In addition, there is no funding from FAA to support the test sites. Thus, these sites rely upon revenue generated from entities, such as those in the UAS industry, using the sites for UAS flights. Foreign countries are also experiencing an increase in UAS use, and some have begun to allow commercial entities to fly UASs under limited circumstances. According to industry stakeholders, easier access to testing in these countries’ airspace has drawn the attention of some U.S. companies that wish to test their UASs without needing to adhere to FAA’s administrative requirements for flying UASs at one of the domestically located test sites, or obtaining an FAA COA. It has also led at least one test site to partner with a foreign country where, according to the test site operator, UAS test flights can be approved in 10 days. Since being named in December 2013, the six designated test sites have become operational, applying for and receiving authorization from FAA to conduct test flights. From April 2014 through August 2014, as we were conducting our ongoing work, each of the six test sites became operational and signed an Other Transaction Agreement with FAA. All flights at a test site must be authorized under the authority of a COA or under the authority of an experimental certificate approved by FAA. Since becoming operational in 2014 until March 2015, five of the six test sites received 48 COAs and one experimental certificate in support of UAS operations resulting in over 195 UAS flights across the five test sites. These flights provide operations and safety data to FAA in support of UAS integration. While there are only a few contracts with industry thus far, according to test site operators these are important if the test sites are to remain operational. Table 2 provides an overview of test-site activity since the sites became operational. FAA officials and some test sites told us that progress has been made in part because of FAA’s and sites’ efforts to work together. Test site officials meet every two weeks with FAA officials to discuss current issues, challenges, and progress. According to meeting minutes, these meetings have been used to discuss many issues from training for designated airworthiness representatives to processing of COAs. In addition, test sites have developed operational and safety processes that have been reviewed by FAA. Thus, while FAA has no funding directed to the test sites to specifically support research and development activities, FAA dedicates time and resources to supporting the test sites, and FAA staff we spoke to believe test sites are a benefit to the integration process and worth this investment. According to FAA, its role is to ensure each test site sets up a safe-testing environment and to provide oversight that guarantees each test site operates under strict safety standards. FAA views the test sites as a location for industry to safely access the airspace. FAA told us it expects to collect data obtained from the users of the test ranges that will contribute to the continued development of standards for the safe and routine integration of UASs. The Other Transaction Agreement between FAA and the test sites defines the purpose of the test sites as research and testing in support of safe UAS integration into the national airspace. FAA and the test sites have worked together to define the role of the test sites and see that both the FAA and the test sites are effectively supporting each other and the goal of the test sites, we will continue to examine this progress and will report our final results late this year. As part of our ongoing work, we identified a number of countries that allow commercial UAS operations and have done so for years. In Canada and Australia, regulations pertaining to UAS have been in place since 1996 and 2002, respectively. According to a MITRE study, the types of commercial operations allowed vary by country. For example, as of December 2014, Australia had issued over 180 UAS operating certificates to businesses engaged in aerial surveying, photography, and other lines of business. In Japan, the agriculture industry has used UASs to apply fertilizer and pesticide for over 10 years. Furthermore, several European countries have granted operating licenses to more than 1,000 operators to use UASs for safety inspections of infrastructure, such as rail tracks, or to support the agriculture industry. The MITRE study reported that the speed of change can vary based on a number of factors, including the complexity and size of the airspace and the supporting infrastructure. In addition, according to FAA, the legal and regulatory structures are different and may allow easier access to the airspace in other countries for UAS operations. While UAS commercial operations can occur in some countries, there are restrictions controlling their use. We studied the UAS regulations of Australia, Canada, France, and the United Kingdom and found these countries impose similar types of requirements and restrictions on commercial UAS operations. For example, all these countries except Canada require government-issued certification documents before UASs can operate commercially. In November 2014, Canada issued new rules creating exemptions for commercial use of small UASs weighing 4.4 pounds or less and from 4.4 pounds to 55 pounds. UASs in these categories can commercially operate without a government-issued certification but must still follow operational restrictions, such as a height restriction and a requirement to operate within line of sight. Transport Canada officials told us this arrangement allows them to use scarce resources to regulate situations of relatively high risk. In addition, each country requires that UAS operators document how they ensure safety during flights and that their UAS regulations go into significant detail on subjects such as remote pilot training and licensing requirements. For example, the United Kingdom has established “national qualified entities” that conduct assessments of operators and make recommendations to the Civil Aviation Authority as to whether to approve that operator. If UASs were to begin flying today in the national airspace system under the provisions of FAA’s proposed rules, their operating restrictions would be similar to regulations in these other four countries. However, there would be some differences in the details. For example, FAA proposes altitude restrictions of below 500 feet, while Australia, Canada, and the United Kingdom restrict operations to similar altitudes. Other proposed regulations require that FAA certify UAS pilots prior to commencing operations, while Canada and France do not require pilot certification. Table 3 shows how FAA’s proposed rules compare with the regulations of Australia, Canada, France, and the United Kingdom. While regulations in these countries require UAS operations remain within the pilot’s visual line of sight, some countries are moving toward allowing limited operations beyond the pilot’s visual line of sight. For example, according to Australian civil aviation officials, they are developing a new UAS regulation that would allow operators to request a certificate allowing beyond line-of-sight operations. However, use would be very limited and allowed only on a case-by-case basis. Similarly, according to a French civil aviation official, France approves on a case-by-case basis, very limited beyond line-of-sight operations. Finally, in the United States, there have been beyond line-of-sight operations in the Arctic, and, NASA, FAA and the industry have successfully demonstrated detect-and-avoid technology, which is necessary for beyond line-of-sight operations. In March 2015, the European Aviation Safety Agency (EASA) issued a proposal for UAS regulations that creates three categories of UAS operations—open, specific, and certified. Generally, the open category would not require authorization from an aviation authority but would have basic restrictions including altitude and distance from people. The specific category would require a risk assessment of the proposed operation and an approval to operate under restrictions specific to the operation. The final proposed category, certified operations, would be required for those higher-risk operations, specifically when the risk rises to a level comparable to manned operations. This category goes beyond FAA’s proposed rules by proposing regulations for large UAS operations and operations beyond the pilot’s visual line-of-sight. As other countries work toward integration standards organizations from Europe and the United States are coordinating to try and ensure harmonized standards. Specifically, RTCA and the European Organization for Civil Aviation Equipment (EUROCAE) have joint committees focused on harmonization of UAS standards. We found during our ongoing work that FAA faces some critical steps to keeping the UAS integration process moving forward, as described below: Issue final rule for small UASs: As we previously discussed, the NPRM for small UAS was issued in February 2015. However, FAA plans to process comments it receives on the NPRM and then issue a final rule for small UAS operations. FAA told us that it is expecting to receive tens of thousands of comments on the NPRM. Responding to these comments could extend the time to issue a final rule. According to FAA, its goal is to issue the final rule 16 months after the NPRM, but it may take longer. If this goal is met, the final rule would be issued in late 2016 or early 2017, about 2 years after the 2012 Act required. FAA officials told us that it has taken a number of steps to develop a framework to efficiently process the comments it expects to receive. Specifically, the officials said that FAA has a team of employees assigned to lead the effort with contractor support to track and categorize the comments as soon as they are received. According to FAA officials, the challenge of addressing comments could be somewhat mitigated if industry groups consolidated comments, thus reducing the total number of comments that FAA must address. Implementation plan: The Comprehensive Plan and Roadmap provide broad plans for integration, but some have pointed out that FAA needs a detailed implementation plan to predict with any certainty when full integration will occur and what resources will be needed. The UAS Aviation Rulemaking Committee developed a detailed implementation plan to help FAA and others focus on the tasks needed to integrate UAS into the national airspace.need for an implementation plan that would identify the means, necessary resources, and schedule to safely and expeditiously integrate civil UASs into the national airspace. The proposed implementation plan contains several hundred tasks and other activities needed to complete the UAS integration process. FAA stated it used this proposed plan and the associated tasks and activities when developing its Roadmap. However, unlike the Roadmap, an implementation plan would include specific resources and time frames to meet the near-term goals that FAA has outlined in its Roadmap. An internal FAA report from August 2014 discussed the importance for incremental expansion of UAS operations. While this report did not specifically propose an implementation plan, it suggested that for each incremental expansion of operations, FAA identify the tasks necessary, responsibilities, resources, and expected time frames. Thus, the internal report suggested FAA develop plans to account for all the key components of an implementation plan. The Department of Transportation’s – Inspector General issued a report in June 2014 that contained a recommendation that FAA develop such a plan. The FAA mentioned concerns regarding the augmentation of appropriations and limitations on accepting voluntary services. As a general proposition, an agency may not augment its appropriations from outside sources without specific statutory authority. The Antideficiency Act prohibits federal officers and employees from, among other things, accepting voluntary services except for emergencies involving the safety of human life or the protection of property. 31 U.S.C. § 1342. operations conducted by the test sites must have a COA.requires the test sites to provide safety and operations data collected for each flight. Test site operators have told us incentives are needed to encourage greater UAS operations at the test sites. The operators explained that industry has been reluctant to operate at the test sites because under the current COA process, a UAS operator has to lease its UAS to the test site, thus potentially exposing proprietary technology. With a special airworthiness certificate in the experimental category, the UAS operator would not have to lease its UAS to the test site, therefore protecting any proprietary technology. FAA is, however, working on providing additional flexibility to the test sites to encourage greater use by industry. Specifically, FAA is willing to train designated airworthiness representatives for each test site. These individuals could then approve UASs for a special airworthiness certificate in the experimental category for operation at a test site. As previously indicated, three test sites had designated airworthiness representatives aligned with the test site, but only one experimental certificate had been approved. More broadly, we were told that FAA could do more to make the test sites accessible. According to FAA and some test site operators, FAA is working on creating a broad area COA that would allow easier access to the test site’s airspace for research and development. Such a COA would allow the test sites to conduct the airworthiness certification, typically performed by FAA, and then allow access to the test site’s airspace. As previously stated, one test site received 4 broad area COAs that were aircraft specific. Officials from test sites we spoke with during our ongoing work were seeking broad area COAs that were aircraft “agnostic”—meaning any aircraft could operate under the authority of that COA. According to FAA officials, in an effort to make test sites more accessible, they are working to expand the number of test ranges associated with the test sites, but not increasing the number of test sites. Currently, test sites have ranges in 14 states. Public education program: UAS industry stakeholders and FAA have begun an educational campaign that provides prospective users with information and guidance on flying safely and responsibly. The public education campaign on allowed and safe UAS operations in the national airspace may ease public concerns about privacy and support a safer national airspace in the future. UASs’ operating without FAA approval or model aircraft operating outside of the safety code established by the Academy of Model Aeronautics potentially presents a danger to others operating in the national airspace. To address these safety issues, FAA has teamed up with industry to increase public awareness and inform those wishing to operate UAS how to do so safely. For example, three UAS industry stakeholders and FAA teamed up to launch an informational website for UAS operators. UASs are increasingly available online and on store shelves. Prospective operators—from consumers to businesses—want to fly and fly safely, but many do not realize that, just because you can easily acquire a UAS, that does not mean you can fly it anywhere, or for any purpose. “Know Before You Fly” is an educational campaign that provides prospective users with information and guidance on flying safely and responsibly (see table 4). UAS and air traffic management: As FAA and others continue to address the challenges to UAS integration they are confronted with accounting for expected changes to the operations of the national airspace system as a FAA part of the Next Generation Air Transportation System (NextGen)has stated that the safe integration of UAS into the national airspace will be facilitated by new technologies being deployed. However, according to one stakeholder, UASs present a number of challenges that the existing national airspace is not set up to accommodate. For example, unlike manned aircraft, UASs that currently operate under COAs do not typically follow a civil aircraft flight plan where an aircraft takes off, flies to a destination, and then lands. Such flights require special accommodation by air-traffic controllers. Additionally, the air-traffic-control system uses navigational waypoints for manned aircraft, while UASs use Global Positioning System coordinates. Finally, if a UAS loses contact with its ground-control station, the air traffic controller might not know what the UAS will do to recover and how that may affect other aircraft in the vicinity. NextGen technologies, according to FAA, are continually being developed, tested, and deployed at the FAA Technical Center, and the FAA officials are working closely with MITRE to leverage all available technology for UAS integration. Chairman Ayotte, Ranking Member Cantwell, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202)512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Brandon Haller, Assistant Director; Daniel Hoy; Eric Hudson; Bonnie Pignatiello Leer; and Amy Rosewarne. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

UAS—often called drones—are aircraft that do not carry a pilot but instead operate on pre-programmed routes or are manually controlled. Currently, UAS only operate in the United States with FAA approval on a case-by-case basis. However, in the absence of regulations, unauthorized UAS operations have, in some instances, compromised safety. The FAA Modernization and Reform Act of 2012 emphasized the need to integrate UAS into the national airspace by requiring that FAA establish requirements governing them. In response, FAA has taken a number of steps, most notably, issuing an NPRM for small UAS operations, and designating six UAS test sites which became operational in 2014 and have begun to conduct test flights. Other countries have started to integrate UAS as well, and many currently allow commercial operations. This testimony provides preliminary observations on 1) status of FAA's test sites, 2) how other countries have progressed integrating UAS for commercial purposes, and 3) critical steps for FAA going forward. This testimony is based on GAO's ongoing study examining issues related to UAS integration into the national airspace system for UAS operations. To conduct this work, GAO reviewed documents and met with officials from test sites, FAA, and industry stakeholders. Since becoming operational in 2014, the Federal Aviation Administration's (FAA) unmanned aerial systems (UAS) test sites have conducted over 195 flights across five of the six test sites. These flights provide operations and safety data that FAA can use in support of integrating UAS into the national airspace. FAA has not provided funding to the test sites in support of research and development activities but has provided staff time through, for example bi-weekly meetings to discuss ongoing issues with test site officials. FAA staff said that the sites are a benefit to the integration process and worth this investment. GAO's preliminary observations found that other countries have progressed toward UAS integration and allow commercial use. GAO studied the UAS regulations in Australia, Canada, France, and the United Kingdom and found these countries have similar rules and restrictions on commercial UAS operations, such as allowing line of sight operations only. In November 2014, Canada issued new rules creating exemptions for UAS operations based on size and relative risk. In addition, as of December 2014, Australia had issued over 180 UAS operating certificates to businesses engaged in aerial surveying, photography, and other lines of business. Under the provisions of FAA's proposed rules, operating restrictions would be similar to regulations in these other four countries. For example, all countries have UAS altitude restrictions of 500 feet or below.

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Afghanistan is a unique country with different development, security, and infrastructure issues and needs than Iraq. As a result, CERP efforts in Afghanistan are frequently focused on development and construction whereas in Iraq the focus of CERP is reconstruction of neglected or damaged infrastructure. The program has evolved over time in terms of the cost and complexity of projects, and the number of projects costing more than $500,000 in Afghanistan has reportedly increased from 9 in fiscal year 2004 to 129 in fiscal year 2008. As the program has matured, projects have become more complex, evolving from building small-scale projects such as wells that cost several thousand dollars to a boys’ dormitory construction project that cost several hundred thousand dollars to building roads that cost several million dollars. For example, of the $486 million that DOD obligated on CERP projects in fiscal year 2008, about $281 million was for transportation, which was largely for roads. CJTF-101 guidance identifies the individuals authorized to approve CERP projects based on the estimated cost of the project (see table 1). As shown in the table, 90 percent of the CERP projects executed in Afghanistan in fiscal year 2008 cost $200,000 or less. Management and execution of the CERP program is the responsibility of officials at CJTF-101 headquarters, the brigades and the PRTs. CJTF-101 personnel include the CERP manager who has the primary day-to-day responsibility for the program, a staff attorney responsible for reviewing all projects with a value of $200,000 or more, and a resource manager responsible for, among other things, maintaining CERP training records and tracking CERP obligations and expenditures. In addition, CJTF-101 guidance assigns responsibilities to the various staff sections such as engineering, medical, and contracting when specific projects require it. For example, the command engineering section is tasked with reviewing construction projects over $200,000, including reviewing plans for construction and project quality-assurance plans, and with participating in the CERP review boards. Similarly, the command’s surgeon general is responsible for coordinating all plans for construction, refurbishment, or equipping of health facilities with the Afghanistan Minister of Health and evaluating all project nominations over $200,000 that relate directly to healthcare or the healthcare field. Brigade commanders are responsible for the overall execution of CERP in their areas of responsibilities and are tasked with a number of responsibilities including identifying and approving CERP projects, appointing project purchasing officers, and paying agents and ensuring that proper management, reporting, and fiscal controls are established to account for CERP funds. In addition, the brigade commander is responsible for ensuring that project purchasing officers and paying agents receive training and ensuring that all personnel comply with CERP guidance. Additional personnel in the brigade are tasked with specific day- to-day management of the CERP program for the brigade commander. Table 2 details the activities of key individuals tasked with executing and managing CERP at the brigade level. In addition to those tasked with day-to-day responsibility, others at the brigade have a role in the CERP process. For example, the brigade attorney is responsible for reviewing project nominations to ensure that they are legally sufficient and in compliance with CERP guidelines, and the brigade engineer is tasked with providing engineering expertise, including reviewing projects and assisting with oversight. DOD is statutorily required to provide Congress with quarterly reports on the source, allocation and use of CERP funds. The reports are compiled based on information about the projects that is entered by unit officials into the Combined Information Data Network Exchange, a classified DOD database that not only captures operations and intelligence information, but also tracks information on CERP projects such as project status, project start and completion date, and dollars committed, obligated, and disbursed. This database is the third database that DOD has used since 2006 to track CERP projects in Afghanistan. According to a military official, some historical data on past projects were lost during the transfer of this information from previous database systems. CERP information is now available in an unclassified format to members of PRTs and others who have access to a network that can be used to share sensitive but unclassified information. U. S. efforts to enhance Afghanistan’s development is costly and requires some complex projects, underscoring the need to effectively manage and oversee the CERP program, including effectively managing and overseeing contracting as well as contractor efforts. During our review, we identified problems with the availability of personnel to manage and oversee CERP, as well as the sufficiency of training on CERP. Although DOD has used CERP funds to construct roads, schools, and other projects that commanders believe have provided benefits to the Afghan people, DOD faces significant challenges in providing adequate management and oversight of CERP because of an insufficient number of trained personnel to execute and manage the program. We have frequently reported on several long-standing problems facing DOD as it uses contractors in contingency operations including inadequate numbers of trained management and oversight personnel. Our previous work has shown that high-performing organizations routinely use current, valid, and reliable data to make informed decisions about current and future workforce needs, including data on the appropriate number of employees, key competencies, and skill mix needed for mission accomplishment, and appropriate deployment of staff across the organization. DOD has not conducted a workforce assessment of CERP to identify how many military personnel are needed to effectively and efficiently execute and oversee the program. Rather, commanders determine how many personnel will manage and execute CERP. Personnel at all levels, including headquarters and unit personnel that we interviewed after they returned from Afghanistan or were in Afghanistan in November 2008, expressed a need for more personnel to perform CERP program management and oversight functions. Due to a lack of personnel, key duties such as performing headquarters staff assistance visits to help units to improve contracting procedures and site visits to monitor project status and contractor performance were either not performed or not consistently performed. At the headquarters level, at the time of our review, CJTF-101 had designated one person to manage the day-to-day operations of CERP. Among many other tasks outlined in the CJTF-101 CERP guidance, the CJTF-101 CERP manager was responsible for conducting training for PPOs and PAs, providing oversight of all projects, ensuring proper coordination for all projects with the government of Afghanistan, validating performance metrics, ensuring that all project information is updated monthly in the command’s electronic database and conducting staff assistance visits semiannually or as requested by brigades. Staff assistance visits are conducted to assist units by identifying any additional training or guidance that may be required to ensure consistency in program execution. According to documents we reviewed, staff assistance visits conducted in the past have uncovered problems with project documentation, adhering to project guidelines, and project tracking, among others. The CJTF-101 CERP manager we interviewed during our visit to Afghanistan stated that he spent most of his time managing the headquarters review process of projects costing more than $200,000 and was unable to carry out his full spectrum of responsibilities, including conducting staff assistance visits. After our November 2008 visit to Afghanistan, CJTF-101 added additional personnel to manage CERP on a full-time basis. Headquarters and brigade level personnel responsible for CERP also expressed a need for additional personnel at brigades to perform essential functions from program management to project execution. For example: CJTF-101 guidance assigns a number of responsibilities for executing CERP, including project monitoring and oversight, to military personnel; however, according to unit officials we spoke with, tasks such as completing project oversight and collecting metrics on completed projects are often not accomplished due to a lack of personnel. In a July 2008 memorandum to CENTCOM, the CJTF-101 commanding general noted that in some provinces, units have repositioned or are unable to do quality- assurance and quality-control checks due to competing missions and security risks. Furthermore, according to military officials from units that had deployed to Afghanistan, project oversight is frequently not provided because units lack the personnel needed to conduct site visits and ensure compliance with CERP contracts. For example, according to one CERP manager we spoke with, his unit was not able to provide oversight of 20 of the 27 CERP projects because it was often difficult to put together a team to conduct site visits due to competing demands for forces. Similarly, the competing demands for forces made it difficult for units to visit completed projects and determine the effectiveness of the projects as required by CERP guidance. CJTF-101 guidance also requires units to consult subject-matter experts, such as engineers, when required. However, military officials stated that there is a lack of subject-matter experts to consult on some projects. For example, military personnel stated that agriculture experts are needed to assist on agriculture projects. Moreover, more public health officials are needed. A commander from one task force stated that his soldiers were not qualified to monitor and assess clinics because they did not have the proper training. Furthermore, several officials we spoke with, including officials at the CJTF-101 headquarters, noted that they needed additional civil/military affairs personnel to do project assessments both before projects are selected to determine which projects would be most appropriate and after projects are completed to measure the effectiveness of those projects. We recently reported that the lack of subject-matter experts puts DOD at risk of being unable to identify and correct poor contractor performance, which could affect the cost, completion, and sustainability of CERP projects. According to DOD policy, members of the Department of Defense shall receive, to the maximum extent possible, timely and effective, individual, collective, and staff training, conducted in a safe manner, to enable performance to standard during operations. CERP familiarization wever, training may be provided to Army personnel before deployment; ho according to several Army officials, units frequently do not know who will be responsible for managing the CERP program until after they arrive in Afghanistan so task-specific training is generally not included in predeployment training. Others, such as PPOs, receive training after they arrived in Afghanistan. However, personnel assigned to manage and execute CERP had little or no training on their duties and responsibilities, and personnel we spoke with in Afghanistan and those who had recently returned from Afghanistan believed they needed more quality training in order to perform their missions effectively. For example: One of the attorneys responsible for reviewing and approving CERP projects received no CERP training before deploying. Unsure of how to interpret the guidance, the attorney sought clarification from higher headquarters, which delayed project approval. Personnel from a U.S. Marine Corps unit that deployed to Afghanistan reported that they received no training on CERP prior to deployment and believed that such training would have been helpful to ensure that projects they selected would provide long-term benefits to the population in their area of operation. Army training on CERP consisted of briefing slides that focused on the authorized and unauthorized uses of CERP but did not discuss how to complete specific CERP responsibilities such as project selection, developing a statement of work, selecting the appropriate contract type, or providing the appropriate types and levels of contract oversight. Additionally, according to officials from brigades we spoke with in Afghanistan, they received little or no training on their CERP responsibilities after arriving in-theater. Military officials from PRTs also noted that they received little training on CERP prior to deploying to Afghanistan and felt that additional training was needed so that they could more easily perform their CERP duties. In some cases, personnel told us that working with their predecessors during unit rotations provided them with sufficient training. However not all personnel have that opportunity. Our reports as well as recent reports from others have highlighted the difficulties associated with contracting in contingency operations particularly for those personnel with little contracting experience. DOD’s Financial Management Regulation allows contracting officers to delegate the authority to PPOs to obligate funds for CERP contracts for projects valued at less than $500,000. Additionally, PPOs are involved in other activities such as writing the statement of work for each project, ensuring that the project is completed to contract specifications, and completing contract close out. During our visit to Afghanistan, we observed PPO training provided by the principal assistant responsible for contracting in Afghanistan. The training consisted of a 1-hour briefing, which included a detailed discussion of CERP guidance but did not provide detailed information on the duties of the PPO. For example, according to CJTF-101 guidance, contracts are to be supported by accurate cost estimates; however, the PPO briefing does not provide training on how to develop these estimates. All of the contracting officers we spoke with believe that the training brief provided is insufficient and noted that unlike PPOs, who have less training but more authority under CERP, warranted contracting officers have at least 1 year of experience and are required to take a significant amount of classroom training before they are allowed to award any contracts. Moreover, some PPOs we spoke with stated that they needed more training. Military officials at both the brigade and CJTF-101 level told us that inadequate training has led to some common mistakes in CERP contracts and CERP project files. For example, officials from PRTs, brigades, and the CJTF-101 level noted that statements of work often are missing key contract clauses or include clauses that are not appropriate and require revision. A training document provided by the principal assistant responsible for contracting identified several important clauses that are commonly omitted by PPOs including termination clauses, progress schedule clauses, and supervision and quality control clauses. As we have reported in the past, poorly written contracts and statements of work can increase the department’s cost risk and could result in the department paying for projects that do not meet project goals or objectives. Additionally, several officials at CJTF-101 with responsibilities for CERP also noted that project packages sent to the headquarters for review were often incomplete or incorrect, thereby, slowing down the CERP project approval process and increasing the workload of the CERP staff at both the headquarters and unit level. For example, the CJTF-101 official responsible for reviewing all projects valued at $200,000 or more noted that most of the project packets he reviewed had to be returned to the brigades because the packets lacked key documents, signatures, or other required information. Finally, the lack of training affects the quality of the oversight provided and can increase the risk of fraud. To illustrate, the Principal Deputy Inspector General Department of Defense testified in February 2009, that contingency contracting, specifically the Commander’s Emergency Response Program, is highly vulnerable to fraud and corruption due to a lack of oversight. He went on to state “it would appear that even a small amount of contract training provided through command channels and some basic ground-level oversight that does not impinge on the CERP’s objective would lower the risk in this susceptible area.” DOD and USAID participate in various mechanisms to facilitate coordination, but lack information that would provide greater visibility on all U.S. government development projects in Afghanistan. Teams have been formed in Afghanistan that integrate U.S. government civilians and military personnel to enhance coordination among U.S. agencies executing development projects in Afghanistan. For example, for projects involving roads, DOD and USAID officials have set up working groups to coordinate road construction and both agencies agreed that coordination on roads was generally occurring. Additionally, a USAID member is part of the PRT and sits regularly with military colleagues to coordinate and plan programming, according to USAID officials. Those same officials stated that this has resulted in joint programming and unity of effort, marrying CERP and USAID resources. Military officials we spoke with from several brigades also stated that coordination with the PRTs was good. Further, a USAID representative is located at the CJTF-101 headquarters and acts as a liaison to help coordinate projects costing $200,000 or more. Also, in November 2008, the Integrated Civilian-Military Action Group which consists of representatives from the Department of State, USAID, and U.S. Forces-Afghanistan was established at the U.S. Embassy in Kabul, to help unify U.S. efforts in Afghanistan through coordinated planning and execution, according to a document provided by USAID. The role of the Integrated Civilian-Military Action Group, which is expected to meet every 3 weeks, is to establish priorities and identify roles and responsibilities for both long-term and short-term development. Any decisions made by this group are then presented to the Executive Working Group-a group of senior military, State Department, and USAID officials-for approval. According to USAID officials, the Executive Working Group is empowered by the participating organizations to engage in coordinated planning and execution, provide guidance that synchronizes civilian and military efforts, convene interagency groups as appropriate, monitor and assess implementation and impact of integrated efforts, and recommend course changes to achieve U.S. government goals in support of the Government of the Islamic Republic of Afghanistan and of achieving stability in Afghanistan. Despite these interagency teams, military and USAID officials lack a common database that would promote information sharing and facilitate greater visibility of all development projects in Afghanistan. At the time of our review, development projects in Afghanistan were not tracked in a single database that was accessible by all parties conducting development in the country. For example, the military uses a classified database— Combined Information Data Network Exchange—to track CERP projects and other information. In early 2009, USAID officials were granted access to an unclassified portion of this database, providing them with information on the military’s CERP projects including project title, project location, project description, and name of the unit executing the project, among other information. On the other hand, USAID officials use a database called GEOBASE to track their development projects, and there are a myriad of other databases used to track individual development efforts. USAID officials stated that they did not believe military officials had access to GEOBASE. However, in our 2008 review of Afghanistan road projects, we reported that there was a DOD requirement to provide CERP project information to USAID via the GEOBASE system to provide a common operating picture of reconstruction projects for U.S. funded efforts. We found that this was not being done for the CERP-funded road projects and recommended that DOD do so, to which DOD concurred. At the time of our review, the requirement to input CERP project information into that database was not included in the most recent version of the CJTF-101 standard operating procedure. In a memorandum to CENTCOM, the commanding general of CJTF-101 noted that data on various development projects in Afghanistan are maintained in a wide range of formats making CERP data the only reliable data for the PRTs. In January 2009, USAID initiated a project to develop a unified database to capture reliable and verified data for all development projects in Afghanistan and make it accessible to all agencies engaging in development activities in the country. The goal for the database is to create visibility of development projects for all entities executing projects in Afghanistan in a single place. However, plans are preliminary and a number of questions remain including how the database will be populated and how the database development will be funded. USAID officials told us that they have been coordinating with CJTF-101 civil affairs officials about the development of the database and plan to hold a meeting in April 2009 to discuss recommendations for its development and to obtain input about the database from other U.S. government agencies. While USAID officials have conducted some assessments for the development of the centralized database, as of yet no specific milestones have been established for when that database will be complete. Without clear goals and a method to judge the progress of this initiative it is unclear how long this project might take or if it will ever be completed. The expected surge in troops and expected increase in funding for Afghanistan heightens the need for an adequate number of trained personnel to execute and oversee CERP. With about $1 billion worth of CERP funds already spent to develop Afghanistan, it is crucial that individuals administering and executing the program are properly trained to manage all aspects of the program including management and oversight of the contractors used. If effective oversight is not conducted, DOD is at risk of being unable to verify the quality of contractor performance, track project status, or ensure that the program is being conducted in a manner consistent with guidance. Without such assurances, DOD runs the risk of wasting taxpayer dollars, squandering opportunities to positively influence the Afghan population and diminishing the effectiveness of a key program in the battle against extremist groups including the Taliban. Although coordination mechanisms are in place to help increase visibility, eliminate project redundancy, and maximize the return on U.S. investments, the U.S. government lacks an easily accessible mechanism to identify previous and ongoing development projects. Without a mechanism to improve the visibility of individual development projects, the U.S. government may not be in a position to fully leverage the resources available to develop Afghanistan and risks duplicating efforts and wasting taxpayer dollars. We recommend that the Secretary of Defense direct the commander of U.S. Central Command to evaluate workforce requirements and ensure adequate staff to administer establish training requirements for CERP personnel administering the program, to include specific information on how to complete their duties and responsibilities . We further recommend that the Secretary of Defense and Administrator of USAID; collaborate to create a centralized project-development database for use by U.S. government agencies in Afghanistan, including establishing specific milestones for its development and implementation. In written comments to a draft of this report, DOD partially concurred with two of our recommendations and concurred with one. These comments are reprinted in appendix II. DOD partially concurred with our recommendation to require U.S. Central Command to evaluate workforce requirements and ensure adequate staff to administer the Commander’s Emergency Response Program (CERP). DOD acknowledged the need to ensure adequate staff to administer CERP and noted that since our visit, U.S. Forces-Afghanistan had added personnel to manage the program on a full-time basis. Because of the actions already being taken, DOD believed that no further action is warranted at this time, but stated it would monitor the situation and respond as required. Although steps have been taken to improve management and oversight of CERP in Afghanistan, we still believe that CENTCOM should conduct a workforce assessment to identify the number of personnel needed to effectively manage and oversee the program. As we described in the report, in the absence of such an assessment, commanders determine how many personnel will manage and execute CERP. As commanders rotate in and out of Afghanistan, the number of people they assign to administer and oversee CERP could vary. Therefore, to ensure consistency, we continue to believe that CENTCOM, rather than individual commanders, should assess and determine the workforce needs for the program. DOD partially concurred with our recommendation to establish training requirements for CERP personnel administering the program to include specific information on how to complete their duties and responsibilities. DOD acknowledged the need for training for CERP personnel administering the program and stated that since our visit, U.S. Forces- Afghanistan has begun work on implementing instructions to enhance selection processes and training programs for personnel administering the program and handling funding. Based on these efforts, DOD believed that no further action is warranted at this time but said it would monitor the situation and respond as required. However, the efforts outlined by DOD appear to be focused on training after personnel arrive in Afghanistan. Because our work also identified limitations in training prior to deployment, we believe that additional action is required, on the part of CENTCOM, to fully implement our recommendation. DOD concurred with our recommendation to collaborate with USAID to create a centralized project-development database for use by U.S. government agencies in Afghanistan, including establishing specific milestones for its development and implementation. USAID officials were given an opportunity to comment on the draft report. However, officials stated that they had no comments on the draft. We are sending copies of this report to other interested congressional committees and the Secretary of Defense and Administrator of USAID. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions on the matters discussed in this report, please contact me at (202) 512-9619 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To determine the extent to which the Department of Defense (DOD) has the capacity to provide adequate management and oversight of the CERP in Afghanistan, we reviewed guidance from DOD, Combined Joint Task Force-101 (CJTF-101), and Combined Joint Task Force-82 (CJTF-82) to identify roles and responsibilities of CERP personnel, how personnel are assigned to the CERP, the nature and extent of the workload related to managing and executing the CERP, and the training curriculum provided to familiarize personnel with the CERP. We traveled to Afghanistan and interviewed officials at higher command, including those responsible for the overall management of CERP at CJTF-101, as well as commanders, staff judge advocates, project purchasing officers, engineers, and CERP managers about how they administered, monitored, and provided oversight to the program, what training they received, and how personnel assigned to administer and manage the program were chosen. We also interviewed personnel at all levels to obtain their perspective on their ability to execute their assigned workload and sufficiency of training they received prior to deployment and upon arrival in Afghanistan and attended a training session that was provided to Project Purchasing Officers (PPO). Additionally, we interviewed officials at the Office of the Secretary of Defense (Comptroller) and the Office of the Assistant Secretary of the Army (Financial Management and Comptroller), as well as Marine Corps and Army units that had returned from Afghanistan about the type of management and oversight that exists for CERP and the quality of that oversight. We selected these units (1) based on Afghanistan deployment and redeployment dates; (2) to ensure that we obtained information from officials at the division, brigade, and Provincial Reconstruction Team (PRT) levels who had direct experience with CERP; and (3) because unit officials had not yet been transferred to other locations within the United States or abroad. In order to determine the extent to which commanders coordinate CERP projects with USAID, we reviewed and analyzed DOD, CJTF-101, and CJTF-82 guidance to determine what coordination, if any, was required. We also interviewed military officials at the headquarters, brigade, and PRT levels that had redeployed from Afghanistan between July 2008 and April 2009 to determine the extent of their coordination with USAID officials. We also met with USAID officials in Washington, D.C., as well as traveled to Afghanistan and interviewed officials at the CJTF-101 headquarters, brigade, PRT, as well as, USAID about their coordination efforts. We spoke with military officials about the database they use to track CERP projects-Combined Information Data Network Exchange (CIDNE)—and learned that some historical data on past projects was lost during the transfer of information from a previous database to CIDNE. However, the information is in the project files and had already been included in the quarterly reports to Congress. Therefore, we analyzed the reported obligations in the quarterly CERP reports to Congress for fiscal year 2004 to fiscal year 2008 and interviewed officials about information contained in the reports. Based on interviews with officials, we determined that these data are sufficiently reliable for the purpose of this report. United States Agency for International Development, Washington, D.C. United States Agency for International Development, Kabul, Afghanistan Department of State, Washington, D.C. We conducted this performance audit from July 2008 to April 2009 in accordance with generally accepted government accounting standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Carole Coffey, Assistant Director; Susan Ditto, Rodney Fair, Karen Nicole Harms, Ron La Due Lake, Marcus Oliver, and Sonja Ware made key contributions to this report. Defense Management: Actions Needed to Overcome Long-standing Challenges with Weapon Systems Acquisition and Service Contract Management. GAO-09-362T. Washington, D.C: February 12, 2009. Iraq and Afghanistan: Availability of Forces, Equipment, and Infrastructure Should Be Considered in Developing U.S. Strategy and Plans. GAO-09-380T. Washington, D.C: February 11, 2009. Provincial Reconstruction Teams in Afghanistan and Iraq. GAO-09-86R. Washington, D.C.: October 1, 2008. Military Operations: DOD Needs to Address Contract Oversight and Quality Assurance Issues for Contracts Used to Support Contingency Operations. GAO-08-1087. Washington, D.C.: September 26, 2008. Afghanistan Reconstruction: Progress Made in Constructing Roads, but Assessments for Determining Impact and a Sustainable Maintenance Program Are Needed. GAO-08-689. Washington, D.C.: July 8, 2008. Securing, Stabilizing, and Rebuilding Iraq: Progress Report: Some Gains Made, Updated Strategy Needed. GAO-08-1021T. Washington, D.C: July 23, 2008. Military Operations: Actions Needed to Better Guide Project Selection for Commander’s Emergency Response Program and Improve Oversight in Iraq. GAO-08-736R. Washington, D.C.: June 23, 2008. Stabilizing and Rebuilding Iraq: Actions Needed to Address Inadequate Accountability over U.S. Efforts and Investments. GAO-08-568T. Washington, D.C.: March 11, 2008. Defense Logistics: The Army Needs to Implement Effective Management and Oversight Plan for the Equipment Maintenance Contract in Kuwait. GAO-08-316R. Washington, D.C.: January 22, 2008. Stabilization and Reconstruction: Actions Needed to Improve Governmentwide Planning and Capabilities for Future Operations. GAO-08-228T. Washington, D.C.: October 30, 2007. Securing, Stabilizing, and Reconstructing Afghanistan. GAO-07-801SP. Washington, D.C.: May 24, 2007. Military Operations: The Department of Defense’s Use of Solatia and Condolence Payments in Iraq and Afghanistan. GAO-07-699. Washington, D.C: May 23, 2007. Military Operations: High-Level DOD Action Needed to Address Long- standing Problems with Management and Oversight of Contractors Supporting Deployed Forces. GAO-07-145. Washington, D.C: December 18, 2006. Rebuilding Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S. Goals. GAO-06-788. Washington, D.C.: July 2006. Afghanistan Reconstruction: Despite Some Progress, Deteriorating Security and Other Obstacles Continue to Threaten Achievement of U.S. Goals. GAO-05-742. Washington, D.C.: July 28, 2005. Afghanistan Reconstruction: Deteriorating Security and Limited Resources Have Impeded Progress; Improvements in U.S. Strategy Needed. GAO-04-403. Washington, D.C.: June 2, 2004.

U.S. government agencies, including the Department of Defense (DOD) and the United States Agency for International Development (USAID) have spent billions of dollars to develop Afghanistan. From fiscal years 2004 to 2008, DOD has reported obligations of about $1 billion for its Commander's Emergency Response Program (CERP), which enables commanders to respond to urgent humanitarian and reconstruction needs. As troop levels increase, DOD officials expect the program to expand. Under the authority of the Comptroller General, GAO assessed DOD's (1) capacity to manage and oversee the CERP in Afghanistan and (2) coordination of projects with USAID. Accordingly, GAO interviewed DOD and USAID officials, and examined program documents to identify workload, staffing, training, and coordination requirements. In Afghanistan, GAO interviewed key military personnel on the sufficiency of training, and their ability to execute assigned duties. Although DOD has used CERP to fund projects that it believes significantly benefit the Afghan people, it faces significant challenges in providing adequate management and oversight because of an insufficient number of trained personnel. GAO has frequently reported that inadequate numbers of management and oversight personnel hinders DOD's use of contractors in contingency operations. GAO's work also shows that high-performing organizations use data to make informed decisions about current and future workforce needs. DOD has not conducted an overall workforce assessment to identify how many personnel are needed to effectively execute CERP. Rather, individual commanders determine how many personnel will manage and execute CERP. Personnel at all levels, including headquarters and unit personnel that GAO interviewed after they returned from Afghanistan or who were in Afghanistan in November 2008, expressed a need for more personnel to perform CERP program management and oversight functions. Due to a lack of personnel, key duties such as performing headquarters staff assistance visits to help units improve contracting procedures and visiting sites to monitor project status and contractor performance were either not performed or inconsistently performed. Per DOD policy, DOD personnel should receive timely and effective training to enable performance to standard during operations. However, key CERP personnel at headquarters, units, and provincial reconstruction teams received little or no training prior to deployment which commanders believed made it more difficult to properly execute and oversee the program. Also, most personnel responsible for awarding and overseeing CERP contracts valued at $500,000 or less received little or no training prior to deployment and, once deployed, received a 1-hour briefing, which did not provide detailed information on the individual's duties. As a result, frequent mistakes occurred, such as the omission of key clauses from contracts, which slowed the project approval process. As GAO has reported in the past, poorly written contracts and statements of work can increase DOD's cost risk and could result in payment for projects that do not meet project goals or objectives. While mechanisms exist to facilitate coordination, DOD and USAID lack information that would provide greater visibility on all U.S. government development projects. DOD and USAID generally coordinate projects at the headquarters and unit level as well as through military-led provincial reconstruction teams which include USAID representatives. In addition, in November 2008, USAID, DOD and the Department of State began participating in an interagency group composed of senior U.S. government civilians and DOD personnel in Afghanistan to enhance planning and coordination of development plans and related projects. However, complete project information is lacking, because DOD and USAID use different databases. USAID has been tasked to develop a common database and is coordinating with DOD to do so, but development is in the early stages and goals and milestones have not been established. Without clear goals and milestones, it is unclear how progress will be measured or when it will be completed

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Solar energy can be used to heat, cool, and power homes and businesses with a variety of technologies that convert sunlight into usable energy. Examples of solar energy technologies include photovoltaics, concentrated solar power, and solar hot water. Solar cells, also known as photovoltaic cells, convert sunlight directly into electricity. Photovoltaic technologies are used in a variety of applications. They can be found on residential and commercial rooftops to power homes and businesses; utility companies use them for large power stations, and they power space satellites, calculators, and watches. Concentrated solar power uses mirrors or lenses to concentrate sunlight and produce intense heat, which is used to generate electricity via a thermal energy conversion process; for example, by using concentrated sunlight to heat a fluid, boil water with the heated fluid, and channel the resulting steam through a turbine to produce electricity. Most concentrated solar power technologies are designed for utility-scale operations and are connected to the electricity-transmission system. Solar hot water technologies use a collector to absorb and transfer heat from the sun to water, which is stored in a tank until needed. Solar hot water systems can be found in residential and industrial buildings. Innovation in solar energy technology takes place across a spectrum of activities, which we refer to as technology advancement activities, and which include basic research, applied research, demonstration, and commercialization. For purposes of this report, we defined basic research to include efforts to explore and define scientific or engineering concepts or is conducted to investigate the nature of a subject without targeting any specific technology; applied research includes efforts to develop new scientific or engineering knowledge to create new and improved technologies; demonstration activities include efforts to operate new or improved technologies to collect information on their performance and assess readiness for widespread use; and commercialization efforts transition technologies to commercial applications by bridging the gap between research and demonstration activities and venture capital funding and marketing activities. Congressional Budget Office, Federal Financial Support for the Development and Production of Fuels and Energy Technologies (Washington, D.C.: March 2012). as a whole but not necessarily for the firms that invested in the activities. For example, basic research can create general scientific knowledge that is not itself subject to commercialization but that can lead to multiple applications that private companies can produce and sell. As activities get closer to the commercialization stage, the private sector may increase its support because its return on investment increases. We identified 65 solar-related initiatives with a variety of key characteristics at six federal agencies. Over half of the 65 initiatives supported solar projects exclusively; the remaining initiatives supported solar energy technologies in addition to other renewable energy technologies. The initiatives demonstrated a variety of key characteristics, including focusing on different types of solar technologies and supporting a range of technology advancement activities from basic research to commercialization, with an emphasis on applied research and demonstration activities. Additionally, the initiatives supported several types of funding recipients including universities, industry, nonprofit organizations, and federal labs and researchers, primarily through grants and contracts. Agency officials reported that they obligated around $2.6 billion for the solar projects in these initiatives in fiscal years 2010 and 2011. In fiscal years 2010 and 2011, six federal agencies—DOD, DOE, EPA, NASA, NSF, and USDA—undertook 65 initiatives that supported solar energy technology, at least in part. (See app. II for a full list of the initiatives). Of these initiatives, 35 of 65 (54 percent) supported solar projects exclusively and 30 (46 percent) also supported projects that were not solar. For example, in fiscal years 2010 and 2011, DOE’s Solar Energy Technologies Program—Photovoltaic Research and Development initiative, had 263 projects, all of which focused on solar energy. In contrast, in fiscal years 2010 and 2011, DOE’s Hydrogen and Fuel Research and Development initiative—which supports wind and other renewable sources that could be used to produce hydrogen—had 209 projects, 26 of which were solar projects. Although initiatives support solar energy technologies, in a given year, they might not support any solar projects. For example, NSF officials noted that the agency funds research across all fields and disciplines of science and engineering and that individual initiatives invite proposals for projects across a broad field of research, which includes solar-related research in addition to other renewable energy research. However, in any given year, NSF may not fund proposals that address solar energy because either no solar proposals were submitted or the submitted solar-related proposals were not deemed meritorious for funding based upon competitive, merit-based reviews. Although more than half of the agencies’ initiatives supported solar energy projects exclusively, the majority of projects supported by all 65 initiatives were not focused on solar. As shown in table 1, of the 4,996 total projects active in fiscal years 2010 and 2011 under the 65 initiatives, 1,506 (30 percent) were solar projects, and 3,490 (70 percent) were not solar projects. Agencies’ solar-related initiatives supported different types of solar energy technologies. According to agency officials responding to our questionnaire, 47 of the 65 initiatives supported photovoltaic technologies, and 18 supported concentrated solar power; some initiatives supported both of these technologies or other solar technologies. For example, NSF’s CHE-DMR-DMS Solar Energy Initiative (SOLAR) supports both photovoltaic and concentrated solar power technologies, including a project that is developing hybrid organic/inorganic materials to create ultra-low-cost photovoltaic devices and to advance solar concentrating technologies. These initiatives supported solar energy technologies through multiple technology advancement activities, ranging from basic research to commercialization. As shown in figure 1, five of the six agencies supported at least three of the four technology advancement activities we examined, and four of the six supported all four. Our analysis showed that of the 65 initiatives, 20 initiatives (31 percent) supported a single type of technology advancement activity; 45 of the initiatives (69 percent) supported more than one type of technology advancement activity; and 4 of those 45 initiatives (6 percent) supported all four. For example, NASA’s Solar Probe Plus Technology Development initiative—which tests the performance of solar cells in elevated temperature and radiation environments such as near the sun— supported applied research exclusively. In contrast, NASA’s Small Business Innovations Research/Small Business Technology Transfer Research initiative—which seeks high-technology companies to participate in government-sponsored research and development efforts critical to NASA’s mission—supported all four technology advancement activities. The technology advancement activities supported by the initiatives were applied research (47 initiatives), demonstration (41 initiatives), basic research (27 initiatives), and commercialization (17 initiatives). The initiatives supported these technology advancement activities by providing funding to four types of recipients: universities, industry, nonprofit organizations, and federal laboratories and researchers. The initiatives most often supported universities and industry. In many cases, initiatives provided funding to more than one type of recipient. Specifically, our analysis showed that of the 65 initiatives, 23 of the initiatives (35 percent) supported one type of recipient; 21 of the initiatives (32 percent) provided funding to at least two types of recipients; 17 initiatives (26 percent) supported three types; and 4 initiatives (6 percent) supported all four. In two cases, agency officials reported that their initiatives supported “other” types of recipients, which included college students and military installations. Initiatives often supported a variety of recipient types, but individual agencies more often supported one or two types. As shown in figure 2, DOE’s initiatives most often supported federal laboratories and researchers; DOD’s most often supported industry recipients; NASA’s supported federal laboratories and industry equally; NSF’s supported universities exclusively. For example, NASA’s Small Business Innovations Research/Small Business Technology Transfer Research initiative provided contracts to industry to participate in government- sponsored research and development for advanced photovoltaic technologies to improve efficiency and reliability of solar power for space exploration missions. NSF’s Emerging Frontiers in Research and Innovation initiative provided grants to universities for, among other purposes, promoting breakthroughs in computational tools and intelligent systems for large-scale energy storage suitable for renewable energy sources such as solar energy. Federal solar-related initiatives provided funding to these recipients through multiple mechanisms, often using more than one mechanism per initiative. As shown in figure 3, the initiatives primarily used grants and contracts. Of the 65 initiatives, 27 awarded grants, and 36 awarded contracts; many awarded both. Agency officials also reported funding solar projects via cooperative agreements, loans, and other mechanisms. Agency officials reported that the 65 initiatives as a group used multiple funding mechanisms, but we found that individual agencies tended to use primarily one or two funding mechanisms. For example, USDA exclusively used grants, while DOD tended to use contracts. DOE reported using grants and cooperative agreements almost equally. For example, DOE’s Solar ADEPT initiative, an acronym for “Solar Agile Delivery of Electrical Power Technology,” awards cooperative agreements to universities, industry, nonprofit organizations, and federal laboratories and researchers. Through a cooperative agreement, the initiative supported a project at the University of Colorado at Boulder that is developing advanced power conversion components that can be integrated into individual solar panels to improve energy yields. According to the project description, the power conversion devices will be designed for use on any type of solar panel. The University of Colorado at Boulder is partnering with industry and DOE’s National Renewable Energy Laboratory on this project. In responding to our questionnaire, officials from the six agencies reported that they obligated around $2.6 billion for the 1,506 solar projects in fiscal years 2010 and 2011. These obligations data represented a mix of actual obligations and estimates. Actual obligations were provided for both years for 51 of 65 initiatives. Officials provided estimated obligations for 12 initiatives for at least 1 of the 2 years, and officials from another 2 initiatives were unable to provide any obligations data. Those officials who provided estimates or were unable to provide obligations data noted that the accuracy or the availability of the obligations data was limited because isolating the solar activities from the overall initiative obligations can be difficult. (See app. II for a full list of the initiatives and their related obligations.) As shown in table 2, over 90 percent of the funds (about $2.3 billion of $2.6 billion) were obligated by DOE. The majority of DOE’s obligations (approximately $1.7 billion) were obligated as credit subsidy costs—the government’s estimated net long-term cost, in present value terms, of the loans—as part of Title XVII Section 1705 Loan Guarantee Program from funds appropriated by Congress under the American Recovery and Reinvestment Act (Recovery Act). Even excluding the Loan Guarantee Program funds, DOE obligated $661 million, which is more than was obligated by the other five agencies combined. The 65 solar-related initiatives are fragmented across six agencies and many overlap to some degree, but agency officials reported a number of coordination activities to avoid duplication. We found that many initiatives overlapped in the key characteristics of technology advancement activities, types of technologies, types of funding recipients, or broad goals; however, these areas of overlap do not necessarily lead to duplication of efforts because the initiatives sometimes differ in meaningful ways or leverage the efforts of other initiatives, and we did not find clear evidence of duplication among initiatives. Officials from most initiatives reported that they engage in a variety of coordination activities with other solar-related initiatives, at times specifically to avoid duplication. The 65 solar-related initiatives are fragmented in that they are implemented by various offices across six agencies and address the same broad area of national need. In March 2011, we reported that fragmentation has the potential to result in duplication of resources. However, such fragmentation is, by itself, not an indication that unnecessary duplication of efforts or activities exists. For example, in our March 2011 report, we stated that there can be advantages to having multiple federal agencies involved in a broad area of national need— agencies can tailor initiatives to suit their specific missions and needs, among other things. In particular, DOD is able to focus its efforts on solar energy technologies that serve its energy security mission, among other things, and NASA is able to focus its efforts on solar energy technologies that aid in aeronautics and space exploration, among other things. As table 3 illustrates, we found that many initiatives overlap because they support similar technology advancement activities and types of funding recipients. For example, initiatives that support basic and applied research most often fund universities, and those initiatives that support demonstration and commercialization activities most often fund industry. Almost all of the initiatives overlapped to some degree with at least one other initiative in that they support broadly similar technology advancement activities, types of technologies, and eligible funding recipients. Twenty-seven initiatives support applied research for photovoltaic technologies by universities. For example, NSF’s Engineering Research Center for Quantum Energy and Sustainable Solar Technologies at Arizona State University pursues cost-competitive photovoltaic technologies with sustained market growth. The Air Force’s Space Propulsion and Power Generation Research initiative partners with various universities to develop improved methods for powering spacecraft, including solar cell technologies. Sixteen initiatives support demonstration activities focused on photovoltaic technologies by federal laboratories and researchers. For example, NASA’s High-Efficiency Space Power Systems initiative conducts activities at NASA’s Glenn Research Center to develop technologies to provide low cost and abundant power for deep space missions, such as highly reliable solar arrays, to enable a crewed mission to explore a near Earth asteroid. DOE’s Solar Energy Technologies Program (SETP), which includes the Photovoltaic Research and Development initiative, works with national laboratories such as the National Renewable Energy Laboratory, Sandia National Laboratories, Brookhaven National Laboratory, and Oak Ridge Laboratory to advance a variety of photovoltaic technologies to enable solar energy to be as cost competitive as traditional energy sources by 2015. Seven initiatives supported applied research on concentrated solar power technologies by industry. For example, DOE’s SETP Concentrated Solar Power subprogram, which focuses on reducing the cost of and increasing the use of solar power in the United States, funded a company to develop the hard coat on reflective mirrors that is now being used in concentrated solar power applications. In addition, DOD’s Fast Access Spacecraft Testbed Program, which concluded in March 2011, funded industry to demonstrate a suite of critical technologies including high-efficiency solar cells, sunlight concentrating arrays, large deployable structures, and ultra- lightweight solar arrays. Additionally, 40 of the 65 initiatives overlap with at least one other initiative in that they supported similar broad goals, types of technologies, and technology advancement activities. Providing lightweight, portable energy sources. Officials from several initiatives within DOD reported that their initiatives supported demonstration activities with the broad goal of providing lightweight, portable energy sources for military applications. For example, the goal of the Department of the Army’s Basic Solar Power Generation Research initiative is to determine the feasibility and applicability of lightweight flexible, foldable solar panels for remote site power generation in tactical battlefield applications. Similarly, the goal of the Office of the Secretary of Defense’s Engineered Bio-Molecular Nano- Devices and Systems initiative is to provide a low-cost, lightweight, portable photovoltaic device to reduce the footprint and logistical burden on the warfighter. Artificial photosynthesis. Several initiatives at DOE and NSF reported having the broad goal of supporting artificial photosynthesis, which converts sunlight, carbon dioxide, and water into a fuel, such as hydrogen. For example, one of DOE’s Energy Innovation Hubs, the Fuels from Sunlight Hub, supports basic research to develop an artificial photosynthesis system with the specific goals of (1) understanding and designing catalytic complexes or solids that generate chemical fuel from carbon dioxide and/or water; (2) integrating all essential elements, from light capture to fuel formation components, into an effective system; and (3) providing a pragmatic evaluation of the system under development. NSF’s Catalysis and Biocatalysis initiative has a specific goal of developing new materials that will be catalysts for converting sunlight into usable energy for direct use, or for conversion into electricity, or into fuel for use in fuel cell applications. Integrating solar energy into the grid. Officials from several initiatives reported focusing on demonstration activities for technologies with the broad goal of integrating solar or renewable energies into the grid or onto military bases. For example, DOE’s Smart Grid Research and Development initiative has a goal of developing smart grid technologies, particularly those that help match supply and demand in real time, to enable the integration of renewable energies, including solar energy, into the grid by helping stabilize variability and facilitate the safe and cost-effective operation by utilities and consumers. The goal of this initiative is to achieve a 20 percent improvement in the ratio of the average power supplied to the maximum demand for power during a specified period by 2020. DOD’s Installation Energy Research initiative has a goal of developing better ways to integrate solar energy into a grid system, thereby optimizing the benefit of renewable energy sources. Some initiatives may overlap on key characteristics such as technology advancement activities, types of technologies, types of recipients, or broad goals, but they also differ in meaningful ways that could result in specific and complementary research efforts, which may not be apparent when analyzing the characteristics. For example, an Army official told us that both the Army and Marine Corps were interested in developing a flexible solar substrate, which is a photovoltaic panel laminated onto fabric that can be rolled up and carried in a backpack. The Army developed technology that included a battery through its initiative, while the Marine Corps, through a separate initiative, altered the Army’s technology to create a flexible solar substrate without a battery. Other initiatives may also overlap on key characteristics, but the efforts undertaken by their respective projects may complement each other rather than result in duplication. For example, DOE officials told us that one solar company may receive funding from multiple federal initiatives for different components of a larger project, thus simultaneously supporting a common goal without providing duplicative support. While we did not find clear instances of duplicative initiatives, it is possible that there are duplicative activities among the initiatives that could be consolidated or resolved through enhanced coordination across agencies and at the initiative level. Also, it is possible that there are instances in which recipients receive funding from more than one federal source or that initiatives may fund some activities that would have otherwise sought and received private funding. Because it was beyond the scope of this work to look at the vast number of activities and individual awards that are encompassed in the initiatives we evaluated, we were unable to rule out the existence of any such duplication of activities or funding. Officials from 57 of the 65 initiatives (88 percent) reported coordinating with other solar-related initiatives. Coordination is important because, as we have previously reported, a lack of coordination can waste scarce funds and limit the overall effectiveness of the federal effort. We have also previously reported that coordination across programs may help address fragmentation, overlap, and duplication. Officials from nearly all initiatives that we identified as overlapping in their broad goals, types of technologies, and technology advancement activities, reported coordinating with other solar-related initiatives. In October 2005, we identified key practices that can help enhance and sustain federal agency coordination, such as (1) establishing joint strategies, which help align activities, core processes, and resources to accomplish a common outcome; (2) developing mechanisms to evaluate and report on the progress of achieving results, which allow agencies to identify areas for improvement; (3) leveraging resources, which helps obtain additional benefits that would not be available if agencies or offices were working separately; and (4) defining a common outcome, which helps overcome differences in missions, cultures, and established ways of doing business. Agency officials at solar-related initiatives reported coordination activities that are consistent with these key practices, as described below. Some agency officials reported undertaking formal activities within their own agency to coordinate the efforts of multiple initiatives. For example: Establishing a joint strategy. NSF initiatives reported participating in an Energy Working Group, which includes initiatives in the agency’s Directorates for Mathematical and Physical Sciences and for Engineering. Officials from initiatives we identified as overlapping reported participating in the Energy Working Group. NSF formed this group to initiate coordination of energy-related efforts between the two directorates, including solar efforts, and tasked it with establishing a uniform clean, sustainable energy strategy and implementation plan for the agency. Developing mechanisms to monitor, evaluate, and report results. DOD officials from initiatives in the Army, Marine Corps, and Navy that we identified as overlapping reported they participated in the agency’s Energy and Power Community of Interest. The goal of this group is to coordinate the R&D activities within DOD. The group is scheduled to meet every quarter, but an Army official told us the group has been meeting every 3 to 4 weeks recently to produce R&D road maps and to identify any gaps in energy and power R&D efforts that need to be addressed. Because of the information sharing that occurs during these meetings, the official said the risk of such duplication of efforts across initiatives within DOD is minimized. In responding to our questionnaire, agency officials also reported engaging in formal activities across agencies to coordinate the efforts of multiple initiatives. For example: Leveraging resources. The Interagency Advanced Power Group (IAPG), which includes the Central Intelligence Agency, DOD, DOE, NASA, and the National Institute of Standards and Technology, is a federal membership organization that was established in the 1950s to streamline energy efforts across the government and to avoid duplicating research efforts. A number of smaller working groups were formed as part of this effort, including the Renewable Energy Conversion Working Group, which includes the coordination of solar efforts. The working groups are to meet at least once each year, but according to a DOD official, working group members often meet more often than that in conjunction with outside conferences and workshops. The purpose of the meetings is to present each agency’s portfolio of research efforts and to inform and ultimately leverage resources across the participating agencies. According to IAPG documents, group activities allow agencies to identify and avoid duplication of efforts. Several of the initiatives that we identified as overlapping also reported participating in the IAPG. Leveraging resources and defining a common outcome. DOE’s SETP in the Office of Energy Efficiency and Renewable Energy (EERE) coordinates with DOE’s Office of Science and the Advanced Research Projects Agency-Energy (ARPA-E) through the SunShot Initiative, which according to SunShot officials, was established expressly to prevent duplication of efforts while maximizing agencywide impact on solar energy technologies. The goal of the SunShot Initiative is to reduce the total installed cost of solar energy systems by 75 percent. SunShot officials said program managers from all three offices participate on the SunShot management team, which holds “brain-storming” meetings to discuss ideas for upcoming funding announcements and subsequently vote on proposed funding announcements. Officials from other DOE offices and other federal agencies are invited to participate, with coordination occurring as funding opportunities arise in order to leverage resources. Officials said meetings may include as few as 25 or as many as 85 attendees, depending on the type of project and the expertise required of the attending officials. Additionally, DOE and NSF coordinate through the SunShot Initiative on the Foundational Program to Advance Cell Efficiency (F-PACE), which identifies and funds solar device physics and photovoltaic technology research and development that will improve photovoltaic cell performance and reduce module cost for grid-scale commercial applications. The initiatives that reported participating in SunShot activities also included many that we found to be overlapping. Developing joint strategies; developing mechanisms to monitor, evaluate, and report results; and defining a common outcome. The National Nanotechnology Initiative (NNI) an interagency program, which includes DOD, DOE, NASA, NSF, and USDA, among others, was established to coordinate the nanotechnology-related activities across federal agencies that fund nanoscale research or have a stake in the outcome of this research. The NNI is directed to (1) establish goals, priorities, and metrics for evaluation for federal nanotechnology research, development, and other activities; (2) invest in federal R&D programs in nanotechnology and related sciences to achieve these goals; and (3) provide for interagency coordination of federal nanotechnology research, development, and other activities. The NNI implementation plan states that the NNI will maximize the federal investment in nanotechnology and avoid unnecessary duplication of efforts. NNI includes a subgroup that focuses on nanotechnology for solar energy collection and conversion. Specifically, this subgroup is to (1) improve photovoltaic solar electricity generation with nanotechnology, (2) improve solar thermal energy generation and conversion with nanotechnology, and (3) improve solar-to-fuel conversions with nanotechnology. In addition to the coordination efforts above, officials reported through our questionnaire that their agencies coordinate through discussions with other agency officials or as part of the program and project management and review processes. Some officials said such discussions and reviews among officials occur explicitly to determine whether there is duplication of funding occurring. For example, SETP projects include technical merit reviews, which include peer reviewers from outside of the federal government, as well as a federal review panel composed of officials from several agencies. Officials from SETP also participate in the technical merit reviews of other DOE offices’ projects. ARPA-E initiatives also go through a review process that includes federal officials and independent experts. DOE officials told us that an ARPA-E High Energy Advanced Thermal Storage review meeting, an instance of potential duplicative funding was found with an SETP project. Funding of the project through SETP was subsequently removed because of the ARPA-E review process, and no duplicative funds were expended. In addition to coordinating to avoid duplication, officials from 59 of the 65 initiatives (91 percent) reported that they determine whether applicants have received other sources of federal funding for the project for which they are applying. Twenty-one of the 65 initiatives (32 percent) further reported that they have policies that either prohibit or permit recipients from receiving other sources of federal funding for projects. Some respondents to our questionnaire said it is part of their project management process to follow up with funding recipients on a regular basis to determine whether they have subsequently received other sources of funding. For example, DOE’s ARPA-E prohibits recipients from receiving duplicative funding from either public or private sources, and requires disclosure of other sources of funding both at the time of application, as well as on a quarterly basis throughout the performance of the award. Even if an agency requires that such funding information be disclosed on applications, applicants may choose not to disclose it. In fact, it was recently discovered that a university researcher did not identify other sources of funding on his federal applications as was required and accepted funding for the same research on solar conversion of carbon dioxide into hydrocarbons from both NSF and DOE. Ultimately, the professor was charged with and pleaded guilty to wire fraud, false statements, and money laundering in connection with the federal research grant. We provided DOD, DOE, EPA, NASA, NSF, and USDA with a draft of this report for review and comment. USDA generally agreed with the overall findings of the report. NASA and NSF provided technical or clarifying comments, which we incorporated as appropriate. DOD, DOE, and EPA indicated that they had no comments on the report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Agriculture, Defense, and Energy; the Administrators of EPA and NASA; the Director of NSF; the appropriate congressional committees; and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of our report were to identify (1) solar-related initiatives supported by federal agencies in fiscal years 2010 and 2011 and key characteristics of those initiatives and (2) the extent of fragmentation, overlap, and duplication, if any, among federal solar-related initiatives, as well as the extent of coordination among these initiatives. To inform our objectives, we reviewed a February 2012 GAO report that was conducted to identify federal agencies’ renewable energy initiatives, which included solar-related initiatives, and examine the federal roles the agencies’ initiatives support. The GAO report on renewable energy- related initiatives identified nearly 700 initiatives that were implemented in fiscal year 2010 across the federal government, of which 345 initiatives supported solar energy. For purposes of this report, we only included those solar-related initiatives that we determined were focused on research and development (R&D), and commercialization, which we defined as follows: Research and development. Efforts ranging from defining scientific concepts to those applying and demonstrating new and improved technologies. Commercialization. Efforts to bridge the gap between research and development activities and the marketplace by transitioning technologies to commercial applications. We did not include those initiatives that focused solely on deployment activities, which include efforts to facilitate or achieve widespread use of existing technologies either in the commercial market or for nonmarket uses such as defense, through their construction, operation, or use. Initiatives that focus on deployment activities include a variety of tax incentives. We also narrowed our list to only those initiatives that focused research on advancing or developing new and innovative solar technologies. Next, we shared our list with agency officials and provided our definitions of R&D and commercialization. We asked officials to determine whether the list was complete and accurate for fiscal year 2010 initiatives that met our criteria, whether those initiatives were still active in fiscal year 2011, and whether there were any new initiatives in fiscal year 2011. If officials wanted to remove an initiative from our list, we asked for additional information to support the removal. In total, we determined that there were 65 initiatives that met our criteria. To identify and describe the key characteristics of solar-related initiatives implemented by federal agencies, we developed a questionnaire to collect information from officials of those 65 federal solar energy-related initiatives. The questionnaire was prepopulated with information that was obtained from the agencies for GAO’s renewable energy report including program descriptions, type of solar technology supported, funding mechanisms, and type of funding recipients. Questions included the type of technology advancement activities, obligations for solar activities in fiscal years 2010 and 2011, initiative-wide and solar-specific goals, and coordination efforts with other solar-related initiatives. We conducted pretests with officials of three different initiatives at three different agencies to check that (1) the questions were clear and unambiguous, (2) terminology was used correctly, (3) the questionnaire did not place an undue burden on agency officials, (4) the information could feasibly be obtained, and (5) the questionnaire was comprehensive and unbiased. An independent GAO reviewer also reviewed a draft of the questionnaire prior to its administration. On the basis of feedback from these pretests and independent review, we revised the survey in order to improve its clarity. After completing the pretests, we administered the questionnaire. We sent questionnaires to the appropriate agency liaisons in an attached Microsoft Word form, who in turn sent the questionnaires to the appropriate officials. We received questionnaire responses for each initiative and, thus, had a response rate of 100 percent. After reviewing the responses, we conducted follow-up e-mail exchanges or telephone discussions with agency officials when responses were unclear or conflicting. When necessary, we used the clarifying information provided by agency officials to update answers to questions to improve the accuracy and completeness of the data. Because this effort was not a sample survey, it has no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in interpreting a particular question, sources of information available to respondents, or entering data into a database or analyzing them can introduce unwanted variability into the survey results. However, we took steps to minimize such nonsampling errors in developing the questionnaire—including using a social science survey specialist for design and pretesting the questionnaire. We also minimized the nonsampling errors when collecting and analyzing the data, including using a computer program for analysis, and using an independent analyst to review the computer program. Finally, we verified the accuracy of a small sample of keypunched records by comparing them with their corresponding questionnaires, and we corrected the errors we found. Less than 0.5 percent of the data items we checked had random keypunch errors that would not have been corrected during data processing. To conduct our analysis, a technologist compared all of the initiatives and identified overlapping initiatives as those sharing at least one common technology advancement activity, one common technology, and having similar goals. A second technologist then completed the same analysis, and the two then compared their findings and, where they differed, came to a joint decision as to which initiatives broadly overlapped on their technology advancement activities, technologies, and broad goals. If the two technologists could not come to an agreement, a third technologist determined whether there was overlap. To assess the reliability of obligations data, we asked officials of initiatives that comprised over 90 percent of the total obligations follow-up questions on the data systems used to generate that data. While we did not verify all responses, on the basis of our application of recognized survey design practices and follow-up procedures, we determined that the data used in this report were of sufficient quality for our purposes. We conducted this performance audit from September 2011 to August 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Tables 4, 5, 6, 7, 8, and 9 provide descriptions, by agency, of the 65 initiatives that support solar energy technologies and the obligations for those initiatives’ solar activities in fiscal years 2010 and 2011. In addition to the individual named above, key contributors to this report included Karla Springer (Assistant Director), Tanya Doriss, Cindy Gilbert, Jessica Lemke, Cynthia Norris, Jerome Sandau, Holly Sasso, Maria Stattel, and Barbara Timmerman.

The United States has abundant solar energy resources and solar, along with wind, offers the greatest energy and power potential among all currently available domestic renewable resources. In February 2012, GAO reported that 23 federal agencies had implemented nearly 700 renewable energy initiatives in fiscal year 2010-- including initiatives that supported solar energy technologies (GAO-12-260). The existence of such initiatives at multiple agencies raised questions about the potential for duplication, which can occur when multiple initiatives support the same technology advancement activities and technologies, direct funding to the same recipients, and have the same goals. GAO was asked to identify (1) solar- related initiatives supported by federal agencies in fiscal years 2010 and 2011 and key characteristics of those initiatives and (2) the extent of fragmentation, overlap, and duplication, if any, of federal solar- related initiatives, as well as the extent of any coordination among these initiatives. GAO reviewed its previous work and interviewed officials at each of the agencies identified as having federal solar initiatives active in fiscal years 2010 and 2011. GAO developed a questionnaire and administered it to officials involved in each initiative to collect information on: initiative goals, technology advancement activities, funding obligations, number of projects, and coordination activities. This report contains no recommendations. In response to the draft report, USDA generally agreed with the findings, while the other agencies had no comments. Sixty-five solar-related initiatives with a variety of key characteristics were supported by six federal agencies. Over half of these 65 initiatives supported solar projects exclusively; the remaining initiatives supported solar and other renewable energy technologies. The 65 initiatives exhibited a variety of key characteristics, including multiple technology advancement activities ranging from basic research to commercialization by providing funding to various types of recipients including universities, industry, and federal laboratories and researchers, primarily through grants and contracts. Agency officials reported that they obligated about $2.6 billion for the solar projects in these initiatives in fiscal years 2010 and 2011, an amount higher than in previous years, in part, because of additional funding from the 2009 American Recovery and Reinvestment Act. The 65 solar-related initiatives are fragmented across six agencies and overlap to some degree in their key characteristics, but most agency officials reported coordination efforts to avoid duplication. The initiatives are fragmented in that they are implemented by various offices across the six agencies and address the same broad areas of national need. However, the agencies tailor their initiatives to meet their specific missions, such as DOD's energy security mission and NASA's space exploration mission. Many of the initiatives overlapped with at least one other initiative in the technology advancement activity, technology type, funding recipient, or goal. However, GAO found no clear instances of duplicative initiatives. Furthermore, officials at 57 of the 65 initiatives (88 percent) indicated that they coordinated in some way with other solar-related initiatives, including both within their own agencies and with other agencies. Such coordination may reduce the risk of duplication. Moreover, 59 of the 65 initiatives (91 percent) require applicants to disclose other federal sources of funding on their applications to help ensure that they do not receive duplicative funding.

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DOD may be unable to prevent an attack using chemical or biological weapons. Therefore, DOD has determined that servicemembers must be protected to survive and conduct effective military operations. Consequently, DOD supplies servicemembers with a protective ensemble consisting of a suit, mask with breathing filter, rubber boots, butyl gloves, and hoods as required. Figure 1 displays the components that comprise a protective ensemble. During Operation Desert Shield/Desert Storm, DOD noted that most of this equipment (1) could cause unacceptable heat stress to the wearer, (2) could limit freedom of movement and impair job performance, (3) is bulky, and (4) is not fully interoperable across the services. Furthermore, most of the existing suits (1) are no longer manufactured, (2) can be used for up to 14 years from the date of manufacture, and (3) will expire by 2007. To address these issues, DOD developed new, lightweight individual protective equipment such as the Joint Service Lightweight Integrated Suit Technology (JSLIST) trousers and coat to replace the current protective suits. DOD began procuring the JSLIST suits in 1997. An improved multipurpose overboot is in procurement and new protective gloves are under development to improve manual dexterity and/or reduce heat stress on the wearer. Similarly, since the existing masks may cause some breathing difficulty, DOD is developing a new mask but does not expect to begin procurement until fiscal year 2006. During fiscal years 2002 through 2007, DOD plans to spend about $5.7 billion on planning for chemical and biological defense, acquisition of defense equipment, facilities construction, and research and development. In 1999, we recommended that DOD develop a performance plan guided by outcome-oriented management principles embodied in the Government Performance and Results Act of 1993 (Pub. L. 103-62). DOD created a plan; however, performance goals and measures were being developed at the time of our review. DOD’s assessment process for determining the risk to military operations is unreliable, and, as a result, the Department’s current determination that the risk is generally low is inaccurate. Although the Department uses the Chemical and Biological Defense Program Annual Report to Congress to indicate its readiness for operations in a chemically and biologically contaminated environment, the 2000 report contains erroneous inventory data and understates equipment requirements. More important, the methodology for assessing the risk is flawed because it is not based on the number of complete ensembles needed and it obscures military service readiness by combining service data and reporting the results jointly. DOD’s criteria for assessing the risk of wartime shortages is to determine the numbers of protective suits, masks, breathing filters, gloves, boots, and hoods it has on hand, compare them against the requirements for those individual items, and then assign risk. (See table 1) In the draft fiscal year 2001 annual report to Congress provided to us in June 2001, DOD reported that it was generally at low risk for suits.However, the risk assessment process was flawed in part because DOD used erroneous data on protective suits. For example DOD made computational errors in comparing the older suits and JSLIST suits against a combined total suit requirement, the Air Force overreported its suit requirement by 801,167 suits, DOD reported it had 1,229,935 JSLIST suits on hand as of September 30, 2000, but overcounted its inventory by 782,232 JSLIST suits, the Navy included about 117,000 suits that had passed their expiration dates and were therefore unusable, and the Army underreported its suit stocks by an estimated 231,050 suits. These errors occurred in large part as the result of problems in DOD’s systems for managing protective suit inventories. We believe that the services collectively had no more than 4,348,999 suits of all types on hand as of September 30, 2000. When we included all the suits for wartime use and adjusted the numbers to account for the errors and miscounts, the risk category changed to high for suits, as shown in table 2. In February 2001, the military services informed the Joint Nuclear, Biological, and Chemical Defense Board that equipment requirements were actually much higher than those reported to Congress and included in the fiscal year 2001 Logistics Support Plan. The board subsequently accepted the new requirements. Based on these new requirements, the risk remained high for suits; changed to high for filters, boots, and hoods; and remained low for gloves and masks, as shown by comparing the risk level columns in tables 2 and 3. DOD has inaccurately assessed the risk to military operations by determining the number of individual items of equipment it has on hand and by combining the services’ inventories of individual items. Service guidance specifies that a total of 1,573,866 active and reserve servicemembers need protection to meet current operations plan requirements. DOD provides each deploying servicemember with up to four ensembles either at deployment or held in war reserve and distributed to theater operating forces when needed. The ensembles consist of five components: (1) four protective suits, (2) between four and eight pairs of gloves and boots, (3) between four and eight hoods, (4) up to four breathing filters, and (5) one mask. Because DOD does not report each service’s readiness based on the equipment it has on hand, but rather provides a joint assessment, critical service shortages or opportunities for cross-service assistance tend to be obscured. In fact, each service reported shortages of one component of the ensemble. Specifically, the Army reported critical shortages of hoods; the Air Force reported shortages of gloves; the Navy, shortages of suits; the Marine Corps, shortages of boots. When we compared the number of ensembles required by each service’s guidance and applied the DOD risk criteria, the risk was high for all four services. As a result, DOD cannot provide all the required ensembles for 682,331 servicemembers scheduled for wartime deployment, as shown in table 4. The risk posed by suit shortages is likely to worsen through 2007 due to increasing rates of older suits’ expiration and DOD’s plan not to replace all of them. As of October 1, 2000, DOD reported a shortage of about 1.7 million protective suits; it believes about 3.3 million, or 75 percent, of the current suit inventory will expire by 2006. JSLIST suits cost about $203 each compared to about $80 each for most of the existing suits, and DOD plans to buy only about 2.8 million JSLIST suits as replacements. Therefore, the shortage will increase to about 2.2 million suits by 2006. DOD’s plan to buy fewer new suits is also influenced by expiration of the suits and budgetary considerations. By replacing suits at a rate slower than the expiration rate, DOD plans to spread future suit purchases over more years to avoid a disproportionately large amount of suits expiring in any one year. This tactic allows greater dispersion of future suit expirations and replacement costs but is likely to also increase the short-term risk of wartime shortages. DOD is attempting to mitigate some of the shortages. For example, the Army plans to procure more than 500,000 hoods through fiscal year 2002, and the Defense Logistics Agency was procuring more of the existing generation of boots at the time of our report. Some opportunities also exist for one service to assist another. For example, the Army and Marine Corps reported significantly more gloves on hand than required and could transfer some to the Air Force to offset Air Force shortfalls since all the services use the same gloves. However, other available equipment is not interoperable and cannot be easily shared. For example, the Navy and Marine Corps suits are hooded, so they do not have separate hoods and therefore cannot help alleviate the Army’s shortage. If all goes according to plan, such interoperability problems should ease after fiscal year 2006, as all four services begin using the JSLIST suit and new joint masks, gloves, and boots. Shortcomings in DOD’s inventory management of chemical and biological protective equipment adversely affect the Department’s ability to accurately assess the readiness of the services to meet requirements for the equipment and mitigate the risk of shortages. DOD’s current inventory information on chemical and biological equipment is unreliable for making an accurate risk assessment because DOD and the services cannot easily link inventory records; lack data on suit expiration dates; cannot easily identify, track, and locate defective suits; and have miscalculated the requirements and the number of suits available. These shortcomings are consistent with long-term problems in DOD’s inventory management that we have consistently identified since 1990 as a high-risk area due to a variety of problems, including ineffective and wasteful management systems and procedures. The Defense Logistics Agency and the military services store war reserve inventories of chemical and biological protective suits and other equipment at a variety of depots, warehouses, and storage facilities and as noted earlier, use at least nine different inventory systems to manage the inventories. However, because these systems are not linked, DOD-wide oversight of the inventories is restricted, and the systems are not used to directly support the inventory data in the annual report to Congress and the Logistics Support Plan. Instead, DOD makes an additional effort to collect data theoretically already in the systems. The data collection requires units and depots that store the chemical protective equipment to provide separate data on the equipment annually and relies heavily on government and contractor personnel to manually compile the data. Although DOD has at least nine major inventory management systems, it cannot accurately determine the expiration rate of most of the older suits used by the Air Force and Army. These account for about 3.3 million of the current suit inventory and can be used for up to 14 years from the date of manufacture after which testing has determined that the suits cannot be used in a contaminated environment. Therefore, knowing the date the suits were manufactured is critical to estimating the suits’ expiration rate and the rate at which the suits must be replaced with JSLIST suits. However, neither DOD nor we can accurately determine the expiration rate of the old suits because the Defense Logistics Agency, the buyer of the suits, was unable to locate most of the relevant procurement records. Moreover, many of the inventory systems cannot be used to locate the actual expired suits in specific depots because the systems do not record equipment expiration dates or the manufacturers’ contract or lot numbers. Two examples or illustrations follow: The Army does not record suit expiration information in its primary inventory management system. To compensate, the Army has assumed an annual 20-percent expiration rate of its inventory through fiscal year 2005 and expects that all suits will expire by 2005. However, the Army’s assumption may be inaccurate. Records from a depot in Kentucky indicate that almost 80,000 suits would be serviceable after 2005 and some as late as 2008. The Navy does not know when its suits will expire because, according to the Naval Sea Systems Command, the Navy does not require inventory managers to include the expiration date in inventory records. Nonetheless, in June 2001, the Navy estimated that of 178,000 suits that it had on hand, only about 61,000 were actually serviceable because the rest had passed their expiration date. Our review of 19 Military Sealift Command ships, which help to sustain deployed U.S. forces, showed that most had severe suit shortages, due mostly to expirations. We found additional problems in 48 ships in the Atlantic and Pacific fleets. These ships currently report that they are missing one or more components of their ensembles and consequently cannot provide a complete ensemble for a single crewmember. The Air Force and Marine Corps use different inventory management systems that include contract, lot, and expiration information. Consequently, these two services can estimate suit expiration rates to manage their inventories effectively. Nonetheless, neither system is compatible with the other DOD systems. The majority of DOD’s and the services’ inventory systems cannot be used to identify, track, and locate defective suits that may be in current inventories because contract and lot numbers needed for the purpose are not always included in the inventory records. In September 1999, officials from one manufacturer pleaded guilty to selling 778,924 defective suits to the government. Since these defective suits were distributed to DOD war reserve and various other inventories, it was imperative that the suits be found. In May 2000, DOD directed units and depots to locate the defective suits and issue them for training use only. At the conclusion of our review, DOD had not found about 250,000 of these suits and did not know whether they had been used, were still in supply, or were sent for disposal. Finding the suits was difficult even when the storage depot was known. For example, the Defense Logistics Agency inventory system does not link the contract and lot number with the box or pallet number to allow ease in locating specific items. Consequently, during our review, the Agency resorted to using 19 reservists for up to 34 days to physically inspect all pallets and boxes containing about 1.3 million protective suits at its depot in Albany, GA. The reservists found about 347,000 defective suits. Figure 2 displays some of the boxes of these suits. Despite the problem in finding defective suits, the Defense Logistics Agency’s supply system remained unchanged at the time of our review. Agency officials acknowledged that they would have to physically reinspect depot stocks if specific lots of other suits need to be removed from the inventory before the end of their normal 14-year shelf life. Several questionable inventory management practices and related actions have further contributed to the generation of the inaccurate inventory data, which in turn affects the accuracy of DOD’s risk assessment process. These include miscalculating suit requirements, failing to count parts of the suit inventory, and counting suits as part of the inventory long before they are actually delivered from manufacturers. Some specifics regarding these counts are as follows: The Air Force double-counted a portion of its suit requirement by reporting a requirement for both 801,167 of the older suits and the same number of replacement JSLIST suits. The Army asked units that store suits to report the numbers being stored, but it did not tell them to include desert pattern suits, which are generally reserved for use in desert climates. As a result, units did not always include desert pattern suits in their reported inventories, and the Army believes it consequently underreported its desert pattern suit inventory by 10 percent of the total, or 231,050 suits. In the fiscal year 2001 Logistics Support Plan and draft Annual Report to Congress, the services reported they had 1,229,935 JSLIST suits on hand on September 30, 2000, but that included 782,232 suits not yet delivered. DOD procedures for compiling inventory data for these reports allow reporting suits expected to be delivered during the year as on hand. In March 2001, the Marine Corps Systems Command, which manages JSLIST suit distribution, acknowledged that DOD did not have 1,229,935 JSLIST suits on hand on September 30, 2000 but might reach that quantity a year later on September 30, 2001. Moreover, in the same two reports, DOD projected that it would reach 1.5 million suits by September 30, 2001, again overestimating JSLIST production. DOD’s inventory management practices tend to affect the suit inventory count. This count in turn can significantly affect the results of the risk assessment process, which is a comparison of requirements against the inventory on hand. Because the Department of Defense’s risk assessment process is flawed and unreliable, DOD inaccurately assessed the risk to servicemembers’ lives and military operations from potential wartime shortages of protective equipment as low. The Department underestimated the risk by analyzing requirements based on individual equipment items and not ensembles. Furthermore, DOD combined this service data into a consolidated DOD inventory position, which obscured service-specific shortages. As we discovered, the risk is currently higher than reported by DOD. Inadequate inventory management has contributed to increased risk. Because the Department has no integrated inventory system for managing protective equipment, it has no effective way to (1) gather the data needed for the annual report to Congress and Logistics Support plan, (2) determine the expiration dates of protective equipment, and (3) ensure that its data is correct. To further compound the problem, the services have counted equipment as on hand before it has been delivered, adding to the overcounting of equipment that they had in the inventory. Inaccurate risk assessment and inadequate inventory management could adversely affect readiness and prevent informed acquisition decisions that could undermine risk mitigation. To improve the Department of Defense’s ability to accurately assess the level of risk and readiness for operations in a contaminated environment, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to issue and implement guidance requiring each service to evaluate its risk on the basis of current inventory numbers of complete ensembles against wartime requirements; implement a fully integrated inventory management system to manage chemical and biological defense equipment and use it to prepare (1) the required annual report to Congress and (2) the annual Logistics Support Plan on chemical and biological defense; establish data fields in the inventory management system to show the contract, lot number, and expiration date of shelf life items; and cease counting equipment as on hand before delivery from the contractor. DOD provided written comments on a draft of our report and generally concurred with our recommendations. DOD partially concurred with our recommendation to conduct risk assessments on the basis of ensembles required in wartime and not just components of the ensemble and stated that the department will issue implementing guidance. DOD concurred with comment with our recommendations to (1) establish an integrated inventory management system; (2) include item contract, lot number, and expiration date information in the new inventory system; and (3) cease counting equipment as on hand before it is delivered and explained its plan to implement the recommendations. In addition, DOD provided technical comments, which we incorporated into our report as appropriate. DOD’s comments are printed in their entirety in appendix II along with our evaluation of their comments. We discuss our scope and methodology in detail in appendix I. We conducted our review from August 2000 to April 2001 in accordance with generally accepted government auditing standards. We will send copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Director of the Office of Management and Budget. If you or your staff have any questions about this report, please contact me at (202) 512-6020. Additional contact and staff acknowledgments are listed in appendix III. We determined (1) whether DOD’s process for assessing the risk to military operations on the basis of wartime equipment requirements is reliable and (2) how DOD’s inventory management of chemical and biological protective gear has affected the risk level. We included in our scope chemical and biological protective suits, masks and breathing filters, gloves, boots, and hoods. To understand the process DOD uses to assess the risk, we determined how DOD performs risk assessments. We examined DOD’s fiscal years 1999, 2000, and 2001 Chemical and Biological Defense: Annual Report to Congress and Joint Service Nuclear, Biological, and Chemical Defense Logistics Support Plan: Readiness and Sustainment Status and service input to these reports. To understand equipment requirements, we interviewed an official from the Office of the Deputy Assistant to the Secretary of Defense, Chemical and Biological Defense; the Joint Nuclear, Biological, and Chemical Defense Board; the Joint Staff; and other organizations and obtained documents showing how many suits, masks, breathing filters, gloves, boots, and hoods are needed to support operations. We also obtained the Center for Army Analysis’ Joint Service Chemical Defense Equipment Consumption Rates IV, Volume II; briefing slides; guidance; directives; memorandums; cables; and other documents that specify requirements. We also used service guidance to determine the number of servicemembers scheduled for deployment who need protection. We did not evaluate the validity of the requirements. To calculate on-hand stocks, we obtained inventory records from war reserve or other depots in the United States, Japan, the Republic of Korea, the Netherlands, elsewhere in Europe, and aboard prepositioned ships in Guam to determine the size of the stockpile. As a result of the national security reviews under way at the time of our review, requirements for chemical defense equipment could change. If so, current risk assessments would need revision. To determine how DOD’s inventory management practices affected risk, we tried to verify the accuracy of inventory data reported by the services. We did this by (1) interviewing officials and obtaining documents showing how the inventory data were collected and verified, (2) obtaining Navy documents showing the number of suits still in the inventory that had not expired and comparing that number to the reported inventory, and (3) obtaining JSLIST suit production data. We also tried to determine how many of the older chemical protective suits DOD had bought and when, but the Defense Logistics Agency could not find most of its records documenting suit procurement. To determine the compatibility of the nine major supply systems, we interviewed the responsible DOD officials, compared system inventory procedures, checked records against physical inventories, and obtained relevant documents. To determine how long shelf life items can be used and to estimate equipment expiration rates, we interviewed officials from the Army’s Soldier Biological and Chemical Command in Maryland; Natick Soldier Center in Massachusetts; and Rock Island Arsenal in Illinois; the Naval Sea Systems Command in Virginia; the Air Force Headquarters Directorate of Supply in Washington, D.C.; and the Marine Corps’ Combat Development Command in Virginia and Materiel Command in Georgia. We also interviewed officials and obtained documents from the Defense Logistics Agency offices in Pennsylvania showing planned or actual procurement of JSLIST suits and other equipment. To determine how the services and depots identify which items will expire and need replacement, we inspected or inventoried chemical protective suits stored at the Bluegrass Army Depot in Richmond, KY; the Defense Logistics Agency’s war reserve depot in Albany, GA; the Air Force’s Mobility Bag Center in Avon Park and MacDill Air Force Base, FL; and aboard ships at the Norfolk Navy Base, Norfolk, VA. At these locations, we met with officials and obtained supply records and suit and other equipment expiration data. The following is our response to the Department of Defense letter dated September 18, 2001. 1. While DOD presents the data in the cited Annual Report to Congress and Logistics Support Plan annexes, the data is presented on an item-by- item basis and not an ensemble basis. Consequently, the information as presented does not give a fully reliable risk assessment. DOD acknowledges that it has scarce resources and must manage risk within those resource constraints. Consequently, DOD also indicated in its comments that it will rely on industrial surge capacity to make up any shortfall in required ensemble components. Nonetheless, the Department’s risk assessment is based on having 120 days of supply at the units or in war reserve. If the Department now plans to stock fewer than 120 days of supply and rely on industrial surge to make up the difference in a crisis, the risk level would be higher because the continuing shortages would be greater. 2. The Air Force has developed, and the Marine Corps is developing inventory systems, both of which include contract, lot number, and expiration date of equipment on hand. Adopting one of these systems DOD-wide could reduce or eliminate development costs associated with the Business System Modernization program, assure interoperability across the services, and meet the intent of our third recommendation. In addition to the contact named above, Brian J. Lepore, Raymond G. Bickert, Tracy M. Brown, and Sally L. Newman made key contributions to this report. Major Management Challenges and Program Risks: Department of Defense (GAO-01-244, Jan. 2001). Chemical and Biological Defense: Units Better Equipped but Training and Readiness Reporting Problems Remain (GAO-01-27, Nov. 2000). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/T-NSIAD-00-180, May 2000). Chemical and Biological Defense: Observations on Nonmedical Chemical and Biological R&D Programs (GAO/T-NSIAD-00-130, Mar. 2000). Chemical and Biological Defense: Chemical Stockpile Emergency Preparedness Program for Oregon and Washington (GAO/NSIAD-00-13, Oct. 1999). Chemical and Biological Defense: Observations on Actions Taken to Protect Military Forces (GAO/T-NSIAD-00-49, Oct. 1999). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/NSIAD-99-159, Aug. 1999). Chemical and Biological Defense: Coordination of Nonmedical Chemical and Biological R&D Programs (GAO/NSIAD-99-160, Aug. 1999). Chemical and Biological Defense: DOD’s Evaluation of Improved Garment Materials (GAO/NSIAD-98-214, Aug. 1998). Chemical and Biological Defense: Observations on DOD’s Plans to Protect U.S. Forces (GAO/T-NSIAD-98-83, Mar. 1998). Assuring Condition and Inventory Accountability of Chemical Protective Suits (D-2000-086, Feb. 25, 2000). M41 Protection Assessment Test System Capabilities (99-061, Dec. 24, 1998). Unit Chemical and Biological Defense Readiness Training (98-174, July 17, 1998). Inventory Accuracy at the Defense Depot, Columbus, Ohio (97-102, Feb. 27, 1997). Army Protective Mask Requirements (95-224, June 8, 1995).

The Department of Defense (DOD) believes it is increasingly likely that an adversary will use chemical or biological weapons against U.S. forces to degrade superior U.S. conventional warfare capabilities, placing servicemembers' lives and effective military operations at risk. To reduce the effects of such an attack on military personnel, DOD has determined the quantity of chemical and biological protective suits, masks, breathing filters, gloves, boots, and hoods that are needed based on projected wartime requirements. DOD's assessment process is unreliable for determining the risk to military operations. DOD's 2000 report is inaccurate because it includes erroneous inventory data and wartime requirements. Inadequate inventory management is an additional risk factor because readiness can be compromised by DOD's inventory management practices, which prevent an accurate accounting of the availability or adequacy of its protective equipment.

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Program evaluations are systematic studies that use research methods to address specific questions about program performance. Evaluation is closely related to performance measurement and reporting. Whereas performance measurement entails the ongoing monitoring and reporting of program progress toward preestablished goals, program evaluation typically assesses the achievement of a program’s objectives and other aspects of performance in the context in which the program operates. In particular, evaluations can be designed to better isolate the causal impact of programs from other external economic or environmental conditions in order to assess a program’s effectiveness. Thus, an evaluation study can provide a valuable supplement to ongoing performance reporting by measuring results that are too difficult or expensive to assess annually, explaining the reasons why performance goals were not met, or assessing whether one approach is more effective than another. Evaluation can be key in program planning, management, and oversight by providing feedback on both program design and execution to program managers, legislative and executive branch policy officials, and the public. In our 2013 survey of a stratified random sample of federal managers, we found that most federal managers reported lacking recent evaluations of their programs. Although only about a third had recent evaluations of their programs or projects, the majority of those who had evaluations reported that they contributed to understanding program performance, assessing program effectiveness or value, making changes to improve program management or performance, and sharing what works with others. Those who had evaluations cited most often a lack of resources as a barrier to implementing evaluation findings. Agency evaluators noted that it takes a number of studies rather than just one study to influence change in programs or policies. Experienced evaluators identified three strategies to facilitate evaluation influence: leadership support of evaluation, building a strong body of evidence, and engaging stakeholders throughout the evaluation process. Our previous literature review found that the key elements of national or organizational capacity to conduct and use evaluation in decision making include an enabling environment that has leadership support for using evidence in decision making; organizational resources to support the supply and use of credible evaluations; and the robust, transparent availability of evaluation results. Our 2014 survey of PIOs on the presence of these elements in their agencies found uneven levels of evaluation expertise, organizational support within and outside the organization, and use across the government. About half the 24 agencies reported committing resources to obtain credible evaluation by establishing a central office responsible for evaluation, yet those agencies with centralized leadership reported greater evaluation coverage and use of the results in decision making. Only six of these agencies reported having stable funding or agency-wide evaluation plans. GPRAMA established an expectation that evidence would have a greater role in agency decision making. The act changed agency performance management roles, planning and review processes, and reporting to ensure that agencies use performance information in decision making and are held accountable for achieving results and improving government performance. The act required the 24 CFO Act agencies and OMB to establish agency priority goals and government-wide cross-agency priority goals, review progress on the goals quarterly, and report publicly on their progress and strategies to improve performance on a government performance website. In addition, GPRAMA, along with OMB guidance, established and defined performance management responsibilities for agency officials in key management roles. In particular, the PIO was given a central role in promoting the agencies’ use of evaluation and other evidence to improve program performance. The act charged the Performance Improvement Council, which includes PIOs from all 24 CFO Act agencies, to facilitate agencies’ exchange of successful practices and the development of tips and tools to strengthen agency performance management. OMB’s guidance implementing GPRAMA also directed agencies to conduct strategic reviews of annual progress toward each strategic objective in their strategic plans to inform agency strategic decision making, budget formulation, and preparation of annual performance plans and reports. Guided by the PIO, agencies are to consider a wide range of evidence (including research, evaluation, and performance indicators) in these reviews and identify areas where additional evaluations or analyses of performance data are needed. Further, GPRAMA is part of a government-wide focus on the crucial role of evidence for improving the effectiveness of federal programs. Since 2009, OMB has issued several memorandums urging efforts to strengthen the use of rigorous impact evaluation, designate a high-level official responsible for evaluation to develop and manage a research agenda, and demonstrate the use of evidence and evaluation in budget submissions, strategic plans, and performance plans. A 2013 OMB memorandum urged agencies to develop an evidence and innovation agenda to exploit existing administrative data to conduct low-cost experiments and implement outcome-focused grant designs and research clearinghouses to catalyze innovation and learning. OMB staff have also established several interagency workgroups to promote sharing evaluation expertise and have organized a series of workshops and interagency collaborations. For example, in 2016 we recommended that OMB establish a formal means for agencies to collaborate on tiered evidence grants, a new grant design in which funding is based on the level of evidence available on the effectiveness of the grantee’s service delivery model. OMB’s Evidence Team convened an interagency working group on tiered evidence grants that meets quarterly and established a website for the group to share resources. This team also co-chairs the Interagency Council on Evaluation Policy, a group of 10 agency evaluation offices that have collaborated on developing common policies and conducting workshops. The Trump Administration’s 2018 Budget proposal endorses a continued commitment to agencies building a portfolio of evidence on what works and how to improve results, investing in evidence infrastructure and capacity, and acting on a strong body of evidence to obtain results. In 2016, the Congress enacted and the President signed two pieces of legislation encouraging federal agency evaluation. The Evidence-Based Policymaking Commission Act of 2016 created the Commission and charged it with conducting a comprehensive study of the data inventory, data infrastructure, database security, and statistical protocols related to federal policy making and the agencies responsible for maintaining that data. This study was to include a determination of the optimal arrangement for which administrative data on federal programs and tax expenditures, survey data, and related statistical data series may be integrated and made available to facilitate program evaluation, continuous improvement, policy-relevant research, and cost-benefit analyses, while considering the privacy of personally identifiable information. In its September 2017 report, the Commission made 22 recommendations to improve secure, private, and confidential access by researchers to government data; modernize data privacy protections; implement a National Secure Data Service to manage secure record linkage and data access for evidence building; and strengthen federal agency evidence- building capacity. In particular, the Commission recommended that each federal department should identify a Chief Evaluation Officer and develop a multi-year learning agenda of high priority research and policy questions to address. The Foreign Aid Transparency and Accountability Act of 2016 (FATAA) requires the President to set guidelines for monitoring and evaluating federal foreign assistance by January 2018. The guidelines are to provide direction to the several federal agencies that administer foreign assistance on how to, for example, establish annual monitoring and evaluation plans, quality assurance procedures, and public dissemination of findings and lessons learned. In 2017, we surveyed federal managers asking the same questions as those we asked in 2013 about managers’ access to evaluation and their use in decision making. Our 2017 survey found no change government- wide in managers’ access to evaluations since 2013. We estimate that 40 percent of federal managers reported having access to recent evaluations of their programs, while another 39 percent reported that they did not know if an evaluation had been conducted. About half the managers who had evaluations once again reported that they contributed to a great or very great extent to improving program management or performance and assessing program effectiveness (54 and 48 percent, respectively), while fewer reported that they contributed to allocating program resources or informing the public (35 and 22 percent, respectively). In 2017, an estimated 40 percent of federal managers reported that an evaluation had been completed within the past 5 years for any of the programs, operations, or projects they were involved in—statistically unchanged from the 2013 survey (37 percent). As in 2013, Senior Executive Service (SES) managers reported having evaluations statistically significantly more often than non-SES managers did (56 percent versus 39 percent in 2017; 54 percent versus 36 percent in 2013).This should be expected, since SES managers are likely to oversee a range of programs broader than that of non-SES managers, any one of whose programs might have been evaluated. An estimated 18 percent of managers reported not having any evaluations, while twice as many managers (an estimated 39 percent) reported that they did not know if an evaluation had been conducted. We believe this may reflect midlevel managers’ lack of familiarity with activities outside their programs. As in 2013, non-SES managers reported twice as often as SES managers that they did not know whether an evaluation had been performed (40 percent versus 19 percent in 2017; 41 percent versus 24 percent in 2013). And in other questions in our survey about GPRAMA provisions, non-SES managers reported significantly more often than SES managers that they were not familiar with cross- agency priority goals (42 versus 22 percent), one or more of their agency’s priority goals (21 versus 9 percent), or their agency’s quarterly performance reviews (61 versus 44 percent). Because these goals and their related reviews apply only to a subset of an agency’s goals, midlevel managers are less likely to be directly involved in them. Of the estimated 40 percent of managers who reported having evaluations, most (86 percent) reported that the agency itself primarily conducted or contracted for these evaluations. Many of these managers also reported that studies were completed by their Inspector General (49 percent), GAO (38 percent), or others such as the National Academy of Sciences and independent boards (17 percent). Because of variation in the responsibilities of managers, we cannot deduce from these results how many programs have been evaluated. However, even if additional evaluations had been conducted by others within or outside the agency, if managers were unaware of them, their results would not have been available for use. Because evaluations are designed to meet decision makers’ information needs, our survey asked federal managers who had recent evaluations to what extent those evaluations contributed to 11 different activities. For the 40 percent of managers who reported having evaluations, the results are very similar to the results of our 2013 survey: federal managers with evaluations credited them with contributing to a great or very great extent to assessing program effectiveness or implementing changes to improve program management or performance (48 and 54 percent, respectively), with no statistically significant changes since 2013. Managers reported less frequently that evaluations contributed greatly to allocating program resources or informing the public (figure 1). Consistent with the 2013 survey results, many managers who reported having evaluations reported that they contributed to a great or very great extent to direct efforts to improve programs such as: implementing changes to improve program management or performance (an estimated 54 percent in 2017), developing or revising performance goals (45 percent), sharing what works or other lessons learned with others (44 percent), and designing or supporting program reforms (39 percent). Evaluations vary in their scope and complexity and may address questions about program implementation as well as program effectiveness, so any resulting recommendations may point to simple corrections or broad re-thinking of a policy’s relevance or effectiveness. In a previous study, evaluators told us that it usually takes a number of studies, rather than just one, to influence change in programs or policies. As one evaluator put it, “the process by which evaluation influences change is iterative, messy, and complex. Policy changes do not occur as a direct result of an answer to an evaluation question; rather, a body of evaluation results, research, and other evidence influences policy and practice over time.” Moreover, designing and approving major program reforms typically involves a number of stakeholders outside the agency. Sharing what works with others is often the most direct action federal managers can take in decentralized programs in which they do not have direct control of program activities conducted by others at the state and local levels. To address this, federal agencies use a variety of methods to disseminate evaluation findings to local decision makers, such as establishing searchable evaluation clearinghouses online or disseminating findings through electronic listservs, through webinars, or at research and evaluation conferences. Fewer managers reported that evaluations contributed to streamlining programs to reduce duplicative activities to a great or very great extent (an estimated 27 percent). We have issued several reports outlining numerous areas of potential duplication, overlap, and fragmentation in federal programs. In these reviews, we identified the need for improved coordination and collaboration as well as better evaluation of these programs’ performance and results to help inform decisions about how to better manage these programs. Evaluation studies, if carefully designed, can address specific questions about the extent of fragmentation, overlap, and duplication as well as the individual and joint effectiveness of related programs. A broad review of evidence on related programs and the relationships among them can clarify the extent of and reveal opportunities for reducing or better managing fragmentation, overlap, and duplication. Managers who reported having access to evaluations reported that evaluations contributed to a great or very great extent to improving their understanding of program performance, such as by assessing program effectiveness, value, or worth (an estimated 48 increasing understanding about the program or topic (48 percent); and supplementing or explaining performance results (44 percent). The primary purpose of program and policy evaluations is to provide systematic evidence on how well a program is working, whether it is operating as intended or achieving its intended results. They can be especially useful for helping improve program performance when they help identify for whom or under what conditions a program or approach is effective or ineffective or the reasons for change (or lack of change) in program performance. We have also reported that evaluations can help measure more complex or costly forms of performance than can be obtained routinely, such as by following up on high school students’ success in college. Similar to the 2013 survey results, fewer managers found that evaluations contributed to a great or very great extent to allocating resources within the program (35 percent), or supporting program budget requests (33 percent), than to improving program management or understanding (54 and 48 percent, respectively). This result is not surprising because many factors and priorities influence the budget process and need to be considered when deciding how to allocate limited resources among competing needs. Evaluators told us that high-stakes decisions such as funding are taken rarely on the basis of a single study but, rather, on the basis of a body of evidence. Our 2014 survey of the PIOs at the 24 CFO Act agencies provided a mixed picture of evaluation use in allocating resources. Almost half (10) reported that their agencies had increased their use of evaluation in supporting budget requests and allocating resources within programs since 2010; while 5 PIOs either provided no opinion or reported little or no agency use of evaluation evidence to support budget or policy changes as part of their agency’s annual budget process. Similar to the 2013 survey results, less than half the federal managers who reported having evaluations also reported that evaluations contributed to informing the public about how programs are performing to a great or very great extent (an estimated 22 percent). In fact, similar to 2013, 20 percent of these managers reported no basis to judge whether these evaluations informed the public. As we noted in our 2013 report, federal managers’ use of evaluation appears to be oriented more internally than externally, and they may think that they are not in a position to know whether the public reads their reports. This does not mean that agencies do not make their evaluation reports public. In our 2014 survey of the 24 PIOs, half reported that their agencies posted evaluation reports in a searchable database on their websites, and a third reported disseminating evaluation reports by electronic mailing lists. Simply having program evaluations does not ensure that managers will use their results in management or policy making. As we noted above, our reviews of the research and policy literature have found that organizational and national capacity to conduct and use evaluation in decision making relies on leadership support for using evidence in decision making, organizational resources, and the availability of evaluation results. In addition, the nature of study results can influence evaluation use; mixed or inconclusive results may not suggest a clear path of action. To help understand the relative importance of these factors for evaluation use, our survey asked federal managers who had recent evaluations of any of their programs, operations, or projects to what extent specific factors regarding leadership support, policy context, staff capabilities, or evaluation characteristics hindered or facilitated using evaluations in their agencies. Managers’ views of which factors facilitate or hinder evaluation use have changed little since our 2013 survey. Managers who reported having evaluations once again most often reported that lack of resources to implement results was a barrier to evaluation use (an estimated 29 percent). They most often identified leadership support for evaluation (38 percent), and the evaluation’s relevance to decision makers (36 percent) as facilitators of evaluation use. While 19 percent perceived lack of staff knowledgeable in evaluation as a barrier, 35 percent reported that staff involvement facilitated use. As in our 2013 survey, many agency managers (35 percent) reported they had no basis to judge the influence of the presence or absence of congressional support for evaluation. In our 2014 survey, the PIOs generally identified the same factors facilitating evaluation use. Managers who reported having access to recent evaluations of their programs rated lack of resources to implement evaluation findings more often than any other potential barrier (see figure 2). They also reported modest concerns related to program context and agency capacity or support for evaluation as barriers to evaluation use more often than potential problems with study quality. For the estimated 40 percent of managers who reported having evaluations, the factor that they most often reported hindering the use of program evaluations to a great or very great extent was a lack of resources to implement evaluation findings (29 percent), which was also the most commonly reported factor in 2013 (33 percent, difference not statistically significant). This is not surprising given today’s constrained federal budget resources. In a climate of budget reductions, agencies are hard-pressed to argue for expanding or creating new programs. But agencies may also lack resources to undertake corrective action within existing programs, such as providing additional staff training or increasing oversight or enforcement efforts. Few federal managers who reported having evaluations cited factors related to agency and policy context as barriers that hinder the use of evaluations to a great or very great extent, such as: difficulty resolving differences of opinion among internal or external stakeholders (an estimated 18 percent), difficulty distinguishing between the results produced by the program and results caused by other factors (17 percent), and concern that the evaluation did not address issues of relevance to decision makers (15 percent). The wide range of stakeholders for federal programs can include the Congress, executive branch officials, nonfederal program partners (state and local agencies and community-based organizations), program beneficiaries, regulated entities, and the policy research community. Their perspectives on evaluation results may differ because of differences in their policy opinions or the complexity of evaluation findings. For programs with broad goals, stakeholders may differ in their perception of a program’s purpose and how program “success” should be defined. Disagreements about what to do next can occur when evaluation findings are not wholly positive or negative. Some federal managers who reported having evaluations also reported that difficulty distinguishing between results produced by the program and results caused by other factors was a great or very great barrier to evaluation use (18 percent). Across the federal government, programs aim to achieve outcomes that they do not control, that are influenced by other programs or external social, economic, or environmental factors, complicating the task of assessing program effectiveness. Typically, this challenge is met by conducting a net impact evaluation that compares what occurred with an estimate of what would have occurred in the absence of the program. However, these studies can be difficult to conduct, may have unexpected or contradictory findings, and need to be considered in the context of the larger body of evidence. Some managers (an estimated 15 percent) rated concern about the relevance of an evaluation’s issues to decision makers as hindering use to a great or very great extent, but three times as many managers (47 percent) reported that this was a small or insignificant barrier. Our previous literature review found that collaboration with program stakeholders in evaluation planning is a widely recognized element of evaluation capacity. We also described in a previous report how experienced agency evaluation offices reach out to key program stakeholders to identify important policy and program management questions, vet initial ideas with the evaluations’ intended users, and then scrutinize the proposed portfolio of studies for relevance and feasibility within available resources. The resulting evaluation agenda aims to provide timely, credible answers to important policy and program management questions. This can help ensure that their evaluations will be used effectively in management and legislative oversight. More recently, OMB, in the President’s proposed budget for fiscal year 2018, encouraged agencies to expand on this practice by adopting a “learning agenda” in which they collaboratively identify the critical questions that, when answered, will help their programs be more effective. A learning agenda would then identify the most appropriate tools and methods (for example, research, evaluation, analytics, or performance measures) to answer each question. OMB noted that the selected questions should reflect the priorities and needs of a wide array of stakeholders involved in program and policy decision making: Administration and agency officials, program offices and program partners, researchers, and the Congress. As we noted above, in 2017, the Commission on Evidence-Based Policymaking also recommended that departments create learning agendas. Two infrequently reported barriers related to agency evaluation resources at both the staff and executive levels, at about the same levels as in 2013, are: lack of staff knowledgeable about interpreting or analyzing program evaluation results (an estimated 19 percent rated great or very great extent), and lack of ongoing top executive commitment or support for using program evaluation to make program or funding decisions (17 percent). In contrast, almost half of agency managers who reported having evaluations reported that these two issues hindered evaluation use to a small extent or not at all (an estimated 46 to 47 percent, respectively). The research literature has clearly established leadership support for using evidence in decision making as important for evaluation use. However, it is likely that most managers who have evaluations also have at least some leadership support for evaluation. Our 2014 survey of 24 PIOs found that the 9 agencies who reported having independent, centralized evaluation authority reported greater evaluation use in management and policy making. Program evaluations–-especially net impact evaluations that attempt to isolate a program’s effects from the effects of other factors-–typically employ more complex analytic techniques than performance monitoring, so their results may be unfamiliar to staff without training in research and statistics. Evaluation expertise is needed to plan, conduct, or procure evaluation studies, but program staff also need sufficient knowledge to understand and translate evaluation results into steps toward program improvement. Our 2014 survey of 24 PIOs found that about half the agencies reported increases in hiring staff with research and evaluation expertise and in training staff in research and analysis skills since 2011, but 7 acknowledged additional training was needed to a great or very great extent in data management and statistical analysis, performance measurement and monitoring, and translating evaluation results into actionable recommendations. In both the 2013 and 2017 surveys, the agency managers with evaluations agreed that factors related to study limitations were not serious barriers; approximately half reported that they hindered evaluation use to a small extent or not at all: difficulty determining how to use evaluation findings to improve the program (an estimated 50 percent rated a small extent or not at all), difficulty obtaining study results in time to be useful (51 percent), concern about the credibility (validity or reliability) of study results (55 percent), difficulty generalizing the results to other persons or localities (56 difficulty accepting findings that do not conform to expectations (58 percent). We have reported that an effective evaluation design aims to provide credible, timely answers to the intended users’ questions. Even with the best planning, however, an evaluation might not meet decision makers’ needs. First, the pace of policy making is much quicker than the time it takes to conduct an evaluation. Second, there is no guarantee that study results will point to a clear path of action. We previously reported that, to manage these uncertainties, experienced evaluators recommended building a strong body of evidence and engaging stakeholders throughout the process. A body of evidence—including various forms of evidence—is considered more valuable than a single study because having multiple studies with similar results strengthens confidence in the conclusions, and a body of information can yield answers to a variety of different questions, whenever stakeholders pose them. Comparing results obtained under different conditions can help explain what might be driving seemingly contradictory results. Evaluators pointed out that they rarely based decisions on a single study. Individual evaluation studies typically do not simply identify whether a program works but, rather, they assess the effects of an individual program or intervention on specific domains for the specific populations or conditions studied. Developing a body of evidence is also a strategy for ensuring that information is available for input to fast-breaking policy discussions. Engaging stakeholders throughout the evaluation process permits targeting the evaluation’s questions and timing to decision makers’ needs, gaining their buy-in to the study’s credibility and relevance, and providing stakeholders with interim results or lessons learned about program changes that they can implement right away. Few agency managers who reported having evaluations viewed lack of ongoing congressional commitment or support for using program evaluation to make program or funding decisions as a barrier to use to a great or very great extent (an estimated 16 percent). However, twice as many managers (35 percent) reported they had no basis for determining whether congressional commitment was a barrier. We found this same phenomenon in 2013 as well (18 percent and 39 percent, respectively), most likely reflecting midlevel managers’ lack of direct contact with congressional members and staff. This is also consistent with responses to a parallel question included in our survey of federal managers about congressional commitment or support for using performance information to make program or funding decisions. About a third of the full sample of federal managers reported that they had no basis to judge whether lack of congressional support for using performance information hindered its use. Congressional committees have a number of opportunities to communicate their support for evaluation, such as: consulting with agencies as they revise their strategic plans and agency priority goals (APG); requesting agency evaluations to address specific questions about policy or program implementation or results; conducting oversight hearings on agency performance; and reviewing agency evaluation plans to ensure that they address issues of congressional interest. While the Congress holds numerous oversight hearings and requests studies from GAO, it is not clear whether it regularly requests agencies to conduct evaluations. In our 2014 survey, fewer than half the PIOs (10) reported having congressional mandates to evaluate specific programs. Despite GPRAMA’s requirement that agencies consult with the Congress in developing their strategic plans and priority goals, we found their communication to be one-directional, resembling reporting more than dialogue. In our 2013 interviews with evaluators, one evaluator explained that, for the most part, they conduct formal briefings for the Congress in a tense, high-stakes environment; they lack the opportunity for informal discussion of their results. In 2013 we recommended that OMB ensure that agencies adhere to OMB’s guidance for website updates to provide a description of how congressional consultations were incorporated in each APG. Our analysis of the sections on the 2016—2017 APGs on Performance.gov in October 2016 generally found that agencies either did not include information about congressional input or had not updated Performance.gov to reflect the most recent round of stakeholder engagement. As of June 2017, Performance.gov has been archived as agencies develop updated goals and objectives for release in February 2018 with the President’s next Budget submission to the Congress. To learn what factors facilitate evaluations’ use in decision making, we added a new question to our survey of federal managers with evaluations on the extent to which 12 factors facilitate their use (see figure 3). We selected these factors to parallel factors found in our 2013 survey to hinder use as well as others that were found to facilitate use in our previous interviews with evaluators and in our 2014 survey of the PIOs. In 2017, federal managers who reported having evaluations most frequently reported that agency leadership support for evaluation, staff involvement, and evaluation relevance to decision makers facilitated evaluation use. Although neither the survey respondents nor the survey questions are directly comparable, the PIOs we surveyed in 2014 reported similar factors as facilitating evaluation use. These groups differed in their views on the importance of quarterly performance reviews, possibly reflecting their different responsibilities and levels of involvement. Both the federal managers and the senior agency officials reported limited knowledge of congressional requests for or interest in evaluation. Consistent with the literature on factors supporting evaluation use, about one-third of agency managers who reported having evaluations rated top executive commitment or support for using program evaluation to make program or funding decisions the most often of the factors presented (an estimated 38 percent to a great or very great extent). About twice as many managers reported this factor as facilitating evaluation use as those who rated its absence as hindering evaluation use to a great or very great extent (17 percent). This may be because, as we noted above, these respondents have evaluations and thus probably already have some leadership support for evaluation; lack of leadership support was not much of a problem for them. While our 2014 survey did not ask the PIOs to what extent top leadership support for using evaluations in decision making facilitated its use, many reported that their agencies’ senior leadership demonstrated commitment to using evidence (of various types) in management and policy making through guidance (17 of 22) or internal agency memorandums (12 of 22). Some PIOs also rated holding goal leaders accountable for progress on APGs—another form of leadership support—very useful for improving their agencies’ capacity to use evaluations in decision making (8 of 23 PIOs). GAO and others have commented that for evaluation results to be acted on, not only must decision makers generally support using evidence to inform decisions but also the studies themselves must be seen as relevant and credible. About one-third of agency managers with evaluations in 2017 rated importance of an evaluation’s issues to agency decision makers as facilitating use to a great or very great extent (an estimated 36 percent). This is about twice as many as the managers who said the absence of relevance hindered evaluation use to a great or very great extent (15 percent). We interpret this to mean that the managers perceived their evaluations as generally addressing relevant issues and that the evaluations’ relevance contributed to their use in agency decision making. Despite managers’ high regard for top management’s support for evaluation, it is notable that few managers reported that consideration of evaluation findings in agency quarterly performance reviews facilitated their use in decision making. GPRAMA introduced these reviews to encourage the use of performance information in agency decision making by requiring agencies to review progress on their APGs quarterly and to report publicly on their progress and strategies to improve performance, as needed. Although about a quarter of the PIOs reported in 2014 (6 of 23) that these reviews were very useful in improving agencies’ capacity to use evaluations, the managers surveyed in 2017 were not as sanguine. About a third of the managers with evaluations reported that they had no basis to judge whether these reviews facilitated use (35 percent), and few (14 percent) rated them as facilitating use to a great or very great extent. It may be that few middle managers participated in these reviews; they are only required for APGs, a small subset of an agency’s performance goals (generally 2—8 goals at each agency). Sixty-one percent of the total sample of managers reported that they were not at all familiar with these reviews. Alternatively, evaluations might contribute more effectively to the annual strategic reviews, which aim for a comprehensive assessment of progress on the results the agency aims to achieve. OMB’s guidance for these reviews directs agencies to consider a broad array of evidence and external influences on their objectives, identify any gaps in their evidence and areas where additional evaluations or other analyses are needed, and thus focus their limited evaluation resources to inform the strategic decisions facing the agency. Our 2017 survey did not ask federal managers about these strategic reviews; thus, we do not know whether midlevel managers were aware of or involved in these reviews. Experienced evaluators have told us that engaging staff throughout the evaluation process can gain their buy-in on the relevance and credibility of evaluation findings. In addition, providing program staff with interim results or lessons learned from early program implementation can ensure timely data for program decisions. In 2017, one-third of agency managers with evaluations rated program staff involvement in planning or conducting evaluation studies as greatly or very greatly facilitating use (an estimated 35 percent). This is consistent with our 2014 survey, in which about half the PIOs also rated staff involvement in planning and conducting evaluation studies as very useful for improving agency capacity to use evaluations in decision making (11 of 23). Evaluations may use complex analytic techniques with which program staff are unfamiliar, thus inhibiting staff’s involvement and their ability to interpret the findings. However, only an estimated 19 percent of managers rated lack of staff who are knowledgeable about interpreting or analyzing program evaluation results as greatly or very greatly hindering use. A quarter of managers (25 percent) reported that one possible response—providing program staff and grantees with technical assistance on evaluation and its use–-facilitated evaluation use to a great or very great extent. In 2014, about half the surveyed PIOs agreed; 11 of 23 rated this strategy as very useful for improving agency capacity to use evaluations. Other factors that managers in the 2017 survey rated often as facilitating use were parallel to factors that they rated often as barriers. About a quarter of managers (an estimated 29 percent) reported that agency staff ability to make recommended program changes facilitated use to a great to very great extent. This factor is parallel to the most frequently rated factor to hinder use—lack of resources to implement the evaluation findings—that a similar number identified (29 percent great to very great extent). As we noted above, midlevel managers may not have the authority or resources to implement a study’s recommendations. In addition, the positive characteristics of a study may influence its use. About a third of agency managers who reported having evaluations reported that clear implications of results for improving program design or management (31 percent) facilitated use to a great to very great extent. The absence of such clarity is one of the factors that an evaluator previously told us could lead to disagreements, and such disagreements may lead to inaction. Mixed results or the absence of a clear explanation for disappointing program results can impede consensus on an evaluation’s lessons for program improvement. A strong evaluation design can help prevent message muddling by testing alternative explanations, but it cannot ensure that an evaluation will provide clear implications because the results of an evaluation, like a research study, are inherently uncertain. Written evaluation policies and standards help provide benchmarks for ensuring the quality of an organization’s processes and products. The American Evaluation Association (AEA) publishes a guide for developing and implementing U.S. government evaluation programs that recommends that agencies, among other things, develop written evaluation policies and quality standards, consult with program stakeholders, and prepare annual and long-term evaluation plans to support future decision making. In our 2014 survey of PIOs, about a quarter of the 24 PIOs surveyed reported that their agencies had written agency-wide policies or guidance for key issues contained in that guide: selecting and prioritizing evaluation topics, consulting program staff and subject matter experts, ensuring internal and external evaluator independence and objectivity, selecting evaluation approaches and methods, ensuring completeness and transparency of evaluation reports, timely public dissemination of evaluation findings and recommendations, or tracking implementation of evaluation findings. A few more PIOs (10 of 24) reported having agency-wide policies on ensuring the quality of data collection and analysis. In our 2017 survey, we estimate that 28 percent of managers who reported having evaluations reported that agency policies and procedures to ensure evaluation quality facilitated use to a great or very great extent. Our survey did not ask which types of policies they had, so we do not know whether they included all of the topics listed above. Only a small number of managers—13 percent—reported having no basis to judge their policies’ influence, suggesting that most agencies have evaluation policies, although those policies may not apply agency-wide. The reported positive influence of such policies on evaluation quality is also consistent with the fact that about half the managers with evaluations reported that various factors regarding study limitations did not significantly hinder evaluation use in decision making, as discussed above. Experienced evaluators consult with stakeholders in developing their evaluation or learning agenda to help ensure their evaluations’ credibility and relevance to current management and policy issues. In the 2017 survey, managers with evaluations rated consultation with stakeholders on the agency’s evaluation agenda high for facilitating evaluation use (28 percent to a great or very great extent), although 22 percent responded they had no basis to judge. In our 2014 survey of PIOs, only 7 reported having an agency-wide evaluation agenda. The Congress is a prominent member of federal program stakeholders but congressional interest in and requests for evaluation were not widely reported by the PIOs we surveyed in 2014. Congressional mandates are requirements in statute for an agency (including GAO) to conduct a study, usually specifying the topic and a reporting date. GAO is often requested to report on the progress and success of new programs or program provisions. In our 2014 survey, fewer than half the PIOs (10 of 23) reported that they had any congressional mandate to evaluate a specific program in their agency. Consistent with this low reporting of congressional requests for evaluation, about one-third of managers who reported having evaluations in our 2017 survey reported that they had no basis to judge whether congressional requests or mandates facilitated evaluation use (31 percent). However, 23 percent reported that such requests facilitated use to a great or very great extent. Thus, while congressional evaluation requests are not widely reported among PIOs, they appear to be influential among some federal managers. For several years, OMB has encouraged agencies to use program evaluations and other forms of evidence to learn what works and what does not, and how to improve results. Yet, agencies appear not to have expanded their capacity to conduct or use evaluation in decision making since 2013. Because the majority of agency managers who reported having evaluations also reported that they contributed to improving program performance (54 percent), this lack of evaluation capacity constitutes a lost opportunity to improve the efficiency and effectiveness of limited government resources. The survey results reinforce lessons from our previous reports: involving agency staff and executives in planning and conducting evaluations helps ensure that those evaluations are relevant, credible, and used in agency decision making. Agency managers who reported having evaluations also reported top executive support for using evaluations to make decisions, the importance of the evaluation’s issues to decision makers, and involving agency staff in planning or conducting evaluation studies, most often among factors facilitating evaluation use. GAO, as well as OMB, AEA, and the Commission on Evidence-Based Policymaking, has noted that it is important to develop an evaluation plan or agenda to ensure that even an agency’s scarce research and evaluation resources are targeted to its most important issues and can shape budget and policy priorities and management practices. Although only some agencies have developed agency-wide evaluation agendas, evaluators who have them have found that consulting with stakeholders on their evaluation agendas helps ensure evaluation credibility and relevance, and facilitates the use of evaluation results. Congressional support—through either authorization or appropriation of funds—is often needed for agencies to implement desired program reforms. Although 28 percent of federal managers with evaluations reported that consulting with external stakeholders on their evaluation agendas greatly contributes to their use, we saw limited knowledge of congressional consultation. Congressional consultation on agency evaluation plans could increase the studies’ credibility and relevance for those audiences. Although evaluations were generally not reported as contributing greatly to quarterly performance reviews of progress on agency priority goals, they might contribute more effectively to an agency’s annual strategic review. OMB’s guidance envisions strategic reviews as a more comprehensive assessment of a broad range of evidence on and factors influencing progress on an agency’s desired results. Agencies are also directed to identify any gaps in their evidence and take steps to address them in these reviews; thus, the strategic review could produce an evaluation agenda that is targeted to the agency’s management, budget, and policy priorities. To help ensure that federal agencies obtain the evidence needed to address the most important questions to improve program implementation and performance, we recommend that the Director of the Office of Management and Budget direct each of the 24 Chief Financial Officer Act agencies to prepare an annual agency-wide evaluation plan that describes the key questions for each significant evaluation study that the agency plans to begin in the next fiscal year, and congressional committees; federal, state and local program partners; researchers; and other stakeholders that were consulted in preparing their plan. (Recommendation 1) We requested comments on a draft of this report from the Director of the Office of Management and Budget. In an email response, an OMB staff member commented that it would be more appropriate and effective to encourage agencies to create an annual evaluation plan, rather than require or direct them to do so. Because OMB has encouraged agencies to conduct and use evaluations in decision making for several years with mixed success, we believe that a more directive approach is needed. We are sending copies of this report to the Director of the Office of Management and Budget, and to appropriate congressional committees. This report is also available at no cost on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2700 or [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs may be found on the last page of the report. Staff who made key contributions to the report are listed in appendix II. We administered a web-based questionnaire on organizational performance and management issues to a stratified random sample of 4,395 from a population of approximately 153,779 mid-level and upper- level civilian managers and supervisors working in the 24 executive branch agencies covered by the Chief Financial Officers Act of 1990 (CFO Act), as amended. The sample was drawn from the Office of Personnel Management’s (OPM) Enterprise Human Resources Integration database as of September 2015, using file designators for performance of managerial and supervisory functions. The sample was stratified by agency and by whether the manager or supervisor was a member of the Senior Executive Service (SES). The management levels covered general schedule (GS) or equivalent schedules in other pay plans at levels comparable to GS-13 through GS- 15 and career SES or equivalent. In reporting the questionnaire data, we use “government-wide” or “across the federal government” to refer to these 24 CFO Act executive branch agencies, and “federal managers” and “managers” to refer to both managers and supervisors. We designed the questionnaire to obtain the observations and perceptions of respondents on various aspects of such results-oriented management topics as the presence and use of performance information, agency climate, and program evaluation use. In addition, to address the implementation of GPRA Modernization Act of 2010 (GPRAMA), the questionnaire included a section requesting respondents’ views on its various provisions including cross-agency priority goals, agency priority goals, and quarterly performance reviews. This survey is similar to surveys we have conducted five times previously at the 24 CFO Act agencies—in 1997, 2000, 2003, 2007, and 2013. The questions on GPRAMA provisions and program evaluation use were new in 2013. The 2017 questionnaire includes new questions on the use of performance information and factors that facilitate the use of program evaluation. Several components of the new evaluation question were drawn from our 2014 survey of Performance Improvement Officers (PIOs) on their agencies’ evaluation capacity resources and activities, discussed below, and interviews with agency officials. Before administering the survey, GAO subject matter experts, survey specialists, and a research methodologist reviewed new questions. We also conducted pretests of the new questions with federal managers in several of the 24 CFO Act agencies and based revisions on the feedback we received. The objectives of this report address whether agency managers reported change in their access to and use of program evaluations since 2013 and their views about factors that facilitate or hinder the use of program evaluation. Therefore, this report analyzes results on a subset of survey questions concerning those topics. It then compares these results, when appropriate, to results previously obtained in the 2013 survey of federal managers, as well as the results of our 2014 PIO survey. For the 2014 PIO survey, we administered a web-based questionnaire to the PIOs or their deputies at the 24 CFO Act agencies about agencies’ evaluation resources, policies, and activities and the activities and resources they found useful in building their evaluation capacity. GAO subject matter experts, a survey specialist, and research methodologist also reviewed this survey’s questions. In addition we pretested the questionnaire in person with PIOs at three federal agencies. Because this was not a sample survey, it has no sampling errors but may be subject to nonsampling errors that stem from differences in how a question is interpreted. The survey of PIOs is not directly comparable to the survey of federal managers because the questions about factors influencing evaluation use are not exactly the same, and the PIOs, as senior officials typically reporting to the agency Chief Operating Officer, have very different responsibilities from the population of midlevel and upper-level managers and supervisors responding to the Federal Managers Survey. Most of the items on the 2017 Federal Managers Survey were closed- ended, meaning that depending on the particular item, respondents could choose one or more response categories or rate the strength of their perception on a 5-point “extent” scale ranging from “to no extent” at the low end of the scale to “to a very great extent” at the high end. On most items, respondents also had an option of choosing the response category “no basis to judge/not applicable.” A few items gave respondents “yes,” “no,” or “do not know” options. To administer the survey, we sent an e-mail to managers in the sample that notified them of the survey’s availability on the GAO website and included instructions on how to access and complete the survey. Managers in the sample who did not respond to the initial notice received multiple e-mail reminders and follow-up phone calls asking them to participate in the survey. We administered the survey to all 24 CFO Act agencies from November 2016 through March 2017. For additional details on the survey methodology, see our report summarizing our body of work on GPRAMA’s implementation. From the 4,395 managers selected for the 2017 survey, we found that 388 of the sampled managers had left the agency, were on detail, or had some other reason that excluded them from the population of interest. We received usable questionnaires from 2,726 sample respondents. The response rate across the 24 CFO Act agencies ranged from 36 percent to 82 percent, with a weighted response rate of 67 percent for the entire sample. An estimated 40 percent of respondents reported that an evaluation had been completed within the past 5 years for any of the programs, operations, or projects with which they had been involved. The overall survey results can be generalized government-wide to the population of managers as described above at each of the 24 CFO Act agencies. The responses of each eligible sample member who provided a useable questionnaire were weighted in the analysis to account statistically for all members of the population. All results are subject to some uncertainty or sampling error as well as nonsampling error. The government-wide percentage estimates based on our sample from 2017 presented in this report have 95 percent confidence intervals within plus or minus 4 percentage points of the estimate itself for the initial question about whether an evaluation had been completed and within plus or minus 7 percentage points for subsequent questions posed to those who reported having evaluations. Online supplemental materials show all the questions asked on the survey along with the percentage estimates and associated 95 percent confidence intervals for each question for each agency and government-wide. In addition to the contact named above, Stephanie Shipman (Assistant Director), Valerie Caracelli (Analyst in Charge), Pille Anvelt, Timothy Guinane, Jill Lacey, Benjamin Licht, Krista Loose, Anna Maria Ortiz, Penny Pickett, and Steven Putansu made key contributions to this report. Managing for Results: Further Progress Made in Implementing the GPRA Modernization Act, but Additional Actions Needed to Address Pressing Governance Challenges. GAO-17-775. Washington, D.C.: September 29, 2017. Supplemental Material for GAO-17-775: 2017 Survey of Federal Managers on Organizational Performance and Management Issues. GAO-17-776SP. Washington, D.C.: September 29, 2017. 2017 Annual Report: Additional Opportunities to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-17-491SP. Washington, D.C.: April 26, 2017. Tiered Evidence Grants: Opportunities Exist to Share Lessons from Early Implementation and Inform Future Federal Efforts. GAO-16-818. Washington, D.C.: September 21, 2016. Fragmentation, Overlap, and Duplication: An Evaluation and Management Guide. GAO-15-49SP. Washington, D.C.: April 14, 2015. Program Evaluation: Some Agencies Reported that Networking, Hiring, and Involving Program Staff Help Build Capacity. GAO-15-25. Washington, D.C.: November 13, 2014. Managing for Results: Executive Branch Should More Fully Implement the GPRA Modernization Act to Address Pressing Governance Challenges. GAO-13-518. Washington, D.C.: June 26, 2013. Managing for Results: 2013 Federal Managers Survey on Organizational Performance and Management Issues. GAO-13-519SP. Washington, D.C.: June 2013. Program Evaluation: Strategies to Facilitate Agencies’ Use of Evaluation in Program Management and Policy Making. GAO-13-570. Washington, D.C.: June 26, 2013. Managing for Results: Agencies Should More Fully Develop Priority Goals under the GPRA Modernization Act. GAO-13-174. Washington, D.C.: April 19, 2013. Designing Evaluations: 2012 Revision. GAO-12-208G. Washington, D.C.: January 2012. Program Evaluation: Experienced Agencies Follow a Similar Model for Prioritizing Research. GAO-11-176. Washington, D.C.: January 14, 2011. Government Performance: Lessons Learned for the Next Administration on Using Performance Information to Improve Results. GAO-08-1026T. Washington, D.C.: July 24, 2008. Program Evaluation: Studies Helped Agencies Measure or Explain Program Performance. GAO/GGD-00-204. Washington, D.C.: September 29, 2000.

GPRAMA aims to ensure that agencies use performance information in decision making to achieve results and improve government performance. GPRAMA requires GAO to evaluate the act's implementation; this report is one in a series on its implementation. GAO examined the extent of agencies' use of program evaluations—a particular form of performance information—and factors that may hinder or facilitate their use in program management and policy making. GAO surveyed a stratified random sample of 4,395 federal civilian managers and supervisors to obtain their perspectives on several results-oriented management topics, including the extent of and factors influencing evaluation use. GAO compared the results to those of a similar GAO survey of federal managers in 2013 and a GAO survey of Performance Improvement Officers in 2014. GAO also interviewed OMB staff and reviewed guidance on using evaluation in decision making. In a 2017 government-wide survey, GAO found that most federal managers lack recent evaluations of their programs. Forty percent reported that an evaluation had been completed within the past 5 years of any program, operation, or project they were involved in. Another 39 percent of managers reported that they did not know if an evaluation had been completed, and 18 percent reported having none. Managers who reported having evaluations also reported that those evaluations contributed to a great or very great extent to improving program management or performance (54 percent) and to assessing program effectiveness or value (48 percent). These figures are not statistically different from the results of GAO's 2013 survey. Of the 40 percent of managers who reported having evaluations, the factor most often rated as having hindered use to a great or very great extent, as in 2013, was lack of resources to implement the evaluation findings (29 percent). Managers reported limited knowledge of congressional support for using their results; 35 percent were not able to judge whether lack of support was a barrier. Federal managers who reported having evaluations most frequently reported that agency leadership support for evaluation, staff involvement, and an evaluation's relevance to decision makers facilitated evaluation use. GAO previously reported that involving agency staff in planning and conducting evaluations helps to ensure they are relevant, credible, and used in decision making. The Office of Management and Budget (OMB) encouraged agencies to use the annual strategic reviews the GPRA Modernization Act of 2010 (GPRAMA) requires to assess evidence gaps and inform their strategic decisions and budget making. GAO and OMB have noted the importance of developing an evaluation plan or agenda to ensure that an agency's scarce research and evaluation resources are targeted to its most important issues. While 28 percent of managers with evaluations rated consultation with stakeholders high for facilitating use, another 22 percent reported having no basis to judge. GAO previously noted limited knowledge of agency consultation with the Congress. While 23 percent of managers with evaluations reported congressional requests or mandates facilitated evaluation use, more (31 percent) reported having no basis to judge. GAO concludes that Agencies' continued lack of evaluations may be the greatest barrier to their informing managers and policy makers and constitutes a lost opportunity to improve the efficiency and effectiveness of limited government resources. Although only some agencies have developed agency-wide evaluation plans, evaluators who have them found that obtaining stakeholder input helped ensure evaluation relevance and facilitate use of their results. Congressional consultation on agency evaluation plans could increase the studies' credibility with those whose support is needed to implement program reforms. An agency's annual strategic review provides a good opportunity to help target its evaluation agenda to its management, budget, and policy priorities. To help ensure that agencies obtain the evidence needed to address important questions to improve program implementation and performance, GAO recommends that the Director of OMB direct federal agencies to prepare an annual agency-wide evaluation plan that describes the congressional and other stakeholders that were consulted. OMB staff stated that agencies should be encouraged, rather than directed, to create an annual evaluation plan. Because OMB has already been encouraging evaluation, GAO believes a more directive approach is needed.

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Under the Rehabilitation Act, a person is considered to have a disability if the individual has a physical or mental impairment that substantially limits one or more major life activities. Existing federal efforts are intended to promote the employment of individuals with disabilities in the federal workforce and help agencies carry out their responsibilities under the Rehabilitation Act. For example, federal statutes and regulations provide special hiring authorities for people with disabilities. These include Schedule A excepted service hiring authority—which permits the noncompetitive appointment of qualified individuals with intellectual, severe physical, or psychiatric disabilities without posting and publicizing the position—and appointments and noncompetitive conversion for veterans who are 30 percent or more disabled. To qualify for a Schedule A appointment, an applicant must generally provide proof of disability and a certification of job readiness. Proof of disability can come from a number of sources, including a licensed medical professional, or a state agency that issues or provides disability benefits. The proof of disability document does not need to detail the applicant’s medical history or need for an accommodation. Executive Order 13548 committed the federal government to many of the goals of an executive order issued a decade earlier, but went further by requiring federal agencies to take certain actions. For example, Executive Order 13548 requires federal agencies to develop plans for hiring and retaining employees with disabilities and to designate a senior-level official to be accountable for meeting the goals of the order and to develop and implement the agency’s plan. In addition, OPM and Labor have oversight responsibilities to ensure the successful implementation of the executive order (see table 1). For the purposes of determining agency progress in the employment of people with disabilities and setting targeted goals, the federal government tracks the number of individuals with disabilities in the workforce through OPM’s Standard Form 256, Self-Disclosure of Disability (SF-256). Federal employees voluntarily submit this form to disclose that they have a disability, as defined by the Rehabilitation Act. For reporting purposes, disabilities are separated into two major categories: Targeted and Other Disabilities. Targeted disabilities, generally considered to be more severe, include such conditions as total deafness, complete paralysis, and psychiatric disabilities. Other disabilities include such conditions as partial hearing or vision loss, gastrointestinal disorders, and learning disabilities. Further, Labor is given responsibilities in the executive order to improve efforts to help employees who sustain work-related injuries and illnesses return to work. In July 2010, the Protecting Our Workers and Ensuring Reemployment (POWER) Initiative was established, led by Labor. This initiative aims to improve agency return-to-work outcomes by setting performance targets, collecting and analyzing injury and illness data, and prioritizing safety and health management programs that have proven effective in the past. 5 U.S.C. §8101, et seq. Workers’ Compensation Programs (OWCP) reviews FECA claims and makes decisions on eligibility and payments. We have completed a number of reviews that have identified steps that agencies could take to provide equal employment opportunity to qualified individuals with disabilities in the federal workforce. In July 2010, we held a forum that identified barriers to the federal employment of people with disabilities and leading practices to overcome these barriers. Participants said that the most significant barrier keeping people with disabilities from the workplace is attitudinal and identified eight leading practices that agencies could implement to help the federal government become a model employer: (1) top leadership commitment; (2) accountability, including goals to help guide and sustain efforts; (3) regular surveying of the workforce on disability issues; (4) better coordination within and across agencies; (5) training for staff at all levels to disseminate leading practices (6) career development opportunities inclusive of people with (7) a flexible work environment; and (8) centralized funding at the agency level for reasonable accommodations. GAO, Highlights of a Forum: Participant-Identified Leading Practices that Could Increase the Employment of Individuals with Disabilities in the Federal Workforce, GAO-11-81SP (Washington, D.C.: Oct. 5, 2010). OPM, in consultation with EEOC, OMB, and Labor, issued a memorandum in November 2010 to heads of executive departments and agencies outlining the key requirements of the executive order and what elements must be included in agency disability hiring plans. These elements include listing the name of the senior-level official to be held accountable for meeting the goals of the executive order and describing how the agency will hire individuals with disabilities at all grade levels and in various job occupations. The memorandum also described strategies that agencies could take to become model employers of people with disabilities, such as reviewing all recruitment materials to ensure accessibility for people with disabilities. To help implement the strategies, OPM contracted in December 2010 with a private firm to recruit and to manage a list of Schedule A-certified individuals from which federal agencies can hire. OPM received 66 agency plans for promoting the employment of individuals with disabilities, representing over 99 percent of the federal civilian executive branch workforce. OPM officials reviewed all the plans, recording whether they met criteria developed by OPM based on the executive order and its model strategies memorandum. OPM also identified and informed agencies about innovative ideas included in plans. In reviewing the plans, OPM found that many agency plans did not meet one or more of its review criteria (see fig. 1). For example, OPM’s review found that 29 of the 66 agency plans did not include numerical goals for the hiring of people with disabilities. OPM also found that 9 of the 66 agency plans did not identify a senior-level official responsible for the development and implementation of the plan. Finally, only 7 of the 66 plans met all of the criteria; over half of the plans met 8 or fewer of the 13 criteria. However, OPM expected agencies to begin implementing their plans immediately, regardless of any unaddressed deficiencies. Agencies met some criteria more successfully than others. For example, OPM found that 40 of the 66 agency plans included a process for increasing the use of Schedule A to increase the hiring of people with disabilities. In contrast, 29 of the 66 agency plans provided for the quarterly monitoring of the rate at which employees injured on the job successfully return to work. OPM provided agencies with written feedback on plan deficiencies and strongly encouraged agencies to address them numerous times beginning in June 2011. However, 32 out of the 59 agencies with deficiencies in their plans had not addressed them as of April 2012. Specifically, in June 2011, OPM provided agencies with access to reviews of their plans, which identified deficiencies, through OMB’s Max Information System (MAX). According to OPM, in July 2011, a White House official told agency senior executives that they were required to address deficiencies in their plans. In October and November 2011, OPM provided agencies with a list of the deficiencies identified in their plans, and asked agencies to determine how their plans could be improved. In December 2011, OPM again told agencies they were strongly encouraged to review and address plan deficiencies and provided agencies with several examples of plans that met all of the criteria. Though the executive order does not specifically authorize OPM to require agencies to address plan deficiencies, it calls for OPM to regularly report on agencies’ progress in implementing their plans to the White House and others. In response to the executive order’s reporting requirement, OPM officials told us that they had briefed White House officials on issues related to agencies’ implementation of the executive order, but did not provide information on the deficiencies in all of the agency plans. In addition, OPM does not think that the federal government is on target to achieve the goals set in the executive order. While the executive order did not provide additional detail as to what information should be reported, providing information on the extent to which agencies’ plans have met OPM’s criteria would better enable the White House to hold agencies accountable for addressing plan deficiencies. In addition to reviewing agency plans, the executive order required OPM to develop mandatory training programs on the employment of people with disabilities for both human resources personnel and hiring managers, within 60 days of the executive order date. We have previously reported that training at all staff levels, in particular training on hiring, reasonable accommodations, and diversity awareness, can help disseminate leading practices throughout an agency and communicate expectations for implementation of policies and procedures related to improving employment of people with disabilities. Such policies and procedures could be communicated across the federal government with training on topics such as how to access and efficiently use the list of Schedule A- certified individuals, the availability of internships and fellowships, such as Labor’s Workforce Recruitment Program, and online communities of practice established to help officials share best practices on hiring people with disabilities, such as eFedlink. In its November 2010 model strategies memorandum to heads of executive agencies, OPM stated that, in consultation with Labor, EEOC, and OMB, it was developing the mandatory training programs required by the executive order and that further information would be forthcoming. OPM officials told us in March 2012 that they are working with federal Chief Human Capital Officers (CHCO) to develop modules on topics such as using special hiring authority that will be available through HR University. Officials explained that they need to ensure that the training is uniform to ensure all personnel receive consistent information, and they expect the training modules to be ready by August 2012. Although it has yet to fully develop mandatory training programs, OPM has taken steps to train and inform federal officials about tools available to them. For example, OPM partnered with Labor, EEOC, and other agencies to provide elective training courses for federal officials involved in implementing the executive order on topics including: the executive order, model recruitment strategies, guidance on developing disability hiring plans, and return-to-work strategies. OPM also conducted training on implementation of the executive order in July 2011 specifically for senior executives accountable for their agencies’ plans. It also offers short online videos for hiring managers on topics such as Schedule A hiring authority. Further, other governmentwide training on employing people with disabilities exists. For example, Labor’s Job Accommodation Network offers online training on relevant issues like applying the Americans with Disabilities Amendments Act and providing reasonable accommodations. Moreover, the Department of Defense’s Computer/Electronic Accommodations Program offers online training modules to help federal employees understand the benefits of hiring people with disabilities. Nevertheless, agency officials we interviewed told us that they would like to have more comprehensive training on strategies for hiring and retaining individuals with disabilities, confirming the need for OPM to complete the development of the training programs required by the executive order. For example, officials from one agency said that more training on the relationship between return-to-work efforts and providing reasonable accommodations is needed, while officials from another agency identified a need for increased awareness of the Schedule A hiring process. Executive Order 13548 requires OPM to implement a system for reporting regularly to the president, heads of agencies, and the public on agencies’ progress in implementing the objectives of the executive order. OPM is also to compile, and post on its website, governmentwide statistics on the hiring of individuals with disabilities. This is important because effectively measuring workforce demographics requires reliable data to inform decisions and to allow for individual and agencywide accountability. To measure and assess their progress towards achieving the goals of the executive order, agencies and OPM use data about disability status that employees voluntarily self-report on the SF-256. OPM’s guidance to agencies for implementing the executive order explained that the data gathered from the SF-256 is crucial for agencies to determine whether they are achieving their disability hiring goals. Agencies also report these data to EEOC in an effort to identify and develop strategies to eliminate potential barriers to equal employment opportunities. According to the form, the data are used to develop reports to bring to light agency specific or governmentwide deficiencies in the hiring, placement, and advancement of individuals with disabilities. The information is confidential and cannot be used to affect an employee in any way. Only staff who record the data in an agency’s or OPM’s personnel systems have access to the information. According to draft data from OPM, as stated earlier, the government hired approximately 20,000 employees with disabilities during fiscal years 2010 and 2011. However, according to officials at OPM, EEOC, VA, Education, and SSA, accurately measuring the number of current and newly hired employees with disabilities is an ongoing challenge. While the accuracy of the SF- 256 data is unknown, agency officials and advocates for people with disabilities believe there is an undercount of employees with disabilities. For example, despite the safeguards in place explaining the confidentiality of the data, agency officials and advocates for people with disabilities told us that some individuals with disabilities may not disclose their disability status out of concern that they will be subjected to discrimination. Similarly, EEOC reported that some persons with disabilities are reluctant to self-identify because they are concerned that such disclosure will preclude them from advancement. Additionally, some individuals may develop disabilities during federal employment and may not know how to or why they should update their disability status. We have reported that regularly encouraging employees to update their disability status allows agencies to be aware of any changes in their workforce. EEOC guidance recommends that agencies request that employees update their disability status every 2 to 4 years. As previously noted, disabled veterans with a compensable service-connected disability of 30 percent or more may be noncompetitively appointed and converted to a career appointment under 5 U.S.C. § 3112. agency’s ability to establish appropriate policies and goals, and assess progress towards those goals. Labor has taken several steps toward meeting the requirements of the executive order to improve return-to-work outcomes for employees injured on the job, including pursuing overall reform of the FECA system. Specifically, Labor developed new measures and targets to hold federal agencies accountable for improving their return-to-work outcomes within a 2-year period. Agencies were expected to improve return-to-work outcomes by 1 percent for fiscal year 2011 and an additional 2 percent in each of the following 3 years over the 2009 baseline. In fiscal year 2011, the federal government had a cumulative return-to-work rate of 91.6 percent, almost 5 percent better than the target rate of 86.7 percent. Goals such as these are useful tools to help agencies improve performance. Labor is also researching strategies that agencies can use to increase the successful return-to-work of employees who have sustained disabilities as a result of workplace injuries or illnesses. The results of this study are expected to be released in September 2012. Another Labor initiative is aimed at helping the federal government rehire injured federal workers who are not able to return to the job at which they were injured. OWCP initiated a 6-month pilot project in May 2011 to explore how Schedule A noncompetitive hiring authority might be used to rehire injured federal workers under FECA. As part of the project, OWCP provided guidance to claims staff, rehabilitation specialists, rehabilitation counselors, and employing agencies on the process of Schedule A certification and the steps it will take to facilitate Schedule A placements. According to Labor, the pilot identified obstacles to reemployment and provided input needed to determine whether such an effort can be expanded to other federal agencies. Identified obstacles included unanticipated questions from potential workers, such as if acceptance of a Schedule A designation would require a “probationary” period, and what impact acceptance of a Schedule A position would have on their retirement benefits. Of the 48 individuals Labor screened for Schedule A certification, 45 obtained certification, of whom 5 have been placed into federal employment. Each of the four agencies we reviewed submitted a plan for implementing the executive order as required. Only VA’s plan, as initially submitted, met all of OPM’s criteria for satisfying the requirements of the executive order (see table 2). Education and SSA revised their plans based on feedback from OPM. Specifically, Education’s revised plan states that Education will hire individuals with disabilities in all occupations and across all job series and grades. Education also clarified its commitment to coordinate with Labor to improve return-to-work outcomes through the POWER Initiative, and to engage and train managers on Schedule A hiring authority. Further, Education increased its goals for the percentage of job opportunity announcements that include information related to individuals with disabilities. SSA revised its plan to include goals and planned activities under the POWER Initiative, including quarterly monitoring of return-to-work successes under the program and a strategy for identifying injured employees who would benefit from reasonable accommodations and reassignment. OMB submitted its plan in March 2012 but, according to OMB officials, the agency has not received feedback from OPM. Agencies had positive views about the executive order’s requirement that they develop written plans to increase the number of federal employees with disabilities. In particular, Education, SSA, and VA said that the executive order provided an opportunity to further develop the written plans they already had in place for hiring and retaining employees with disabilities. Agencies were supportive of the goal of increasing the hiring and retention of federal employees with disabilities, and reported few challenges in implementing their plans to achieve this goal. Officials at all of the agencies we interviewed cited funding constraints as a potential obstacle to hiring more employees with disabilities. OMB officials also said that it was a challenge to identify individuals with the right skills and experience to fill their positions. For example, officials said that many of the candidates on OPM’s list of Schedule A-certified individuals have entry level skills and not the more advanced skills and experience that are required for positions at OMB. Agency officials cited no special challenges with respect to retaining employees with disabilities at their agencies. In October 2010, we reported on eight leading practices that could help the federal government become a model employer for individuals with disabilities. These practices, which are consistent with the executive order’s goal of increasing the number of individuals with disabilities in the federal government, have been implemented to varying degrees by the four agencies we contacted for this review. Top leadership commitment: Involvement of top agency leadership is necessary to overcome the resistance to change that agencies could face when trying to address attitudinal barriers to hiring individuals with disabilities. When leaders communicate their commitment throughout the organization, they send a clear message about the seriousness and business relevance of diversity management. Leaders at the agencies we talked with have, to varying degrees, communicated their commitment to hiring and retaining individuals with disabilities to their employees. Education has issued annual policy statements to its employees ensuring equal employment opportunity for all applicants and employees, including those with targeted disabilities, and officials told us that they routinely host events that address issues related to hiring and promoting equal employment opportunity. For example, in October 2008, Education hosted an event to encourage hiring individuals with disabilities and distributed a written guide about using Schedule A hiring authority to facilitate hiring individuals with targeted or severe disabilities, as well as disabled veterans. OMB officials said that it is briefing managers on the requirements of the executive order and that it planned to communicate the agency’s commitment to implementing the executive order to all staff in May 2012. SSA’s Commissioner announced his support for employing individuals with disabilities and encouraged employees to continue efforts to hire and promote these individuals in a March 2009 broadcast to all employees. VA said that the Secretary regularly communicates his commitment to hiring and retaining employees with disabilities through memorandums to all employees. In a September 2010 memorandum, the Secretary announced the agency’s goal of increasing the percentage of individuals with targeted disabilities that it hires and employs to 2 percent in fiscal year 2011. Accountability: Accountability is critical to ensuring the success of an agency’s efforts to implement leading practices and improve the employment of individuals with disabilities. To ensure accountability, agencies should set goals, determine measures to assess progress toward goals, evaluate staff and agency success in helping meet goals, and report results publicly. Education, SSA and VA’s disability hiring plans all include goals that will allow them to measure their progress toward meeting the goals of the executive order. Prior to the executive order, Education issued a Disability Employment Program Strategic Plan for fiscal years 2011-2013 that established goals related to reasonable accommodations, and recruitment and retention, and offered strategies for meeting these goals, as well as ways to track and measure agency progress. At SSA, accountability for results related to the executive order is included in the performance plan of the senior-level official responsible for implementing it. VA specifically holds senior executives accountable for meeting agency numerical goals by including these goals in their contracts. Additionally, VA senior executives’ contracts include a performance element for meeting hiring goals for individuals with targeted disabilities. OMB has not yet developed such goals. Regular surveying of the workforce on disability issues: Regularly surveying their workforces allows agencies to have more information about potential barriers to employment for people with disabilities, the effectiveness of their reasonable accommodation practices, and the extent to which employees with disabilities find the work environment friendly. To collect this information, agencies should survey their workforces at all stages of their employment, including asking employees to complete the SF-256 when they are hired, and asking relevant questions on employee feedback surveys and in exit interviews. VA officials said that they encourage new employees to complete the SF- 256, and SSA reminds all employees to annually review their human resource records and update or correct information, including disability data. In addition, all of the agencies we contacted survey employees to solicit feedback on a range of topics. However, only SSA and VA include a question on disability status or reasonable accommodations on these surveys. In addition, Education and SSA said that they routinely conduct exit surveys to solicit information from employees who separate from service about their reasons for leaving. While VA has an exit survey, officials said it is not consistently administered to all employees who separate. Education officials said that they have additional means of obtaining information about barriers for employees with disabilities. For example, senior managers hold open forums with staff, and employees can submit feedback to management through the agency’s Intranet. Education officials also reported that employees with disabilities have formed their own group to address access to assistive technology, which has helped Education to obtain improved technology, such as videophones. OMB officials said that their Diversity Council and Personnel Advisory Board provide forums for employees to discuss diversity issues, including those related to disabilities, and share them with senior leadership. Better coordination of roles and responsibilities: Often the responsibilities related to employment of people with disabilities are dispersed, which can create barriers to hiring if agency staff defer taking action, thinking that it is someone else’s responsibility. Coordination across agencies can encourage agencies with special expertise in addressing employment obstacles for individuals with disabilities to share their knowledge with agencies that have not yet developed this expertise. All of the agencies we interviewed had, to some extent, coordinated within and across agencies to improve their recruitment and retention efforts. Specifically, each agency has a designated section 508 coordinator who assists the agency in ensuring that, as required by section 508 of the Rehabilitation Act, employees with disabilities have access to information and data that are comparable to that provided to those without disabilities. In addition, each agency has a single office or primary point of contact that is responsible for overseeing activities related to hiring and retaining employees with disabilities. Officials at all of the agencies we talked to said their agencies engaged in one or more interagency efforts to address disability issues. All of these agencies participate in the CHCO Council, which facilitates sharing of best practices and challenges related to human capital issues, including those related to employees with disabilities. In addition, Education, OMB and SSA officials said that they work with state vocational rehabilitation agencies, which can help them identify accommodations that may be needed for new hires with disabilities. Education and SSA also participate in the Federal Disability Workforce Consortium, an interagency partnership working to improve recruitment, hiring, retention, and advancement of individuals with disabilities by sharing information on disability employment issues across government. SSA and VA have also participated in the Workforce Recruitment Program for College Students VA and Education have also worked together to assist with Disabilities; disabled veterans by providing unpaid work experience at Education, which may lead to permanent employment. Managed by Labor’s Office of Disability Employment Policy and the Department of Defense’s Office of Diversity Management and Equal Opportunity, this program is a recruitment and referral effort that connects federal sector employers nationwide with highly motivated college students and recent graduates with disabilities. said that the site is useful for seeing what other agencies are doing, and that they have also shared their own practices on the site. Training for staff at all levels: Agencies can leverage training to communicate expectations about implementation of policies and procedures related to improving employment of people with disabilities, and help disseminate leading practices that can help improve outcomes. All of the selected agencies provide some training for staff at all levels on the importance of workforce diversity. They also require managers and supervisors to take training on hiring procedures related to individuals with disabilities, and the use of Schedule A hiring authority. In addition, VA requires employees at all levels to take training specifically devoted to the legal rights of individuals with disabilities. At Education, this training is required for managers and supervisors, while at SSA it is available but optional for all employees. Career development opportunities: Opportunities for employees with disabilities to participate in work details, rotational assignments, and mentoring programs can lead to increased retention and improved employee satisfaction, and improve employment outcomes by helping managers identify employees with high potential. All of the agencies we interviewed provided special work details or rotational assignments for all employees; one reported having a program exclusively for those with disabilities. Specifically, Education uses Project SEARCH to provide internships for students with disabilities to help them become ready to work through on-the-job training. Education officials reported that some of these internships have led to permanent employment at Education. A flexible work environment: Flexible work schedules, telework, and other types of reasonable accommodations are valuable tools for the recruitment and retention of employees, regardless of disability status. Such arrangements can make it easier for employees with health impairments to successfully function in the work environment or facilitate an injured employee’s return to work. All of the agencies we interviewed provide flexible work arrangements, including flexible work schedules and teleworking. These agencies also make assistive technologies, such as screen reader software, available for employees with disabilities, which can facilitate their ability to take advantage of flexible work arrangements. Education, OMB, and SSA also offer all employees opportunities for job sharing. Centralized funding for reasonable accommodations: Having a central budget at the highest level of the agency can help ensure that employees with disabilities have access to reasonable accommodations by removing these expenses from local operational budgets and thus reducing managers’ concerns about their costs. Education, SSA, and VA use centralized funding accounts to pay for reasonable accommodations for employees with disabilities. At Education, a centralized fund is usually used to cover expenses related to providing readers, interpreters, and personal attendants. However, in cases where these services are needed on a daily basis, Education may require the operating unit to hire someone full-time and pay for this from their unit budget. OMB provides funding from its own budget to pay for reasonable accommodations, rather than receiving funding from the Executive Office of the President. OMB officials also told us that they also have been able to rely on the Department of Defense’s Computer/Electronic Accommodations Program to help provide reasonable accommodations for some of the employees. This program facilitates access to assistive technology and services to people with disabilities, federal managers, supervisors, and information technology professionals by providing a single point of access for executive branch agencies. As the nation’s largest employer, the federal government has the opportunity to be a model for the employment of people with disabilities. Consistent with the July 2010 executive order, OPM, Labor, and other agencies have helped provide the framework for federal agencies to take proactive steps to improve the hiring and retention of persons with disabilities. However, nearly 2 years after the executive order was signed, the federal government is not on track to achieve the executive order’s goals. Although federal agencies have taken the first step by submitting action plans to OPM for review, many agency plans do not meet the criteria identified by OPM as essential to becoming a model employer of people with disabilities. Though the executive order does not specifically authorize OPM to require agencies to address deficiencies, regularly reporting to the president and others on agency progress in addressing these deficiencies may compel agencies to address them and better position the federal government to reach the goals of the executive order. Further, officials responsible for hiring at federal agencies need to acquire the necessary knowledge and skills to proactively recruit, hire, and retain individuals with disabilities. Agency officials we spoke with said more comprehensive training on the tools available to them, including the requirements of Schedule A hiring authority, is needed. While the mandatory training program remains in development, until it is fully developed and communicated to agencies, opportunities to better inform relevant agency officials on how to increase the employment of individuals with disabilities may be missed. Finally, concerns have been raised by stakeholders, including EEOC, OPM, and advocates for people with disabilities, about the reliability of government statistics on the number of individuals with disabilities in the federal government. Most of the concerns focus on the likelihood of underreporting given the reliance on voluntary disclosure, but the extent of the underreporting is unknown. Unreliable data hinder OPM’s ability to measure the population of federal workers with disabilities and may prevent the federal government from developing needed policies and procedures that support efforts to become a model employer of people with disabilities. Determining the accuracy of SF-256 data, for example, by examining the extent to which employees voluntarily disclose their disability status and reasons for nondisclosure, is an essential step for ensuring that OPM can measure progress towards the executive order’s goals. To ensure that the federal government is well positioned to become a model employer of individuals with disabilities, we recommend that the Director of OPM take the following three actions: 1. Incorporate information about plan deficiencies into its regular reporting to the president on agencies’ progress in implementing their plans, and inform agencies about this process to better ensure that the plan deficiencies are addressed. 2. Expedite the development of the mandatory training programs for hiring managers and human resource personnel on the employment of individuals with disabilities, as required by the executive order. 3. Assess the extent to which the SF-256 accurately measures progress toward the executive order’s goal and explore options for improving the accuracy of SF-256 reporting, if needed, including strategies for encouraging employees to voluntarily disclose their disability status. Any such strategies must comply with legal standards governing disability-related inquiries, including ensuring that employee rights to voluntarily disclose a disability are not infringed upon. We provided a draft of this report to Education, EEOC, Labor, OMB, OPM, SSA, and VA for review and comment. In written comments, OPM agreed with findings and recommendations identified in the report, and described actions being implemented in an effort to address them. To better ensure agencies address deficiencies identified in their disability hiring plans, OPM has begun notifying agencies that it plans to report remaining deficiencies to the president and on the OPM website by August 2012. With regard to the need to expedite the development of the mandatory training program, OPM, in coordination with partner agencies has identified training for hiring managers and supervisors, and Human Resource personnel. Finally, OPM stated that it is engaged in discussions with the White House and stakeholder agencies to better define questions on the SF-256 to increase response rates. OPM also said it plans to work with EEOC and Labor to develop guidance for agencies to encourage voluntary self-disclosure through annual re-surveying of the workforce and providing employees with the option to complete the SF-256 when they request a reasonable accommodation. OPM expects to complete these efforts by January 2013. While these actions may help improve the accuracy of the SF-256 data, we think taking steps to assess the accuracy of the data will enhance OPM’s efforts. For example, understanding the extent to which employees do not voluntarily self- disclose their disability status and the reasons why may help target the messages agencies can use to encourage voluntary self-disclosure. Without such an understanding, OPM and agencies may miss opportunities to increase the accuracy of the data collected on the SF- 256. Education, EEOC, OMB, OPM, and SSA provided technical comments, which have been incorporated into the report as appropriate. Labor and VA had no comments. We are sending copies of this report to Education, EEOC, Labor, OMB, OPM, SSA, and VA and to the appropriate congressional committees and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Yvonne Jones at (202) 512-2717 or [email protected], or Daniel Bertoni at (202) 512-7215 or [email protected]. Contact information for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. Daniel Bertoni, (202) 512-7215, [email protected]. Yvonne D. Jones, (202) 512-2717, [email protected]. In addition to the contacts named above, Neil Pinney, Assistant Director; Debra Prescott, Assistant Director; Charlesetta Bailey; Benjamin Crawford; Catherine Croake; Karin Fangman; David Forgosh; Robert Gebhart; Michele Grgich; Amy Radovich; Terry Richardson; and Regina Santucci made key contributions to this report. Federal Employees’ Compensation Act: Preliminary Observations on Fraud-Prevention Controls. GAO-12-402. Washington, D.C.: January 25, 2012. Coast Guard: Continued Improvements Needed to Address Potential Barriers to Equal Employment Opportunity. GAO-12-135. Washington, D.C.: December 6, 2011. Federal Workforce: Practices to Increase the Employment of Individuals with Disabilities. GAO-11-351T. Washington, D.C.: February 16, 2011. Highlights of a Forum: Participant-Identified Leading Practices That Could Increase the Employment of Individuals with Disabilities in the Federal Workforce. GAO-11-81SP. Washington, D.C.: October 5, 2010. Highlights of a Forum: Actions that Could Increase Work Participation for Adults with Disabilities. GAO-10-812SP. Washington, D.C.: July 29, 2010. Federal Disability Programs: Coordination Could Facilitate Better Data Collection to Assess the Status of People with Disabilities. GAO-08-872T. Washington, D.C.: June 4, 2008. Federal Disability Programs: More Strategic Coordination Could Help Overcome Challenges to Needed Transformation. GAO-08-635. Washington, D.C.: May 20, 2008. Highlights of a Forum: Modernizing Federal Disability Policy. GAO-07-934SP. Washington, D.C.: August 3, 2007. Equal Employment Opportunity: Improved Coordination Needed between EEOC and OPM in Leading Federal Workplace EEO. GAO-06-214. Washington, D.C.: June 16, 2006. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: October 21, 2005.

In July 2010, the president signed Executive Order 13548 committing the federal government to become a model employer of individuals with disabilities and assigned primary oversight responsibilities to OPM and Labor. According to OPM, the federal government is not on track to meet the goals of the executive order, which committed the federal government to hire 100,000 workers with disabilities over the next 5 years. GAO was asked to examine the efforts that (1) OPM and Labor have made in overseeing federal efforts to implement the executive order; and (2) selected agencies have taken to implement the executive order and to adopt leading practices for hiring and retaining employees with disabilities. To conduct this work, GAO reviewed relevant agency documents and interviewed appropriate agency officials. GAO conducted case studies at Education, SSA, VA, and OMB. The Office of Personnel Management (OPM) and the Department of Labor (Labor) have taken steps to implement the executive order and help agencies recruit, hire, and retain more employees with disabilities. OPM provided guidance to help agencies develop disability hiring plans and reviewed the 66 plans submitted. OPM identified deficiencies in most of the plans. For example, though 40 of 66 agencies included a process for increasing the use of a special hiring authority to increase the hiring of people with disabilities, 59 agencies did not meet all of OPM’s review criteria, and 32 agencies had not addressed plan deficiencies as of April 2012. In response to executive order reporting requirements, OPM officials said they had briefed the White House on issues related to implementation, but they did not provide information on deficiencies in all plans. While the order does not specify what information these reports should include beyond addressing progress, providing information on deficiencies would enable the White House to hold agencies accountable. OPM is still developing the mandatory training programs for officials on the employment of individuals with disabilities, as required by the executive order. Several elective training efforts exist to help agencies hire and retain employees with disabilities, but agency officials said that more information would help them better use available tools. To track and measure progress towards meeting the executive order’s goals, OPM relies on employees to voluntarily disclose a disability. Yet, agency officials, including OPM’s, are concerned about the quality of the data. For example, agency officials noted that people may not disclose their disability due to concerns about how the information may be used. Without quality data, agencies may be challenged to effectively implement and assess the impact of their disability hiring plans. The Department of Education (Education), Social Security Administration (SSA), Office of Management and Budget (OMB), and Department of Veterans Affairs (VA) submitted disability hiring plans, and have taken steps to implement leading practices for increasing employment of individuals with disabilities, such as demonstrating top leadership commitment. The executive order provided SSA, VA, and Education an opportunity to further develop existing written plans. However, officials at these agencies cited funding constraints as a potential obstacle to hiring more employees with disabilities. In terms of leading practices, all four agencies have communicated their commitment to hiring and retaining individuals with disabilities and coordinated within or across other agencies to improve their recruitment and retention efforts. For example, each agency has a single point of contact to help ensure that employees with disabilities have access to information that is comparable to that provided to those without disabilities, and for overseeing activities related to hiring and retaining employees with disabilities. In addition, VA holds senior managers accountable for meeting hiring goals by including targets in their contracts. Each agency requires training for managers and supervisors on procedures for hiring individuals with disabilities, and VA further requires that all employees receive training on the legal rights of individuals with disabilities. Education, SSA, and VA rely on centralized funding accounts to pay for reasonable accommodations. GAO recommends that OPM: (1) incorporate information about plan deficiencies into its required regular reporting to the president on implementing the executive order and inform agencies about this process; (2) expedite the development of the mandatory training programs required by the executive order; and (3) assess the accuracy of the data used to measure progress toward the executive order’s goals and, if needed, explore options for improving its ability to measure the population of federal employees with disabilities, including strategies for encouraging employees to voluntarily disclose disability status. OPM agreed with GAO’s recommendations.

govreport

BLM’s mission is to manage public lands and resources to best serve the needs of the American people. The Bureau, which is part of the Department of the Interior (DOI), has 210 state, district, and resource area offices that manage about 270 million acres of public lands located in 28 states, primarily in the West and Alaska (see figure 1). BLM’s offices also manage another 300 million acres of subsurface mineral resources that underlie lands administered by other government agencies or are owned by private interests. BLM’s fiscal year 1995 appropriation totaled $1.24 billion. In fulfilling its mission, BLM develops land-use plans to balance multiple uses and competing demands, including ecosystem management, timber harvesting, mining, oil and gas production, watershed management, wildlife management, and recreation. It also designates and maintains land of critical environmental concern and is responsible for a major section of the National Spatial Data Infrastructure. In performing these functions, BLM maintains over 1 billion documents, including land surveys and surveyor notes, tract books, land patents, mining claims, oil and gas leases, and land and mineral case files. According to BLM, many of these paper documents are deteriorating, and some are illegible. Most of the documents are manually maintained and stored in a number of locations, although some have been entered into various databases since the 1970s. During the early 1980s, BLM found it could not handle the case processing workload associated with a peak in the number of applications for oil and gas leases. BLM recognized that to keep up with the increased demand it needed to automate its manual records and case processing activities. Thus, the Bureau began planning to acquire an automated land and mineral case processing system (ALMRS). At that time, BLM estimated the life-cycle cost of such a case processing system would be about $240 million. In 1988, BLM expanded the scope of ALMRS to include a land information system (LIS). This system was to provide automated information systems and geographic information systems technology (GIS) support for other land management functions, such as land use and resource planning. BLM then combined the LIS with a project to modernize the Bureau’s computer and telecommunications equipment. BLM estimated the total life-cycle cost of this combined project to be $880 million. According to DOI and ALMRS project officials, the Office of Management and Budget (OMB) directed BLM to scale down the combined project in 1989 because of the projected high cost. The project, which was renamed ALMRS/Modernization, was reduced to three major components—the ALMRS Initial Operating Capability (ALMRS IOC), Geographic Coordinate Data Base (GCDB), and modernization of BLM’s computer and telecommunications infrastructure and rehost of selected management and administrative systems. Estimated life-cycle costs were cut to $575 million. In 1993, BLM reduced the ALMRS/Modernization 10-year life-cycle cost estimate from $575 million to $403 million, after the system development and deployment contract was awarded at a lower cost than had been anticipated. BLM has designated the ALMRS/Modernization project as a mission-critical system to (1) automate land and mineral records and case processing activities and (2) provide information to support land and resource management activities. The project is a large-scale effort that is expected to provide an efficient means to record, maintain, and retrieve land description, ownership, and use information to support BLM, other federal programs, and interested parties. It is to accomplish this by (1) establishing a common information technology platform,(2) increasing public access to BLM records through the Internet, (3) integrating multiple databases into a single geographically referenced database, (4) shortening the time to complete case processing activities, and (5) replacing costly manual records with automated records. Appendix II provides an overview of the planned ALMRS/Modernization architecture. As noted above, the ALMRS/Modernization consists of three components—ALMRS IOC, GCDB, and technology modernization and rehost of selected systems. The ALMRS IOC component is to provide (1) support for case processing activities, including recording valid mining claims, processing mineral patents, and granting rights-of-way for roads and power corridors and (2) information for land and resource management activities, including timber sales and grazing leases. The GCDB component is the database that will contain geographic coordinates and survey information for land parcels. Other databases, such as those containing land and mineral records, will be integrated with GCDB. The information technology modernization and rehost component consists of installing computer and telecommunications equipment and converting selected management and administrative systems to a relational database system that will be used throughout the Bureau. Between fiscal years 1983 and 1995, about $296.2 million had been appropriated for ALMRS/Modernization. According to project officials, obligations for ALMRS/Modernization totaled $262.8 million from 1983 through April 30, 1995. They expect obligations to equal appropriations by September 30, 1995. In 1993, OMB and BLM agreed to annual funding limits for ALMRS/Modernization through fiscal year 2002. As agreed, total spending was not to exceed $403 million for fiscal years 1983 through 2002. However, to stay within the limit for fiscal year 1995, BLM delayed the initial hardware installation for the Alaska and Wyoming state, district, and resource area offices. Also, BLM estimates that it will exceed the fiscal year 1996 limit of $69.5 million by $25.2 million. BLM expects to obtain the $25.2 million from other parts of its operations. According to ALMRS/Modernization project officials, the increase is attributable to several factors, but primarily because of requirements that were added after contract award. These requirements include system engineering studies for system architecture and system security issues, a requirement to integrate BLM’s remaining older personal computers and local area networks with the new ALMRS/Modernization systems, changes to more easily accommodate land record automation requirements of other Interior bureaus and federal agencies, and more training for users and technical staff. In addition, the ALMRS/Modernization project office now believes that operations and maintenance costs in fiscal years 1997 through 2002 will be more than the OMB and BLM funding agreement for that category. BLM is currently working on a new operations and maintenance estimate. BLM has completed most of the initial installation of computer and telecommunications equipment and has met most of its ALMRS IOC, GCDB, and rehost milestones thus far. As the ALMRS IOC development nears completion over the next several months, tasks will become more complex as the system is integrated and tested. BLM has taken action to maintain its tight development schedule, but slippages could still occur because there is little schedule time available to correct unanticipated problems. Also, BLM has recently taken action to obtain an independent assessment of the ALMRS IOC to help ensure that its requirements are met. BLM has been meeting most of its schedule milestones for the initial installation of ALMRS IOC and modernization computer and telecommunications hardware. Thus far, BLM has installed (1) a mix of ALMRS IOC, office automation, E-mail, GIS servers, and telecommunications equipment primarily in eight state offices and their subordinate district and resource area offices and (2) about 4,400 of the planned 6,073 workstations in these offices. The Bureau plans to install 730 more workstations and other equipment in fiscal year 1995 at the Idaho and Utah state offices, their subordinate offices, and a support office. However, initial hardware installation for Alaska and Wyoming state and subordinate offices has been delayed because of a shortage of hardware funds in fiscal year 1995, according to ALMRS/Modernization project officials. BLM recently rescheduled the installation of servers and 951 workstations for these locations to fiscal year 1996. The collection and validation of land and mineral data for ALMRS IOC are on schedule for all ten state offices. The land and mineral data files are to be converted to INFORMIX after the installation and testing of final hardware upgrades and ALMRS IOC software. The development of ALMRS IOC software, which BLM divided into three phases or “builds,” is currently on schedule. Build 1, which consists of about 46,000 lines of code, was developed and successfully tested on time. BLM and the prime contractor have been working on about 124,000 lines of code for build 2. They expect to complete the software integration test for build 2 on September 12, 1995. BLM and the prime contractor estimate that about 120,000 lines of code will be developed in build 3 to complete the ALMRS IOC software. The software produced in builds 1, 2, and 3 will be integrated to form ALMRS IOC. As to the GCDB component, nine state offices are meeting or are ahead of the data collection milestones set in 1993. One state office, Montana, is behind schedule. The final test of the software to convert existing data files to INFORMIX is scheduled to be completed by January 12, 1996. BLM plans to convert the GCDB data files when ALMRS IOC is deployed in each state office. Finally, the administrative systems rehost effort is on schedule with all 13 of the planned software applications and related databases converted from COBOL to INFORMIX. Three of these applications have been rehosted to the ALMRS/ Modernization equipment and are operational, one is in the process of being rehosted, six have been tested and accepted and will be rehosted, and three have undergone testing and are expected to be accepted soon. According to the Deputy Project Manager, BLM plans to update the systems before deploying them to satisfy users’ change requests that were held in abeyance while the systems were being converted to INFORMIX. Figure 2 shows future milestones for the software integration tests of builds 2 and 3, qualification test for ALMRS IOC (functionality and integration), acceptance of ALMRS IOC, and final installation of ALMRS IOC hardware upgrades and software. As the ALMRS/Modernization nears the final testing and implementation stages, the project work will become more complex and the schedule more demanding. The final tests will include assessing the ALMRS IOC software to determine whether it meets design specifications, software units properly interface with other units, software responds correctly and consistently to users, and hardware and software operate as expected at pilot sites and under various levels of workload. As with all development efforts, the actual performance of the new software systems will not be known until they are completed, fully tested, and deployed. Developing realistic project schedules is critical to managing the successful development of large software systems. The General Services Administration has found that setting realistic project schedules is one of the ten most important factors in successfully developing large, complex federal computer systems. ALMRS/Modernization project officials and an Interior Senior Technical Analyst stated that the milestones were not based on an assessment of the time and resources needed, but instead were based on the need to complete the project by the end of fiscal year 1996—the deadline established in the OMB and BLM agreement. Nevertheless, project officials said they have been committed to completing the development and deployment of ALMRS as scheduled. Our analysis of the project schedule showed that several critical milestones are very close together with little recovery time available to deal with unanticipated problems that may be encountered. Therefore, slippages in the ALMRS/Modernization development and testing schedule could occur and impact project cost and completion plans. Similarly, slippages in the deployment of ALMRS IOC and database conversions could also impact project costs and completion plans because of the short installation periods scheduled for each state. As shown in table 1, BLM was allowing only 15 to 20 working days to perform the final installation of ALMRS IOC and convert databases in each state. ALMRS/Modernization project officials and an Interior Senior Technical Analyst agreed that both the development and testing milestones and deployment and database conversion milestones are very tight with little tolerance for slippages. Interior and BLM have been taking a number of actions to closely monitor the project status and schedule to avoid slippages. Interior Information Resources Management (IRM) officials have been conducting periodic oversight reviews and have required project officials to address project schedule issues. BLM has also established a consolidated project schedule that includes BLM’s and the prime contractor’s tasks to estimate and monitor the entire project schedule. Finally, BLM advanced the date for the software integration test for build 2 to provide additional time to deal with any unexpected problems. BLM recently revised the installation schedule because of an anticipated reduction in funding for fiscal year 1996. Specifically, the Bureau rescheduled the final ALMRS IOC installation and database conversions from fiscal year 1996 to 1997. Verification and validation of software is widely accepted and advocated by Federal Information Processing Standards Publication 132. Verification and validation is a formal process to assess the products of each system’s life-cycle phase, including concept, requirements, design, testing, implementation and installation, and operations and maintenance. Typically, the assessments are performed by someone not involved in developing the software to help ensure that the software meets the organization’s requirements, that software development and maintenance costs will not escalate unexpectedly, and that software quality is acceptable. Recently, project officials decided to obtain an independent verification and validation of ALMRS IOC software in response to direction from the House Committee on Appropriations. This action should help ensure that the software meets BLM’s stated requirements and provides the support expected from this mission-critical system. Stress testing automated systems before deploying them is a common industry practice. Such testing is done to ensure that the entire system will successfully process workloads expected during peak operating periods and determine the point at which major system resources (e.g., servers, workstations, storage devices, and local and wide area networks) will be exhausted. BLM plans to perform a 30-day acceptance test of the ALMRS IOC at pilot sites to assess functionality and performance in an operational setting. During this period, BLM also plans to stress test the ALMRS IOC (i.e., state and district office ALMRS IOC servers, terminals, and workstations) in a network environment. If ALMRS IOC performs successfully at the end of the test, BLM will accept and install it throughout all of its offices. However, BLM’s stress-test plans cover only the ALMRS IOC. The plans do not examine how the entire ALMRS/Modernization—including ALMRS IOC, office automation, E-mail, administrative systems, and various departmental, state, and district applications in a network environment—will perform under peak workload conditions. While ALMRS IOC is the largest and most significant component in the initial deployment of BLM’s modernization effort, other systems and applications are expected to place considerable demand on the ALMRS/Modernization computer systems and communications networks. By limiting the stress testing to ALMRS IOC, BLM will deploy the ALMRS/Modernization nationwide without knowing whether it can perform as intended during peak workloads. To date, the Bureau has been completing most of the project tasks according to the schedule milestones established in 1993. However, the project schedule could slip because there is little time available to deal with unexpected problems. Further, over the next several months, BLM and the prime contractor will be working on the more difficult tasks of completing, integrating, and testing ALMRS IOC. BLM’s recent action to obtain independent verification and validation of ALMRS IOC software should help ensure that BLM’s requirements are met. However, the Bureau’s plan to stress test the ALMRS IOC portion of the modernized system is not sufficient. Stress testing only a portion of the modernized system will not provide assurance that all of the systems and technology to be deployed can successfully process the workloads expected during peak operating periods. We recommend that the Director, BLM, ensure that the entire ALMRS/Modernization is thoroughly stress tested before it is deployed throughout the Bureau. In commenting on a draft of this report, BLM stated that it agreed with our conclusions and recommendation. The Bureau said it now plans to stress test the entire ALMRS/ Modernization to ensure that all systems and technology can process the workloads expected during peak operating conditions. As previously noted, the Bureau said it has contracted for an independent verification and validation of the ALMRS IOC software in response to direction by the House Committee on Appropriations to perform a verification and validation test. BLM also suggested some clarifications and provided additional information for our report. We have incorporated these suggestions and information as appropriate. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will provide copies to the Secretary of the Interior; the Director, Bureau of Land Management; the Director, Office of Management and Budget; and interested congressional committees. We will also make copies available to others upon request. Please call me at (202) 512-6253 if you or your staff have any questions concerning this report. Other major contributors are listed in appendix III. To ascertain BLM’s progress in developing and implementing the ALMRS/Modernization, we reviewed ALMRS/Modernization project documents, DOI reports, a Department of the Treasury report, BLM studies on ALMRS/Modernization project development, General Services Administration IRM publications, Federal Information Processing Standards Publication 132, OMB Circular A-130, and GAO reports on large-scale systems development projects. We also attended departmental project reviews at the ALMRS/Modernization project office in Lakewood, Colorado, and reviewed the minutes of four prior project reviews. We discussed the planned capabilities of the system, technical complexity, and development progress with prime contractor officials, a DOI Senior Technical Analyst, and ALMRS/Modernization project officials responsible for systems engineering, software development, and project management. We also discussed with ALMRS/Modernization project officials and BLM Headquarters officials the planning and development history of ALMRS/Modernization, testing plans, and efforts to follow industry practices. We analyzed project milestones against current progress, and reviewed the remaining tasks for their complexity. We reviewed and analyzed ALMRS/Modernization project estimates and fiscal year 1996 budget justifications and documentation. We also compared BLM’s fiscal year 1996 budget request for the ALMRS/Modernization with its cost estimate for fiscal year 1996. We reviewed BLM’s options paper for ALMRS/Modernization operations and maintenance funding through fiscal year 2001 and discussed it with the ALMRS/Modernization Deputy Project Manager and the project budget analyst. We interviewed ALMRS/Modernization project officials and a Department Senior Technical Analyst on ALMRS/Modernization total project budget and milestones. Budget estimates were collected from the ALMRS/Modernization Deputy Project Manager, budget analysts, and other BLM Headquarters representatives. These estimates were confirmed by the Department’s IRM office; however, we did not independently verify the accuracy of the estimates. Our work was performed between March 1995 and August 1995, in accordance with generally accepted government auditing standards. We performed our work at the Department’s IRM headquarters and BLM headquarters in Washington, D.C., and at the ALMRS/Modernization Project Office and prime contractor’s office in Lakewood, Colorado. We requested comments on a draft of this report from the Director, Bureau of Land Management. In response, we received comments from the Chief, Office of Information Resources Management/Modernization, Bureau of Land Management. We have incorporated these comments as appropriate. The ALMRS/Modernization system—slated for deployment at approximately 200 BLM sites around the country—is to be implemented on a common information technology platform. The platform will be composed of servers, terminals, workstations, switching hubs, multiplexers, modems, and firewalls interconnected via local, state, and national-level networks. As planned, the ALMRS environment will initially support existing automated systems, including legacy local area networks and microcomputers. BLM expects that a typical state office installation will consist of several servers supporting major application groups—ALMRS IOC and related databases, office automation applications, GIS applications and related GCDB databases, and E-mail. A typical state office is to provide land and mineral resource data through the state ALMRS IOC server to district and resource area offices. State offices are to be interconnected via a Department of the Interior network. Each district or resource area office is to have its own GIS and office automation servers. BLM users are to access applications via terminals and workstations interconnected through the local, state, and DOI networks. The public is to have access to selected ALMRS information in public access rooms equipped with stand-alone ALMRS IOC servers and terminals. The public access systems are expected to be isolated from the state and district office ALMRS IOC systems for security purposes. BLM is also planning to provide connections to the Internet. The Bureau plans to protect each state office with a firewall system—a security device designed to protect the BLM systems from intrusion by hackers. Figure II.1 shows a high-level overview of the ALMRS/Modernization environment. Accounting and Information Management Division, Washington, D.C. David G. Gill, Assistant Director Mirko J. Dolak, Technical Assistant Director Marcia C. Washington, Senior Information Systems Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Bureau of Land Management's (BLM) modernization of its Automated Land and Mineral Record System (ALMRS), focusing on: (1) BLM progress in developing and implementing ALMRS modernization; and (2) potential modernization risks. GAO found that: (1) although BLM initiated ALMRS planning in the early 1980s, it did not award the modernization contract until 1993 because of numerous changes in the project's concept and scope; (2) BLM has installed most of its initial computer and telecommunications equipment and has met most of its schedule milestones, but it is deferring some equipment deployment until fiscal year (FY) 1996 and FY 1997 because of a lack of funds; (3) project costs are expected to exceed the FY 1996 spending limit by $25.5 million due to added system requirements; (4) schedule slippages may occur because ALMRS modernization is becoming more complicated and BLM has allocated little time to deal with unanticipated problems; and (5) although BLM has recently obtained independent verification and validation of new ALMRS software to ensure that it meets BLM needs, BLM does not plan to stress test the entire ALMRS modernization project to access its ability to meet anticipated peak workloads.

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IAEA is an independent organization affiliated with the United Nations. Its governing bodies include the General Conference, composed of representatives of the 138 IAEA member states, and the 35-member Board of Governors, which provides overall policy direction and oversight. The Secretariat, headed by the Director General, is responsible for implementing the policies and programs of the General Conference and Board of Governors. The United States is a permanent member of the Board of Governors. IAEA derives its authority to establish and administer safeguards from its statute, the Treaty on the Non-proliferation of Nuclear Weapons and regional nonproliferation treaties, bilateral commitments between states, and project agreements with states. Since the NPT came into force in 1970, it has been subject to review by signatory states every 5 years. The 1995 NPT Review and Extension conference extended the life of the treaty indefinitely, and the latest review conference occurred in May 2005. Article III of the NPT binds each of the treaty’s 184 signatory states that had not manufactured and exploded a nuclear device prior to January 1, 1967 (referred to in the treaty as non-nuclear weapon states) to conclude an agreement with IAEA that applies safeguards to all source and special nuclear material in all peaceful nuclear activities within the state’s territory, under its jurisdiction, or carried out anywhere under its control. The five nuclear weapons states that are parties to the NPT—China, France, the Russian Federation, the United Kingdom, and the United States—are not obligated by the NPT to accept IAEA safeguards. However, each nuclear weapons state has voluntarily entered into legally binding safeguards agreements with IAEA, and has submitted designated nuclear materials and facilities to IAEA safeguards to demonstrate to the non- nuclear weapon states their willingness to share in the administrative and commercial costs of safeguards. (App. I lists states that are subject to safeguards, as of August 2006.) India, Israel, and Pakistan are not parties to the NPT or other regional nonproliferation treaties. India and Pakistan are known to have nuclear weapons programs and to have detonated several nuclear devices during May 1998. Israel is also believed to have produced nuclear weapons. Additionally, North Korea joined the NPT in 1985 and briefly accepted safeguards in 1992 and 1993, but expelled inspectors and threatened to withdraw from the NPT when IAEA inspections uncovered evidence of undeclared plutonium production. North Korea announced its withdrawal from the NPT in early 2003, which under the terms of the treaty, terminated its comprehensive safeguards agreement. IAEA’s safeguards objectives, as traditionally applied under comprehensive safeguards agreements, are to account for the amount of a specific type of material necessary to produce a nuclear weapon, and the time it would take a state to divert this material from peaceful use and produce a nuclear weapon. IAEA attempts to meet these objectives by using a set of activities by which it seeks to verify that nuclear material subject to safeguards is not diverted to nuclear weapons or other proscribed purposes. For example, IAEA inspectors visit a facility at certain intervals to ensure that any diversion of nuclear material is detected before a state has had time to produce a nuclear weapon. IAEA also uses material-accounting measures to verify quantities of nuclear material declared to the agency and any changes in the quantities over time. Additionally, containment measures are used to control access to and the movement of nuclear material. Finally, IAEA deploys surveillance devices, such as video cameras, to detect the movements of nuclear material and discourage tampering with IAEA’s containment measures. The Nuclear Suppliers Group was established in 1975 after India tested a nuclear explosive device. In 1978, the Suppliers Group published its first set of guidelines governing the exports of nuclear materials and equipment. These guidelines established several requirements for Suppliers Group members, including the acceptance of IAEA safeguards at facilities using controlled nuclear-related items. In 1992, the Suppliers Group broadened its guidelines by requiring countries receiving nuclear exports to agree to IAEA’s safeguards as a condition of supply. As of August 2006, the Nuclear Suppliers Group had 45 members, including the United States. (See app. II for a list of signatory countries.) IAEA has taken steps to strengthen safeguards by more aggressively seeking assurances that a country is not pursuing a clandestine nuclear program. In a radical departure from past practices of only verifying the peaceful use of a country’s declared nuclear material at declared facilities, IAEA has begun to develop the capability to independently evaluate all aspects of a country’s nuclear activities. The first strengthened safeguards steps, which began in the early 1990s, increased the agency’s ability to monitor declared and undeclared activities at nuclear facilities. These measures were implemented under the agency’s existing legal authority under comprehensive safeguards agreements and include (1) conducting short notice and unannounced inspections, (2) collecting and analyzing environmental samples to detect traces of nuclear material, and (3) using measurement and surveillance systems that operate unattended and can be used to transmit data about the status of nuclear materials directly to IAEA headquarters. The second series of steps began in 1997 when IAEA’s Board of Governors approved the Additional Protocol. Under the Additional Protocol, IAEA has the right, among other things, to (1) receive more comprehensive information about a country’s nuclear activities, such as research and development activities, and (2) conduct “complementary access,” which enables IAEA to expand its inspection rights for the purpose of ensuring the absence of undeclared nuclear material and activities. Because the Additional Protocol broadens IAEA’s authority and the requirements on countries under existing safeguards agreements, each country must take certain actions to bring it into force. For each country with a safeguards agreement, IAEA independently evaluates all information available about the country’s nuclear activities and draws conclusions regarding a country’s compliance with its safeguards commitments. A major source of information available to the agency is data submitted by countries to IAEA under their safeguards agreements, referred to as state declarations. Countries are required to provide an expanded declaration of their nuclear activities within 180 days of bringing the Additional Protocol into force. Examples of information provided in an Additional Protocol declaration include the manufacturing of key nuclear-related equipment; research and development activities related to the nuclear fuel cycle; the use and contents of buildings on a nuclear site; and the location and operational status of uranium mines. The agency uses the state declarations as a starting point to determine if the information provided by the country is consistent and accurate with all other information available based on its own review. IAEA uses various types of information to verify the state declaration. Inspections of nuclear facilities and other locations with nuclear material are the cornerstone of the agency’s data collection efforts. Under the Additional Protocol, IAEA has the authority to conduct complementary access at any place on a site or other location with nuclear material in order to ensure the absence of undeclared nuclear material and activities, confirm the decommissioned status of facilities where nuclear material was used or stored, and resolve questions or inconsistencies related to the correctness and completeness of the information provided by a country on activities at other declared or undeclared locations. During complementary access, IAEA inspectors may carry out a number of activities, including (1) making visual observations, (2) collecting environmental samples, (3) using radiation detection equipment and measurement devices, and (4) applying seals. In 2004, IAEA conducted 124 complementary access in 27 countries. In addition to its verification activities, IAEA uses other sources of information to evaluate countries’ declarations. These sources include information from the agency’s internal databases, open sources, satellite imagery, and outside groups. The agency established two new offices within the Department of Safeguards to focus primarily on open source and satellite imagery data collection. Analysts use Internet searches to acquire information generally available to the public from open sources, such as scientific literature, trade and export publications, commercial companies, and the news media. In addition, the agency uses commercially available satellite imagery to supplement the information it receives through its open source information. Satellite imagery is used to monitor the status and condition of declared nuclear facilities and verify state declarations of certain sites. The agency also uses its own databases, such as those for nuclear safety, nuclear waste, and technical cooperation, to expand its general knowledge about countries’ nuclear and nuclear- related activities. In some cases, IAEA receives information from third parties, including other countries. Department of State and IAEA officials told us that strengthened safeguards measures have successfully revealed previously undisclosed nuclear activities in Iran, South Korea, and Egypt. Specifically, IAEA and Department of State officials noted that strengthened safeguards measures, such as collecting and analyzing environmental samples, helped the agency verify some of Iran’s nuclear activities. The measures also allowed IAEA to conclude in September 2005 that Iran was not complying with its safeguards obligations because it failed to report all of its nuclear activities to IAEA. As a result, in July 2006, Iran was referred to the U.N. Security Council, which in turn demanded that Iran suspend its uranium enrichment activities or face possible diplomatic and economic sanctions. In August 2004, as a result of preparations to submit its initial declaration under the Additional Protocol, South Korea notified IAEA that it had not previously disclosed nuclear experiments involving the enrichment of uranium and plutonium separation. IAEA sent a team of inspectors to South Korea to investigate this case. In November 2004, IAEA’s Director General reported to the Board of Governors that although the quantities of nuclear material involved were not significant, the nature of the activities and South Korea’s failure to report these activities in a timely manner posed a serious concern. IAEA is continuing to verify the correctness and completeness of South Korea’s declarations. IAEA inspectors have investigated evidence of past undeclared nuclear activities in Egypt based on the agency’s review of open source information that had been published by current and former Egyptian nuclear officials. Specifically, in late 2004, the agency found evidence that Egypt had engaged in undeclared activities at least 20 years ago by using small amounts of nuclear material to conduct experiments related to producing plutonium and highly enriched uranium. In January 2005, the Egyptian government announced that it was fully cooperating with IAEA and that the matter was limited in scope. IAEA inspectors have made several visits to Egypt to investigate this matter. IAEA’s Secretariat reported these activities to its Board of Governors. Despite these successes, a group of safeguards experts recently cautioned that a determined country can still conceal a nuclear weapons program. IAEA faces a number of limitations that impact its ability to draw conclusions—with absolute assurance—about whether a country is developing a clandestine nuclear weapons program. For example, IAEA does not have unfettered inspection rights and cannot make visits to suspected sites anywhere at any time. According to the Additional Protocol, complementary access to resolve questions related to the correctness and completeness of the information provided by the country or to resolve inconsistencies must usually be arranged with at least 24- hours advanced notice. Complementary access to buildings on sites where IAEA inspectors are already present are usually conducted with a 2-hour advanced notice. Furthermore, IAEA officials told us that there are practical problems that restrict access. For example, inspectors must be issued a visa to visit certain countries, a process which cannot normally be completed in less than 24 hours. In some cases, nuclear sites are in remote locations and IAEA inspectors need to make travel arrangements, such as helicopter transportation, in advance, which requires that the country be notified prior to the visit. A November 2004 study by a group of safeguards experts appointed by IAEA’s Director General evaluated the agency’s safeguards program to examine how effectively and efficiently strengthened safeguards measures were being implemented. Specifically, the group’s mission was to evaluate the progress, effectiveness, and impact of implementing measures to enhance the agency’s ability to draw conclusions about the non-diversion of nuclear material placed under safeguards and, for relevant countries, the absence of undeclared nuclear material and activities. The group concluded that generally IAEA had done a very good job implementing strengthened safeguards despite budgetary and other constraints. However, the group noted that IAEA’s ability to detect undeclared activities remains largely untested. If a country decides to divert nuclear material or conduct undeclared activities, it will deliberately work to prevent IAEA from discovering this. Furthermore, IAEA and member states should be clear that the conclusions drawn by the agency cannot be regarded as absolute. This view has been reinforced by the former Deputy Director General for Safeguards who has stated that even for countries with strengthened safeguards in force, there are limitations on the types of information and locations accessible to IAEA inspectors. There are a number of weaknesses that hamper IAEA’s ability to effectively implement strengthened safeguards. IAEA has only limited information about the nuclear activities of 4 key countries that are not members of the NPT—India, Israel, North Korea, and Pakistan. India, Israel, and Pakistan have special agreements with IAEA that limit the agency’s activities to monitoring only specific material, equipment, and facilities. However, since these countries are not signatories to the NPT, they do not have comprehensive safeguards agreements with IAEA, and are not required to declare all of their nuclear material to the agency. In addition, these countries are only required to declare exports of nuclear material previously declared to IAEA. With the recent revelations of the illicit international trade in nuclear material and equipment, IAEA officials stated that they need more information on these countries’ nuclear exports. For North Korea, IAEA has even less information, since the country expelled IAEA inspectors and removed surveillance equipment at nuclear facilities in December 2002 and withdrew from the NPT in January 2003. These actions have raised widespread concern that North Korea diverted some of its nuclear material to produce nuclear weapons. Another major weakness is that more than half, or 111 out of 189, of the NPT signatories have not yet brought the Additional Protocol into force, as of August 2006. (App. I lists the status of countries’ safeguards agreements with IAEA). Without the Additional Protocol, IAEA must limit its inspection efforts to declared nuclear material and facilities, making it harder to detect clandestine nuclear programs. Of the 111 countries that have not adopted the Additional Protocol, 21 are engaged in significant nuclear activities, including Egypt, North Korea, and Syria. In addition, safeguards are significantly limited or not applied in about 60 percent, or 112 out of 189, of the NPT signatory countries—either because they have an agreement (known as a small quantities protocol) with IAEA, and are not subject to most safeguards measures, or because they have not concluded a comprehensive safeguards agreement with IAEA. Countries with small quantities of nuclear material make up about 41 percent of the NPT signatories and about one-third of the countries that have the Additional Protocol in force. Since 1971, IAEA’s Board of Governors has authorized the Director General to conclude an agreement, known as a small quantities protocol, with 90 countries and, as of August 2006, 78 of these agreements were in force. IAEA’s Board of Governors has approved the protocols for these countries without having IAEA verify that they met the requirements for it. Even if these countries bring the Additional Protocol into force, IAEA does not have the right to conduct inspections or install surveillance equipment at certain nuclear facilities. According to IAEA and Department of State officials, this is a weakness in the agency’s ability to detect clandestine nuclear activities or transshipments of nuclear material and equipment through the country. In September 2005, the Board of Governors directed IAEA to negotiate with countries to make changes to the protocols, including reinstating the agency’s right to conduct inspections. As of August 2006, IAEA amended the protocols for 4 countries—Ecuador, Mali, Palau, and Tajikistan. The application of safeguards is further limited because 31 countries that have signed the NPT have not brought into force a comprehensive safeguards agreement with IAEA. The NPT requires non-nuclear weapons states to conclude comprehensive safeguards agreements with IAEA within 18 months of becoming a party to the Treaty. However, IAEA’s Director General has stated that these 31 countries have failed to fulfill their legal obligations. Moreover, 27 of the 31 have not yet brought comprehensive safeguards agreements into force more than 10 years after becoming party to the NPT, including Chad, Kenya, and Saudi Arabia. Last, IAEA is facing a looming human capital crisis that may hamper the agency’s ability to meet its safeguards mission. In 2005, we reported that about 51 percent, or 38 out of 75, of IAEA’s senior safeguards inspectors and high-level management officials, such as the head of the Department of Safeguards and the directors responsible for overseeing all inspection activities of nuclear programs, are retiring in the next 5 years. According to U.S. officials, this significant loss of knowledge and expertise could compromise the quality of analysis of countries’ nuclear programs. For example, several inspectors with expertise in uranium enrichment techniques, which is a primary means to produce nuclear weapons material, are retiring at a time when demand for their skills in detecting clandestine nuclear activities is growing. While IAEA has taken a number of steps to address these human capital issues, officials from the Department of State and the U.S. Mission to the U.N. System Organizations in Vienna have expressed concern that IAEA is not adequately planning to replace staff with critical skills needed to fulfill its strengthened safeguards mission. The Nuclear Suppliers Group, along with other multilateral export control groups, has helped stop, slow, or raise the costs of nuclear proliferation, according to nonproliferation experts. For example, as we reported in 2002, the Suppliers Group helped convince Argentina and Brazil to accept IAEA safeguards on their nuclear programs in exchange for expanded access to international cooperation for peaceful nuclear purposes. The Suppliers Group, along with other multilateral export control groups, has significantly reduced the availability of technology and equipment available to countries of concern, according to a State Department official. Moreover, nuclear export controls have made it more difficult, more costly, and more time consuming for proliferators to obtain the expertise and material needed to advance their nuclear program. The Nuclear Suppliers Group has also helped IAEA verify compliance with the NPT. In 1978, the Suppliers Group published the first guidelines governing exports of nuclear materials and equipment. These guidelines established several member requirements, including the requirement that members adhere to IAEA safeguards standards at facilities using controlled nuclear-related items. Subsequently, in 1992, the Nuclear Suppliers Group broadened its guidelines by requiring that members insist that non-member states have IAEA safeguards on all nuclear material and facilities as a condition of supply for their nuclear exports. With the revelation of Iraq’s nuclear weapons program, the Suppliers Group also created an export control system for dual-use items that established new controls for items that did not automatically fall under IAEA safeguards requirements. Despite these benefits, there are a number of weaknesses that could limit the Nuclear Suppliers Group’s ability to curb nuclear proliferation. Members of the Suppliers Group do not share complete export licensing information. Specifically, members do not always share information about licenses they have approved or denied for the sale of controversial items to nonmember states. Without this shared information, a member country could inadvertently license a controversial item to a country that has already been denied a license from another Suppliers Group member state. Furthermore, Suppliers Group members did not promptly review and agree upon common lists of items to control and approaches to controlling them. Each member must make changes to its national export control policies after members agree to change items on the control list. If agreed- upon changes to control lists are not adopted at the same time by all members, proliferators could exploit these time lags to obtain sensitive technologies by focusing on members that are slowest to incorporate the changes and sensitive items may still be traded to countries of concern. In addition, there are a number of obstacles to efforts aimed at strengthening the Nuclear Suppliers Group and other multilateral export control regimes. First, efforts to strengthen export controls have been hampered by a requirement that all members reach consensus about every decision made. Under the current process, a single member can block new reforms. U.S. and foreign government officials and nonproliferation experts all stressed that the regimes are consensus-based organizations and depend on the like-mindedness or cohesion of their members to be effective. However, members have found it especially difficult to reach consensus on such issues as making changes to procedures and control lists. The Suppliers Group reliance on consensus decision making will be tested by the United States request to exempt India from the Suppliers Group requirements to accept IAEA safeguards at all nuclear facilities. Second, since membership with the Suppliers Group is voluntary and nonbinding, there are no means to enforce compliance with members’ nonproliferation commitments. For example, the Suppliers Group has no direct means to impede Russia’s export of nuclear fuel to India, an act that the U.S. government said violated Russia’s commitment. Third, the rapid pace of nuclear technological change and the growing trade of sensitive items among proliferators complicate efforts to keep control lists current because these lists need to be updated more frequently. To help strengthen these regimes, GAO recommended in October 2002, that the Secretary of State establish a strategy that includes ways for Nuclear Suppliers Group members to improve information sharing, implement changes to export controls more consistently, and identify organizational changes that could help reform its activities. As of June 2006, the Nuclear Suppliers Group announced that it has revised its guidelines to improve information sharing. However, despite our recommendation, it has not yet agreed to share greater and more detailed information on approved exports of sensitive transfers to nonmember countries. Nevertheless, the Suppliers Group is examining changes to its procedures that assist IAEA’s efforts to strengthen safeguards. For example, at the 2005 Nuclear Suppliers Group plenary meeting, members discussed changing the requirements for exporting nuclear material and equipment by requiring nonmember countries to adopt IAEA’s Additional Protocol as a condition of supply. If approved by the Suppliers Group, the action would complement IAEA’s efforts to verify compliance with the NPT. Reducing the formidable proliferation risks posed by former Soviet weapons of mass destruction (WMD) assets is a U.S. national security interest. Since the fall of the Soviet Union, the United States, through a variety of programs, managed by the Departments of Energy, Defense (DOD), and State, has helped Russia and other former Soviet countries to secure nuclear material and warheads, detect illicitly trafficked nuclear material, eliminate excess stockpiles of weapons-usable nuclear material, and halt the continued production of weapons-grade plutonium. From fiscal year 1992 through fiscal year 2006, the Congress appropriated about $7 billion for nuclear nonproliferation efforts. However, U.S. assistance programs have faced a number of challenges, such as a lack of access to key sites and corruption of foreign officials, which could compromise the effectiveness of U.S. assistance. DOE’s Material Protection, Control, and Accounting (MPC&A) program has worked with Russia and other former Soviet countries since 1994 to provide enhanced physical protection systems at sites with weapons- usable nuclear material and warheads, implement material control and accounting upgrades to help keep track of the quantities of nuclear materials at sites, and consolidate material into fewer, more secure buildings. GAO last reported on the MPC&A program in 2003. At that time, a lack of access to many sites in Russia’s nuclear weapons complex had significantly impeded DOE’s progress in helping Russia to secure its nuclear material. We reported that DOE had completed work at only a limited number of buildings in Russia’s nuclear weapons complex, a network of sites involved in the construction of nuclear weapons where most of the nuclear material in Russia is stored. According to DOE, by the end of September 2006, the agency will have helped to secure 175 buildings with weapons-usable nuclear material in Russia and the former Soviet Union and 39 Russian Navy nuclear warhead sites. GAO is currently re-examining DOE’s efforts, including the progress DOE has made since 2003 in securing nuclear material and warheads in Russia and other countries and the challenges DOE faces in completing its work. While securing nuclear materials and warheads where they are stored is considered to be the first layer of defense against nuclear theft, there is no guarantee that such items will not be stolen or lost. Recognizing this fact, DOE, DOD, and State, through seven different programs, have provided radiation detection equipment since 1994 to 36 countries, including many countries of the former Soviet Union. These programs seek to combat nuclear smuggling and are seen as a second line of defense against nuclear theft. The largest and most successful of these efforts is DOE’s Second Line of Defense program (SLD). We reported in March 2006 that, through the SLD program, DOE had provided radiation detection equipment and training at 83 sites in Russia, Greece, and Lithuania since 1998. However, we also noted that U.S. radiation detection assistance efforts faced challenges, including corruption of some foreign border security officials, technical limitations of some radiation detection equipment, and inadequate maintenance of some equipment. To address these challenges, U.S. agencies plan to take a number of steps, including combating corruption by installing communications links between individual border sites and national command centers so that detection alarm data can be simultaneously evaluated by multiple officials. The United States is also helping Russia to eliminate excess stockpiles of nuclear material (highly enriched uranium and plutonium). In February 1993, the United States agreed to purchase from Russia 500 metric tons of highly enriched uranium (HEU) extracted from dismantled Russian nuclear weapons over a 20-year period. Russia agreed to dilute, or blend- down, the material into low enriched uranium (LEU), which is of significantly less proliferation risk, so that it could be made into fuel for commercial nuclear power reactors before shipping it to the United States. As of June 27, 2006, 276 metric tons of Russian HEU—derived from more than 11,000 dismantled nuclear weapons—have been downblended into LEU for use in U.S. commercial nuclear reactors. Similarly, in 2000, the United States and Russia committed to the transparent disposition of 34 metric tons each of weapon-grade plutonium. The plutonium will be converted into a more proliferation-resistant form called mixed-oxide (MOX) fuel that will be used in commercial nuclear power plants. In addition to constructing a MOX fuel fabrication plant at its Savannah River Site, DOE is also assisting Russia in constructing a similar facility for the Russian plutonium. Russia’s continued operation of three plutonium production reactors poses a serious proliferation threat. These reactors produce about 1.2 metric tons of plutonium each year—enough for about 300 nuclear weapons. DOE’s Elimination of Weapons-Grade Plutonium Production program seeks to facilitate the reactors’ closure by building or refurbishing two fossil fuel plants that will replace the heat and electricity that will be lost with the shutdown of Russia’s three plutonium production reactors. DOE plans to complete the first of the two replacement plants in 2008 and the second in 2011. When we reported on this program in June 2004, we noted that DOE faced challenges in implementing its program, including ensuring Russia’s commitment to shutting down the reactors, the rising cost of building the replacement fossil fuel plants, and concerns about the thousands of Russian nuclear workers who will lose their jobs when the reactors are shut down. We made a number of recommendations, which DOE has implemented, including reaching agreement with Russia on the specific steps to be taken to shut down the reactors and development of a plan to work with other U.S. government programs to assist Russia in finding alternate employment for the skilled nuclear workers who will lose their jobs when the reactors are shut down. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have at this time. For future contacts regarding this testimony, please contact Gene Aloise at (202) 512-3841 or Joseph Christoff at (202) 512-8979. R. Stockton Butler, Miriam A. Carroll, Leland Cogliani, Lynn Cothern, Muriel J. Forster, Jeffrey Phillips, and Jim Shafer made key contributions to this testimony. Beth Hoffman León, Stephen Lord, Audrey Solis, and Pierre Toureille provided technical assistance. Although North Korea concluded a comprehensive safeguards agreement with IAEA in 1992, it announced its withdrawal from the NPT in January 2003. Secures radiological sources no longer needed in the U.S. and locates, identifies, recovers, consolidates, and enhances the security of radioactive materials outside the U.S. Global Nuclear Material Threat Reduction Eliminates Russia’s use of highly enriched uranium (HEU) in civilian nuclear facilities; returns U.S. and Russian-origin HEU and spent nuclear fuel from research reactors around the world; secures plutonium-bearing spent nuclear fuel from reactors in Kazakhstan; and addresses nuclear and radiological materials at vulnerable locations throughout the world. Provides replacement fossil-fuel energy that will allow Russia to shutdown its three remaining weapons-grade plutonium production reactors. Develops and delivers technology applications to strengthen capabilities to detect and verify undeclared nuclear programs; enhances the physical protection and proper accounting of nuclear material; and assists foreign national partners to meet safeguards commitments. Provides meaningful employment for former weapons of mass destruction weapons scientists. Provides material protection, control, and accounting upgrades to enhance the security of Navy HEU fuel and nuclear material. Provides material protection, control, and accounting upgrades to nuclear weapons, uranium enrichment, and material processing and storage sites. Enhances the security of proliferation-attractive nuclear material in Russia by supporting material protection, control, and accounting upgrade projects at Russian civilian nuclear facilities. Develops national and regional resources in the Russian Federation to help establish and sustain effective operation of upgraded nuclear material protection, control and accounting systems. Negotiates cooperative efforts with the Russian Federation and other key countries to strengthen the capability of enforcement officials to detect and deter illicit trafficking of nuclear and radiological material across international borders. This is accomplished through the detection, location and identification of nuclear and nuclear related materials, the development of response procedures and capabilities, and the establishment of required infrastructure elements to support the control of these materials. HEU Transparency Implementation project Monitors Russia to ensure that low enriched uranium (LEU) sold to the U.S. for civilian nuclear power plants is derived from weapons-usable HEU removed from dismantled Russian nuclear weapons. Disposes of surplus domestic HEU by down-blending it. Surplus U.S. Plutonium Disposition project Disposes of surplus domestic plutonium by fabricating it into mixed oxide (MOX) fuel for irradiation in existing, commercial nuclear reactors. Supports Russia’s efforts to dispose of its weapons-grade plutonium by working with the international community to help pay for Russia’s program. Provides training and equipment to assist Russia in determining the reliability of its guard forces. Enhances the safety and security of Russian nuclear weapons storage sites through the use of vulnerability assessments to determine specific requirements for upgrades. DOD will develop security designs to address those vulnerabilities and install equipment necessary to bring security standards consistent with those at U.S. nuclear weapons storage facilities. Nuclear Weapons Transportation Assists Russia in shipping nuclear warheads to more secure sites or dismantlement locations. Assists Russia in maintaining nuclear weapons cargo railcars. Funds maintenance of railcars until no longer feasible, then purchases replacement railcars to maintain 100 cars in service. DOD will procure 15 guard railcars to replace those retired from service. Guard railcars will be capable of monitoring security systems in the cargo railcars and transporting security force personnel. Provides emergency response vehicles containing hydraulic cutting tools, pneumatic jacks, and safety gear to enhance Russia’s ability to respond to possible accidents in transporting nuclear weapons. Meteorological, radiation detection and monitoring, and communications equipment is also included. Combating Nuclear Smuggling: Challenges Facing U.S. Efforts to Deploy Radiation Detection Equipment in Other Countries and in the United States. GAO-06-558T. Washington, D.C.: March 28, 2006. Combating Nuclear Smuggling: Corruption, Maintenance, and Coordination Problems Challenge U.S. Efforts to Provide Radiation Detection Equipment to Other Countries. GAO-06-311. Washington, D.C.: March 14, 2006. Nuclear Nonproliferation: IAEA Has Strengthened Its Safeguards and Nuclear Security Programs, but Weaknesses Need to Be Addressed. GAO- 06-93. Washington, D.C.: October 7, 2005. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 31, 2005. Nuclear Nonproliferation: DOE’s Effort to Close Russia’s Plutonium Production Reactors Faces Challenges, and Final Shutdown is Uncertain. GAO-04-662. Washington, D.C.: June 4, 2004. Weapons of Mass Destruction: Additional Russian Cooperation Needed to Facilitate U.S. Efforts to Improve Security at Russian Sites. GAO-03- 482. Washington, D.C.: March 24, 2003. Nonproliferation: Strategy Needed to Strengthen Multilateral Export Control Regimes. GAO-03-43. Washington, D.C.: October 25, 2002. Nuclear Nonproliferation: U.S. Efforts to Help Other Countries Combat Nuclear Smuggling Need Strengthened Coordination and Planning. GAO-02-426. Washington, D.C.: May 16, 2002. Nuclear Nonproliferation: Implications of the U.S. Purchase of Russian Highly Enriched Uranium. GAO-01-148. Washington, D.C.: December 15, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The International Atomic Energy Agency's (IAEA) safeguards system has been a cornerstone of U.S. efforts to prevent nuclear weapons proliferation since the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) was adopted in 1970. Safeguards allow IAEA to verify countries' compliance with the NPT. Since the discovery in 1991 of a clandestine nuclear weapons program in Iraq, IAEA has strengthened its safeguards system. In addition to IAEA's strengthened safeguards program, there are other U.S. and international efforts that have helped stem the spread of nuclear materials and technology that could be used for nuclear weapons programs. This testimony is based on GAO's report on IAEA safeguards issued in October 2005 (Nuclear Nonproliferation: IAEA Has Strengthened Its Safeguards and Nuclear Security Programs, but Weaknesses Need to Be Addressed, GAO-06-93 [Washington, D.C.: Oct. 7, 2005]). This testimony is also based on previous GAO work related to the Nuclear Suppliers Group--a group of more than 40 countries that have pledged to limit trade in nuclear materials, equipment, and technology to only countries that are engaged in peaceful nuclear activities--and U.S. assistance to Russia and other countries of the former Soviet Union for the destruction, protection, and detection of nuclear material and weapons. IAEA has taken steps to strengthen safeguards, including conducting more intrusive inspections, to seek assurances that countries are not developing clandestine weapons programs. IAEA has begun to develop the capability to independently evaluate all aspects of a country's nuclear activities. This is a radical departure from the past practice of only verifying the peaceful use of a country's declared nuclear material. However, despite successes in uncovering some countries' undeclared nuclear activities, safeguards experts cautioned that a determined country can still conceal a nuclear weapons program. In addition, there are a number of weaknesses that limit IAEA's ability to implement strengthened safeguards. First, IAEA has a limited ability to assess the nuclear activities of 4 key countries that are not NPT members--India, Israel, North Korea, and Pakistan. Second, more than half of the NPT signatories have not yet brought the Additional Protocol, which is designed to give IAEA new authority to search for clandestine nuclear activities, into force. Third, safeguards are significantly limited or not applied to about 60 percent of NPT signatories because they possess small quantities of nuclear material, and are exempt from inspections, or they have not concluded a comprehensive safeguards agreement. Finally, IAEA faces a looming human capital crisis caused by the large number of inspectors and safeguards management personnel expected to retire in the next 5 years. In addition to IAEA's strengthened safeguards program, there are other U.S. and international efforts that have helped stem the spread of nuclear materials and technology. The Nuclear Suppliers Group has helped to constrain trade in nuclear material and technology that could be used to develop nuclear weapons. However, there are a number of weaknesses that could limit the Nuclear Suppliers Group's ability to curb proliferation. For example, members of the Suppliers Group do not always share information about licenses they have approved or denied for the sale of controversial items to nonmember states. Without this shared information, a member country could inadvertently license a controversial item to a country that has already been denied a license from another member state. Since the early 1990s, U.S. nonproliferation programs have helped Russia and other former Soviet countries to, among other things, secure nuclear material and warheads, detect illicitly trafficked nuclear material, and eliminate excess stockpiles of weapons-usable nuclear material. However, these programs face a number of challenges which could compromise their ongoing effectiveness. For example, a lack of access to many sites in Russia's nuclear weapons complex has significantly impeded the Department of Energy's progress in helping Russia secure its nuclear material. U.S. radiation detection assistance efforts also face challenges, including corruption of some foreign border security officials, technical limitations of some radiation detection equipment, and inadequate maintenance of some equipment.

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The public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, flights grounded, power lost, and national defense affected. Moreover, America’s infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. These many interdependencies among governments and within key economic sectors could cause a single failure to have adverse repercussions. Key economic sectors that could be seriously affected if their systems are not Year 2000 compliant include information and telecommunications; banking and finance; health, safety, and emergency services; transportation; power and water; and manufacturing and small business. The information and telecommunications sector is especially important. In testimony in June, we reported that the Year 2000 readiness of the telecommunications sector is one of the most crucial concerns to our nation because telecommunications are critical to the operations of nearly every public-sector and private-sector organization. For example, the information and telecommunications sector (1) enables the electronic transfer of funds, the distribution of electrical power, and the control of gas and oil pipeline systems, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Reliable telecommunications services are made possible by a complex web of highly interconnected networks supported by national and local carriers and service providers, equipment manufacturers and suppliers, and customers. In addition to the risks associated with the nation’s key economic sectors, one of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. For example, a June 1998 informal World Bank survey of foreign readiness found that only 18 of 127 countries (14 percent) had a national Year 2000 program, 28 countries (22 percent) reported working on the problem, and 16 countries (13 percent) reported only awareness of the problem. No conclusive data were received from the remaining 65 countries surveyed (51 percent). In addition, a survey of 15,000 companies in 87 countries by the Gartner Group found that the United States, Canada, the Netherlands, Belgium, Australia, and Sweden were the Year 2000 leaders, while nations including Germany, India, Japan, and Russia were 12 months or more behind the United States. The Gartner Group’s survey also found that 23 percent of all companies (80 percent of which were small companies) had not started a Year 2000 effort. Moreover, according to the Gartner Group, the “insurance, investment services and banking are industries furthest ahead. Healthcare, education, semiconductor, chemical processing, agriculture, food processing, medical and law practices, construction and government agencies are furthest behind. Telecom, power, gas and water, software, shipbuilding and transportation are laggards barely ahead of furthest-behind efforts.” The following are examples of some of the major disruptions the public and private sectors could experience if the Year 2000 problem is not corrected. Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Aircraft and other military equipment could be grounded because the computer systems used to schedule maintenance and track supplies may not work. Further, the Department of Defense (DOD) could incur shortages of vital items needed to sustain military operations and readiness. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. According to the Basle Committee on Banking Supervision—an international committee of banking supervisory authorities—failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Recognizing the seriousness of the Year 2000 problem, on February 4, 1998, the President signed an executive order that established the President’s Council on Year 2000 Conversion led by an Assistant to the President and composed of one representative from each of the executive departments and from other federal agencies as may be determined by the Chair. The Chair of the Council was tasked with the following Year 2000 roles: (1) overseeing the activities of agencies, (2) acting as chief spokesperson in national and international forums, (3) providing policy coordination of executive branch activities with state, local, and tribal governments, and (4) promoting appropriate federal roles with respect to private-sector activities. Addressing the Year 2000 problem in time will be a tremendous challenge for the federal government. Many of the federal government’s computer systems were originally designed and developed 20 to 25 years ago, are poorly documented, and use a wide variety of computer languages, many of which are obsolete. Some applications include thousands, tens of thousands, or even millions of lines of code, each of which must be examined for date-format problems. The federal government also depends on the telecommunications infrastructure to deliver a wide range of services. For example, the route of an electronic Medicare payment may traverse several networks—those operated by the Department of Health and Human Services, the Department of the Treasury’s computer systems and networks, and the Federal Reserve’s Fedwire electronic funds transfer system. In addition, the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. For example, building security systems, elevators, and air conditioning and heating equipment could malfunction or cease to operate. Agencies cannot afford to neglect any of these issues. If they do, the impact of Year 2000 failures could be widespread, costly, and potentially disruptive to vital government operations worldwide. Nevertheless, overall, the government’s 24 major departments and agencies are making slow progress in fixing their systems. In May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems (1,598 of 7,649) for these departments and agencies were Year 2000 compliant. A year later, in May 1998, these departments and agencies reported that 2,914 of the 7,336 mission-critical systems in their current inventories, or about 40 percent, were compliant. However, unless agency progress improved dramatically, a substantial number of mission-critical systems will not be compliant in time. In addition to slow governmentwide progress in fixing systems, our reviews of federal agency Year 2000 programs have found uneven progress. Some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks continue and a great deal of work remains. The following are examples of the results of some of our recent reviews. Last month, we testified about FAA’s progress in implementing a series of recommendations we had made earlier this year to assist FAA in completing overdue awareness and assessment activities. These recommendations included assessing how the major FAA components and the aviation industry would be affected if Year 2000 problems were not corrected in time and completing inventories of all information systems, including data interfaces. Officials at both FAA and the Department of Transportation agreed with these recommendations, and the agency has made progress in implementing them. In our August testimony, we reported that FAA had made progress in managing its Year 2000 problem and had completed critical steps in defining which systems needed to be corrected and how to accomplish this. However, with less than 17 months to go, FAA must still correct, test, and implement many of its mission-critical systems. It is doubtful that FAA can adequately do all of this in the time remaining. Accordingly, FAA must determine how to ensure continuity of critical operations in the likely event of some systems’ failures. In October 1997, we reported that while the Social Security Administration (SSA) had made significant progress in assessing and renovating mission-critical mainframe software, certain areas of risk in its Year 2000 program remained. Accordingly, we made several recommendations to address these risk areas, which included the Year 2000 compliance of the systems used by the 54 state Disability Determination Services that help administer the disability programs. SSA agreed with these recommendations and, in July 1998, we reported that actions to implement these recommendations had either been taken or were underway.Further, we found that SSA has maintained its place as a federal leader in addressing Year 2000 issues and has made significant progress in achieving systems compliance. However, essential tasks remain. For example, many of the states’ Disability Determination Service systems still had to be renovated, tested, and deemed Year 2000 compliant. Our work has shown that much likewise remains to be done in DOD and the military services. For example, our recent report on the Navy found that while positive actions have been taken, remediation progress had been slow and the Navy was behind schedule in completing the early phases of its Year 2000 program. Further, the Navy had not been effectively overseeing and managing its Year 2000 efforts and lacked complete and reliable information on its systems and on the status and cost of its remediation activities. We have recommended improvements to DOD’s and the military services’ Year 2000 programs with which they have concurred. In addition to these examples, our reviews have shown that many agencies had not adequately acted to establish priorities, solidify data exchange agreements, or develop contingency plans. Likewise, more attention needs to be devoted to (1) ensuring that the government has a complete and accurate picture of Year 2000 progress, (2) setting governmentwide priorities, (3) ensuring that the government’s critical core business processes are adequately tested, (4) recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work, and (5) assessing the nation’s Year 2000 risks, including those posed by key economic sectors. I would like to highlight some of these vulnerabilities, and our recommendations made in April 1998 for addressing them. First, governmentwide priorities in fixing systems have not yet been established. These governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences. Further, while individual agencies have been identifying mission-critical systems, this has not always been done on the basis of a determination of the agency’s most critical operations. If priorities are not clearly set, the government may well end up wasting limited time and resources in fixing systems that have little bearing on the most vital government operations. Other entities have recognized the need to set priorities. For example, Canada has established 48 national priorities covering areas such as national defense, food production, safety, and income security. Second, business continuity and contingency planning across the government has been inadequate. In their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes. Without such plans, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test alternatives. Federal agencies depend on data provided by their business partners as well as services provided by the public infrastructure (e.g., power, water, transportation, and voice and data telecommunications). One weak link anywhere in the chain of critical dependencies can cause major disruptions to business operations. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. Our recently issued guidance aims to help agencies ensure such continuity of operations through contingency planning. Third, OMB’s assessment of the current status of federal Year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified. Without independent reviews, OMB and the President’s Council on Year 2000 Conversion have little assurance that they are receiving accurate information. In fact, we have found cases in which agencies’ systems compliance status as reported to OMB has been inaccurate. For example, the DOD Inspector General estimated that almost three quarters of DOD’s mission-critical systems reported as compliant in November 1997 had not been certified as compliant by DOD components.In May 1998, the Department of Agriculture (USDA) reported 15 systems as compliant, even though these were replacement systems that were still under development or were planned for development. (The department removed these systems from compliant status in its August 1998 quarterly report.) Fourth, end-to-end testing responsibilities have not yet been defined. To ensure that their mission-critical systems can reliably exchange data with other systems and that they are protected from errors that can be introduced by external systems, agencies must perform end-to-end testing for their critical core business processes. The purpose of end-to-end testing is to verify that a defined set of interrelated systems, which collectively support an organizational core business area or function, will work as intended in an operational environment. In the case of the year 2000, many systems in the end-to-end chain will have been modified or replaced. As a result, the scope and complexity of testing—and its importance—is dramatically increased, as is the difficulty of isolating, identifying, and correcting problems. Consequently, agencies must work early and continually with their data exchange partners to plan and execute effective end-to-end tests. So far, lead agencies have not been designated to take responsibility for ensuring that end-to-end testing of processes and supporting systems is performed across boundaries, and that independent verification and validation of such testing is ensured. We have set forth a structured approach to testing in our recently released exposure draft. In our April 1998 report on governmentwide Year 2000 progress, we made a number of recommendations to the Chair of the President’s Council on Year 2000 Conversion aimed at addressing these problems. These included establishing governmentwide priorities and ensuring that agencies set developing a comprehensive picture of the nation’s Year 2000 readiness, requiring agencies to develop contingency plans for all critical core requiring agencies to develop an independent verification strategy to involve inspectors general or other independent organizations in reviewing Year 2000 progress, and designating lead agencies responsible for ensuring that end-to-end operational testing of processes and supporting systems is performed. We are encouraged by actions the Council is taking in response to some of our recommendations. For example, OMB and the Chief Information Officers Council adopted our guide providing information on business continuity and contingency planning issues common to most large enterprises as a model for federal agencies. However, as we recently testified before this Subcommittee, some actions have not been fully addressed—principally with respect to setting national priorities and end-to-end testing. State and local governments also face a major risk of Year 2000-induced failures to the many vital services—such as benefits payments, transportation, and public safety—that they provide. For example, food stamps and other types of payments may not be made or could be made for incorrect amounts; date-dependent signal timing patterns could be incorrectly implemented at highway intersections, and safety severely compromised, if traffic signal systems run by state and local governments do not process four-digit years correctly; and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected by the Year 2000 problem. Recent surveys of state Year 2000 efforts have indicated that much remains to be completed. For example, a July 1998 survey of state Year 2000 readiness conducted by the National Association of State Information Resource Executives, Inc., found that only about one-third of the states reported that 50 percent or more of their critical systems had been completely assessed, remediated, and tested. In a June 1998 survey conducted by the USDA’s Food and Nutrition Service, only 3 and 14 states, respectively, reported that the software, hardware, and telecommunications that support the Food Stamp Program, and the Women, Infants, and Children program, were Year 2000 compliant. Although all but one of the states reported that they would be Year 2000 compliant by January 1, 2000, many of the states reported that their systems are not due to be compliant until after March 1999 (the federal government’s Year 2000 implementation goal). Indeed, 4 and 5 states, respectively, reported that the software, hardware, and telecommunications supporting the Food Stamp Program, and the Women, Infants, and Children program would not be Year 2000 compliant until the last quarter of calendar year 1999, which puts them at high risk of failure due to the need for extensive testing. State audit organizations have identified other significant Year 2000 concerns. For example, (1) Illinois’ Office of the Auditor General reported that significant future efforts were needed to ensure that the year 2000 would not adversely affect state government operations, (2) Vermont’s Office of Auditor of Accounts reported that the state faces the risk that critical portions of its Year 2000 compliance efforts could fail, (3) Texas’ Office of the State Auditor reported that many state entities had not finished their embedded systems inventories and, therefore, it is not likely that they will complete their embedded systems repairs before the year 2000, and (4) Florida’s Auditor General has issued several reports detailing the need for additional Year 2000 planning at various district school boards and community colleges. State audit offices have also made recommendations, including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. In the course of these field hearings, states and municipalities have testified about Year 2000 practices that could be adopted by others. For example: New York established a “top 40” list of priority systems having a direct impact on public health, safety, and welfare, such as systems that support child welfare, state aid to schools, criminal history, inmate population management, and tax processing. According to New York, “the Top 40 systems must be compliant, no matter what.” The city of Lubbock, Texas, is planning a Year 2000 “drill” this month. To prepare for the drill, Lubbock is developing scenarios of possible Year 2000-induced failures, as well as more normal problems (such as inclement weather) that could occur at the change of century. Louisiana established a $5 million Year 2000 funding pool to assist agencies experiencing emergency circumstances in mission-critical applications and that are unable to correct the problems with existing resources. Regarding Illinois, according to the state’s Year 2000 Internet World Wide Web site, it had created a repository of information on vendor claims regarding the Year 2000 compliance of software packages in use by various state agencies. In addition, Illinois’ Treasurer’s Office announced in July 1998 the creation of a Year 2000 Initiative task force composed of public and private officials from 10 regions in the state. This task force is charged with monitoring the progress of all financial vendors doing business with Illinois. To fully address the Year 2000 risks that states and the federal government face, data exchanges must also be confronted—a monumental issue. As computers play an ever-increasing role in our society, exchanging data electronically has become a common method of transferring information among federal, state, and local governments. For example, SSA exchanges data files with the states to determine the eligibility of disabled persons for disability benefits. In another example, the National Highway Traffic Safety Administration provides states with information needed for driver registrations. As computer systems are converted to process Year 2000 dates, the associated data exchanges must also be made Year 2000 compliant. If the data exchanges are not Year 2000 compliant, data will not be exchanged or invalid data could cause the receiving computer systems to malfunction or produce inaccurate computations. Our recent report on actions that have been taken to address Year 2000 issues for electronic data exchanges revealed that federal agencies and the states use thousands of such exchanges to communicate with each other and other entities. For example, federal agencies reported that their mission-critical systems have almost 500,000 data exchanges with other federal agencies, states, local governments, and the private sector. To successfully remediate their data exchanges, federal agencies and the states must (1) assess information systems to identify data exchanges that are not Year 2000 compliant, (2) contact exchange partners and reach agreement on the date format to be used in the exchange, (3) determine if data bridges and filters are needed and, if so, reach agreement on their development, (4) develop and test such bridges and filters, (5) test and implement new exchange formats, and (6) develop contingency plans and procedures for data exchanges. At the time of our review, much work remained to ensure that federal and state data exchanges will be Year 2000 compliant. About half of the federal agencies reported during the first quarter of 1998 that they had not yet finished assessing their data exchanges. Moreover, almost half of the federal agencies reported that they had reached agreements on 10 percent or fewer of their exchanges, few federal agencies reported having installed bridges or filters, and only 38 percent of the agencies reported that they had developed contingency plans for data exchanges. Further, the status of the data exchange efforts of 15 of the 39 state-level organizations that responded to our survey was not discernable because they were not able to provide us with information on their total number of exchanges and the number assessed. Of the 24 state-level organizations that provided actual or estimated data, they reported, on average, that 47 percent of the exchanges had not been assessed. In addition, similar to the federal agencies, state-level organizations reported having made limited progress in reaching agreements with exchange partners, installing bridges and filters, and developing contingency plans. However, we could draw only limited conclusions on the status of the states’ actions because data were provided on only a small portion of states’ data exchanges. To strengthen efforts to address data exchanges, we made several recommendations to OMB. In response, OMB agreed that it needed to increase its efforts in this area. For example, OMB noted that federal agencies had provided the General Services Administration with a list of their data exchanges with the states. In addition, as a result of an agreement reached at an April 1998 federal/state data exchange meeting,the states were supposed to verify the accuracy of these initial lists by June 1, 1998. OMB also noted that the General Services Administration is planning to collect and post information on its Internet World Wide Web site on the progress of federal agencies and states in implementing Year 2000 compliant data exchanges. In summary, federal, state, and local efforts must increase substantially to ensure that major service disruptions do not occur. Greater leadership and partnerships are essential if government programs are to meet the needs of the public at the turn of the century. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. FAA Systems: Serious Challenges Remain in Resolving Year 2000 and Computer Security Problems (GAO/T-AIMD-98-251, August 6, 1998). Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, August 1998). Internal Revenue Service: Impact of the IRS Restructuring and Reform Act on Year 2000 Efforts (GAO/GGD-98-158R, August 4, 1998). Social Security Administration: Subcommittee Questions Concerning Information Technology Challenges Facing the Commissioner (GAO/AIMD-98-235R, July 10, 1998). Year 2000 Computing Crisis: Actions Needed on Electronic Data Exchanges (GAO/AIMD-98-124, July 1, 1998). Defense Computers: Year 2000 Computer Problems Put Navy Operations at Risk (GAO/AIMD-98-150, June 30, 1998). Year 2000 Computing Crisis: A Testing Guide (GAO/AIMD-10.1.21, Exposure Draft, June 1998). Year 2000 Computing Crisis: Testing and Other Challenges Confronting Federal Agencies (GAO/T-AIMD-98-218, June 22, 1998). Year 2000 Computing Crisis: Telecommunications Readiness Critical, Yet Overall Status Largely Unknown (GAO/T-AIMD-98-212, June 16, 1998). GAO Views on Year 2000 Testing Metrics (GAO/AIMD-98-217R, June 16, 1998). IRS’ Year 2000 Efforts: Business Continuity Planning Needed for Potential Year 2000 System Failures (GAO/GGD-98-138, June 15, 1998). Year 2000 Computing Crisis: Actions Must Be Taken Now to Address Slow Pace of Federal Progress (GAO/T-AIMD-98-205, June 10, 1998). Defense Computers: Army Needs to Greatly Strengthen Its Year 2000 Program (GAO/AIMD-98-53, May 29, 1998). Year 2000 Computing Crisis: USDA Faces Tremendous Challenges in Ensuring That Vital Public Services Are Not Disrupted (GAO/T-AIMD-98-167, May 14, 1998). Securities Pricing: Actions Needed for Conversion to Decimals (GAO/T-GGD-98-121, May 8, 1998). Year 2000 Computing Crisis: Continuing Risks of Disruption to Social Security, Medicare, and Treasury Programs (GAO/T-AIMD-98-161, May 7, 1998). IRS’ Year 2000 Efforts: Status and Risks (GAO/T-GGD-98-123, May 7, 1998). Air Traffic Control: FAA Plans to Replace Its Host Computer System Because Future Availability Cannot Be Assured (GAO/AIMD-98-138R, May 1, 1998). Year 2000 Computing Crisis: Potential for Widespread Disruption Calls for Strong Leadership and Partnerships (GAO/AIMD-98-85, April 30, 1998). Defense Computers: Year 2000 Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30, 1998). Department of the Interior: Year 2000 Computing Crisis Presents Risk of Disruption to Key Operations (GAO/T-AIMD-98-149, April 22, 1998). Tax Administration: IRS’ Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/T-GGD/AIMD-98-114, March 31, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). Year 2000 Computing Crisis: Office of Thrift Supervision’s Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation’s Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC’s Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation’s Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems’ Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration’s Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time Is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computer Systems: Risks of VBA’s Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the year 2000 computer system risks facing the nation, focusing on: (1) GAO's major concerns with the federal government's progress in correcting its systems; (2) state and local government year 2000 issues; and (3) critical year 2000 data exchange issues. GAO noted that: (1) the public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the year 2000 computing crisis; (2) the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations; (3) overall, the government's 24 major departments and agencies are making slow progress in fixing their systems; (4) in May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems for these departments and agencies were year 2000 compliant; (5) in May 1998, these departments reported that 40 percent of the mission-critical systems were year 2000 compliant; (6) unless progress improves dramatically, a substantial number of mission-critical systems will not be compliant in time; (7) in addition to slow governmentwide progress in fixing systems, GAO's reviews of federal agency year 2000 programs have found uneven progress; (8) some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time; (9) other agencies have made progress, although risks continue and a great deal of work remains; (10) governmentwide priorities in fixing systems have not yet been established; (11) these governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences; (12) business continuity and contingency planning across the government has been inadequate; (13) in their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes; (14) OMB's assessment of the status of federal year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified; (15) GAO found cases in which agencies' systems compliance status as reported to OMB had been inaccurate; (16) end-to-end testing responsibilities have not yet been identified; (17) state and local governments also face a major risk of year 2000-induced failures to the many vital services that they provide; (18) recent surveys of state year 2000 efforts have indicated that much remains to be completed; and (19) at the time of GAO's review, much work remained to ensure that federal and state data exchanges will be year 2000 compliant.

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IQA consists of two major elements. The first element of IQA required OMB by the end of fiscal year 2001 to develop and issue guidelines that provide policy and procedure guidance for federal agencies to use for “ensuring and maximizing quality, objectivity, utility, and integrity of information, including statistical information,” that they disseminate. The second element required federal agencies covered by the Paperwork Reduction Act to develop IQA guidelines by the end of fiscal year 2002, establish administrative mechanisms allowing “affected persons” to seek and obtain correction of information maintained and disseminated by the agencies, as well as periodically report to the Director of OMB about the number and nature of IQA complaints and how they handled such complaints. IQA builds on previous federal efforts to improve the quality of information, including OMB Circular A-130 and the Paperwork Reduction Act of 1980, as amended. For example, two of the purposes of the Paperwork Reduction Act were to “improve quality and use of federal information … and provide for the dissemination of public information … in a manner that promotes the utility of the information to the public and makes effective use of information technology.” IQA requires, among other things, that executive branch agencies manage their information resources to “improve the integrity, quality, and utility of information to all users within and outside an agency.”7, 8 OIRA, which develops and oversees the implementation of governmentwide policies in the areas of information technology, privacy, and statistics, had responsibility for developing the governmentwide IQA guidelines and helping agencies to meet the act’s requirement that they develop their own guidelines. In an October 2002 memorandum describing the implementation of IQA guidelines, OIRA’s then administrator stated he considered the IQA guidelines a continuation of the executive branch’s decades-long focus on improving the quality of information federal agencies collect and disseminate. The memorandum added that agencies’ implementation “of the Information Quality Law represented the first time that the executive branch has developed a governmentwide set of information quality guidelines, including agency-specific guidelines tailored to each agency’s unique programs and information.” Agencies’ guidelines, which were to follow OMB’s model, were to include administrative mechanisms that allow “affected parties”—as defined by the agencies—to request correction of information that they did not consider correct. 44 U.S.C. § 3506(b)(1)(C). No hearings or debates were held or committee reports filed before IQA was enacted as part of the Treasury and General Government Appropriations Act for Fiscal Year 2001. OMB set up a framework for federal agencies to follow in implementing IQA, including providing assistance and direction to agencies in developing agency IQA guidelines and requiring them to post IQA information on their Web sites. However, we were not able to locate any IQA information on about half of the independent agencies’ Web sites that we examined, nor could we find Federal Register notices about IQA guidelines for them. According to OMB officials and OIRA’s then administrator, OIRA concentrated its communication and other outreach efforts on cabinet- level and regulatory agencies. In written comments on a draft of our report, OIRA noted that in working with agencies to develop and implement information quality measures, it will consider the needed resources for and the potential benefits of such measures. Further, in a number of cases where IQA information was posted online, locating the information was difficult. Agency IQA officials with whom we met noted that their IQA correction mechanism is a formal process and one of a number of correction mechanisms available to the public for having information errors corrected. OMB set up a framework for agencies to follow in implementing IQA and provided assistance and direction to agencies in developing their guidelines. As required by IQA, OMB issued the basic set of governmentwide IQA guidelines that agencies used as the basis for developing their own guidelines. These guidelines explained what agencies were to do to help ensure the development and public dissemination of quality information. In developing these guidelines, OIRA espoused three underlying principles that agencies were to reflect in their guidelines: The guidelines are to apply to a wide variety of government information dissemination activities that may vary in importance and scope. Agencies are to meet basic information quality standards, noting that the more important the information, “the higher the quality standards to which it should be held,” but that “agencies should weigh the costs … and the benefits of higher information quality in the development of information.” Agencies are to apply the guidelines in “a common-sense and workable manner,” meaning that agency guidelines are not to “impose unnecessary administrative burdens that would inhibit the agencies from continuing to take advantage of the Internet and other technologies to disseminate information that can be of great benefit and value to the public.” The guidelines, in elaborating on this last principle, explained that “OMB encourages agencies to incorporate the standards and procedures required by these guidelines into their existing … administrative practices rather than create new and potentially duplicative or contradictory processes.” The guidelines also noted that they were written to provide agencies with flexibility as they developed their own guidelines. Moreover, the guidelines defined four key concepts related to the dissemination of information—quality, objectivity, utility, and integrity— and described how quality was the outcome of the other three components. These guidelines further explained that agencies were to mirror these principles and actions in establishing their own guidelines and to include an administrative mechanism that data users who find mistakes in any agency’s public data or information can use to petition for correction. This mechanism was to include an appeals process, which allows a petitioner to request that an agency reconsider its initial decision about the correction request. The guidelines’ wording about the administrative correction mechanism allowed agencies to avoid duplicating the public comment process required by the rulemaking procedures under the Administrative Procedure Act, in which interested persons are given the opportunity to comment on proposed rules. In addition to writing the governmentwide IQA guidelines, OIRA took other steps to help agencies implement the principles and standards of IQA. As part of helping agencies to develop their guidelines, OIRA offered them assistance, including outreach to agencies such as conducting workshops on drafting guidelines, and reviewed their guidelines. IQA officials from a number of agencies, including the Departments of Defense and Justice, told us they considered this assistance beneficial. OIRA officials also issued memorandums to clarify how agencies were to satisfy the law and otherwise implement IQA, including requiring agencies to post IQA guidelines and related information on their Web sites. Further, OIRA put in place the mechanism for agencies to provide OMB with their annual IQA reports on their implementation of IQA, the number of IQA requests and appeals, and their status. According to OIRA staff and officials and agency memorandums, OIRA monitored IQA correction requests received by agencies and assisted them in developing their responses. Agency officials told us that OMB’s revisions consisted of comments that ranged from editorial to significant and primarily involved IQA requests pertaining to substantive issues. For example, agency officials and OMB staff explained that OMB at times asked for more detailed explanations, including references to other relevant information, in agency responses to correction requests. According to these officials, OMB’s review did not cause changes that would have substantially changed the agencies’ ultimate decision. We found no indication that OMB’s involvement substantially changed agencies responses when we examined nine specific IQA requests from four agencies. As described in figure 1, agencies covered by IQA were to have their guidelines and the correction and appeals mechanism in place by the start of fiscal year 2003 (October 1, 2002). The figure also shows that in April 2004, OMB reported to Congress in response to a mandate that OMB report on the first year—fiscal year 2003—of the implementation of the act. That report included information about the characteristics of the correction requests as well as the sources of the requests, and commented on a number of common perceptions and concerns about the act. OMB, of its own volition, in December 2005, updated this information and included it in a chapter in its report to Congress on the costs and benefits of federal regulations. In this report, OMB provided information on the implementation of IQA in fiscal year 2004 and compared fiscal years 2003 and 2004 IQA information. According to OMB and OIRA staff and officials and OIRA’s then administrator, OIRA concentrated its efforts to implement IQA on cabinet- level and regulatory agencies. In addition to working with the cabinet agencies to create IQA guidelines, OIRA staff stated they also focused their attention on regulatory agencies and commissions, including EPA. OIRA did not clarify for many independent agencies—especially smaller, nonregulatory ones—whether the law applied to them or generally follow up with them to help them meet the act’s provisions. By the fiscal year 2002 deadline, 14 of the 15 cabinet-level agencies had guidelines in place (see table 1). Further, following the flurry of activities to help agencies develop their IQA guidelines by October 1, 2002, OIRA shifted its emphasis away from helping agencies develop their IQA guidelines to helping agencies that already had guidelines to address IQA correction requests. According to OIRA staff, since November 2002 OIRA has not promulgated additional guidance regarding the development of IQA guidelines to agencies. Only one cabinet-level agency, DHS, the newest and one of the largest federal agencies, has no department-level IQA guidelines covering its 22 agencies, which issue a wide array of information used by the public. Because DHS was not created until January 2003—after IQA was enacted and IQA deadlines had passed—OMB began working with DHS officials to develop department-level guidelines after the other cabinet-level and independent agencies had their guidelines in place, according to OMB’s April 2004 report to Congress. As of March 2006, however, DHS did not have its IQA guidelines in place and officials did not have a deadline for establishing them. Also, while 5 DHS component agencies had IQA guidelines before they became part of DHS, the guidelines of 4 of the 5 component agencies—the Coast Guard, Customs and Border Protection, FEMA, and Secret Service—are still linked to their previous parent departments or otherwise have not been updated by DHS. For example, the IQA guidelines for the Coast Guard, which was previously part of the Department of Transportation (DOT), instructed information users submitting IQA requests to file via DOT’s Docket Management System, the administrative mechanism that DOT directs the public to use to file correction requests. Additionally, FEMA has not updated its guidelines since becoming part of DHS. DHS officials told us that the component agencies may update their guidelines after DHS has its departmentwide guidelines in place. Until that occurs, it is unclear what appeals process the public would follow and how DHS agencies will make final decisions about IQA correction requests. Moreover, when we checked the Web sites of 91 independent agencies, we did not find IQA guidelines posted on the Web sites of 44 of those agencies. (See app. II for the list of independent agencies and the status of their guidelines at the end of May 2006.) These 44 commissions, agencies, and other independent entities gave no indication of any IQA guidelines or IQA reports, nor any mention of IQA on their Web sites or on OMB’s Web site of agencies’ IQA guidelines. We also could not find these agencies’ Federal Register notices announcing the establishment of their IQA guidelines, although OMB required these notices. Also, OIRA staff did not have copies of the guidelines and said that they had focused their attention on cabinet agencies and regulatory agencies. These 44 agencies represented a broad spectrum of entities—including fact-finding agencies, such as the U.S. Civil Rights Commission; research organizations, such as the Smithsonian Institution; and others, such as the U.S. Trade and Development Agency— that produce a wide range of publicly disseminated information. In commenting on this report, the acting OIRA administrator noted that OIRA will take into account the resources that would be needed and the potential benefits that would be realized in working with agencies “to develop and implement information quality measures.” Even when agencies posted IQA information on their Web sites as OMB required, such information was hard to access, making it difficult for information users to know whether agencies have IQA guidelines or how to request correction of agency information. As part of the governmentwide IQA guidelines, OIRA required agencies to post their draft agency-specific IQA guidelines online by September 30, 2002, and to inform the public about them and solicit comments. However, we found it difficult to locate IQA information on agency Web sites. In addition to the difficulties of trying to find whether the independent agencies’ Web sites contained IQA guidelines, we had problems finding IQA guidelines on the Web sites of the 14 cabinet-level and 5 independent agencies that we knew had those guidelines. Of these 19 cabinet-level and independent agencies with IQA guidelines that we reviewed, only 4 agencies—the Departments of Agriculture, Commerce, Energy, and the Interior—provided a direct IQA “information quality” link on their home pages, which likely would be relatively easy for the public to use to access IQA information. In the case of the 15 other agencies, we found that accessing IQA information on their Web sites was difficult because these agencies provided no discernable link to IQA information on their home pages; provided access to their guidelines and other information through “contact us,” “policies,” or other less-than-obvious links, such as “resources”; or required multiple searches using various terms related to IQA, as was the case with the Department of Defense and the Department of State. Although OIRA directed agencies to post IQA information online, OIRA’s guidance is not specific about how agencies should provide access to online IQA information. Moreover, agency IQA officials told us that OMB did not provide guidance about where to place IQA information on their Web sites or what kind of access— or transparency—to provide. Agency IQA officials from a number of agencies stated that access to their Web-based IQA information was not “user-friendly” and said they were working to make IQA information more transparent and easily accessible. OMB is aware of the need to improve the public’s access to IQA information. In its April 2004 report to Congress, OIRA acknowledged the need for agencies to improve the transparency of IQA information and recommended that agencies include on their public Web sites IQA correction requests, appeals, and agency responses to them, as well as the agencies’ annual IQA reports to OMB. OMB and OIRA subsequently issued additional directives to facilitate the public’s ability to access government information and the process to request correction of erroneous public information. For example, in August 2004, responding to “inconsistent practices regarding the public availability of correspondence regarding information quality requests,” OIRA’s administrator issued a memorandum instructing each agency to post its IQA documents online by December 1, 2004. From fiscal year 2003 to fiscal year 2004, three agencies shifted to using IQA to address primarily substantive requests—those dealing with the underlying scientific, environmental, or other complex information—which declined from 42 to 38. The total number of all IQA requests dropped from over 24,000 in fiscal year 2003 to 62 in fiscal year 2004. The overwhelming cause for this decline was that in fiscal year 2004 FEMA no longer classified requests to correct flood insurance rate maps as IQA requests or addressed them through IQA. The decline in the number of IQA requests does not indicate that there was a corresponding decrease in agency workloads. In fiscal year 2003, agencies reported having received over 24,600 IQA correction requests, with FEMA’s 24,433 requests accounting for over 99 percent of the year’s total. FEMA’s requests were all related to flood insurance rate maps. Eighteen other agencies accounted for the balance of the year’s requests (183), 54 of which resulted in changes in information, including clarifying language. In fiscal year 2004, FEMA, with OMB’s approval, no longer classified flood insurance rate map correction as IQA requests. Instead, FEMA addressed flood insurance rate map correction requests by using a correction process it had implemented prior to the enactment of IQA. Largely as a result of this change and a similar change by two other agencies—the Department of Labor’s Occupational Safety and Health Administration (OSHA) and DOT’s Federal Motor Carrier Safety Administration—in fiscal year 2004, 15 agencies reported a total of 62 IQA correction requests to OMB. Of these, 26 requests resulted in changes. As shown in table 2, from fiscal year 2003 to fiscal year 2004, the number of substantive requests declined in terms of their total numbers, decreasing from 42 in fiscal year 2003 to 38 in fiscal year 2004. As shown in table 2, during fiscal years 2003 and 2004, over half of the substantive IQA correction requests originated from businesses, trade groups, or other profit-oriented organizations, and over one-quarter were generated by nonprofit or other advocacy organizations. (For a list of these requesters, see app. III.) Substantive requests generated by individual citizens declined from about 1 in 7 of substantive requests to about 1 in 10. Substantive requests in fiscal year 2004 represented a greater proportion of IQA correction requests than in fiscal year 2003, excluding FEMA flood insurance rate map correction requests. Out of 183 non-FEMA requests in fiscal year 2003, 42—or almost one-fourth—were substantive in nature. Addressing these substantive requests required considerably more time and staff resources than simple or administrative requests. OMB and agency officials considered the other 141 requests—over three-fourths—to be of a simple or administrative nature—for example, requests to correct errors in photo captions, personal information, or Internet addresses. Agencies were able to quickly correct these simple or administrative requests—correcting 17 requests took 7 or fewer days from the date the agencies received them. In fiscal year 2004, of 62 total IQA requests, 38 requests—almost two-thirds—were considered to be substantive. Table 3 shows the 80 substantive requests for fiscal years 2003 and 2004 by category of petitioner, agency, and status of requests, as of May 2006. One reason that substantive requests in fiscal year 2004 represented an increased percentage of total IQA correction requests compared with fiscal year 2003 is that in fiscal year 2004 some agencies decided to exclude simple or administrative errors from IQA correction mechanisms. Specifically, according to agency IQA documents and OMB’s December 2005 report, in fiscal 2004, FEMA, the Department of Justice, the Federal Motor Carrier Safety Administration, and OSHA no longer classified and addressed most simple or administrative types of errors as IQA correction requests. As a result, the majority of the correction requests that remained to be processed through IQA were substantive requests. For example, in fiscal year 2004, the Department of Health and Human Services’ (HHS) National Institutes of Health received a request related to information about smokeless tobacco; EPA received a request challenging information related to the water conservation benefits of water utility billing systems of multifamily housing; and the Department of the Interior’s Fish and Wildlife Service received a request that challenged information used to protect the Florida panther. We also found that no one agency dominated or accounted for the majority of fiscal year 2004 requests. In fact, in fiscal year 2004 the distribution of requests was more broadly spread across agencies than in fiscal year 2003, with EPA and the National Archives and Records Administration (NARA) each reporting 12 correction requests, and HHS reporting 9 requests to OMB. A few agencies did not experience a decrease in the total number of IQA requests because they did not shift simple requests away from IQA or otherwise change how they processed such requests during the 2-year period. For example, according to OMB and NARA IQA documents, NARA’s IQA requests—8 in fiscal 2003 and 12 in fiscal 2004—continued to be simple in nature and came primarily from individuals in both years. For the same 2 years, EPA’s 25 requests and HHS’s 19 requests were nearly all substantive and mainly came from businesses or profit-oriented organizations as well as nonprofits or advocacy groups. In fiscal years 2003 and 2004, the simpler and more administrative the initial request, the more likely an agency was to correct the information without appeal. For example, during the 2-year period, NARA corrected or clarified information for 16 of the 20 IQA correction requests it received, which were all considered to be simple in nature. Conversely, the more significant the correction request, the lower the likelihood of a change. HHS, for example, addressed 19 IQA requests that were substantive but changed information for only 5 based on the initial request or an appeal. Regardless of the complexity of the request, agency IQA documents showed that agencies addressed all requests filed during the 2-year period. Substantial requests were less likely to result in an initial information change but more likely to be appealed than simple or administrative requests. Few petitioners appealed agency decisions regarding simple or administrative requests. None of 131 “simple or administrative” fiscal year 2003 IQA requests from the Departments of Transportation, Labor, and the Treasury and NARA was appealed. By comparison, of the 80 substantive requests over the 2-year period, petitioners appealed 39 (almost half) of the agencies’ decisions. Of the 39 requests that were appealed, 25 were denied and 8 appeals resulted in information changes. Table 4 shows the outcome or status of the appeals filed during fiscal years 2003 and 2004, as of the end of March 2006. Two of the 39 appeals still have outcomes pending after more than 2 years, demonstrating that although the number of appeals may be considered small, the impact on agency operations may be significant, depending on the complexity of the specific issue. For example, in table 4, the EPA appeal pending—filed by the U.S. Chamber of Commerce in April 2005—affects 16 EPA databases that deal with such issues as wastewater treatment and the bioaccumulation of organic chemicals. This case has been ongoing for over 2 years, and could have effects on assessments regarding human health risks, other environmental impacts, and cleanup decisions. Also listed in table 3 is another IQA appeal filed in October 2003 by a private individual. The initial request for correction was filed in January 2003 before the DOT’s Federal Aviation Administration (FAA) challenging the analytical basis for its “age 60 rule” that forces air carrier pilots out of service at age 60. FAA upheld its “age 60 rule” in September 2003, but the complainant filed an appeal in October 2003 and filed additional amendments thereafter. The request was still pending at the time we completed our study, more than 3-½ years after the initial IQA request was made and almost 3 years after the appeal. As for the source of appeals, businesses, trade groups, and other profit- oriented organizations filed more appeals than other types of organizations or individuals. Businesses and profit-oriented organizations accounted for 25 of the 39 appeals of IQA requests filed during fiscal years 2003 and 2004. Of these 25 appeals, 4 resulted in changes. Appeals from advocacy/nonprofit groups resulted in 1 change from 5 appeals. Appeals from private citizens resulted in 3 changes from 7 appeals. The most appeals—25, or almost two-thirds of them—were filed with EPA, HHS, and the Department of the Interior. Those agencies also received nearly two- thirds of the requests that were classified as substantive. The impact of IQA on agencies could not be determined because agencies and OMB do not have mechanisms in place to track the effects of implementing IQA. Agencies and OMB do not capture IQA workloads or cost data, nor do they track the impact of IQA requests or resulting information changes. However, evidence indicates that in at least some cases, addressing IQA requests and appeals can take agencies 2 years or longer to resolve and requires a wide range of staff, particularly if IQA correction requests center on substantive matters. More specifically, none of the agencies we visited had information about the actual workload, the number of staff days, or other costs, with one exception. Agency IQA officials told us they do not collect such data. They explained that their agencies did not capture specific workload or cost data related to establishing IQA guidelines, nor do they track workload or cost data involved in responding to IQA requests or have mechanisms to measure any impact IQA information changes have on operations or the quality of information. Officials at two agencies—the National Aeronautics and Space Administration and the Department of the Interior’s Fish and Wildlife Service—considered developing systems to track IQA costs but did not. Fish and Wildlife Service officials told us they decided against implementing an IQA cost tracking system because of the declining number of requests they have received since fiscal years 2003 and 2004 and the high cost and administrative complexities of setting up such a system. Additionally, IQA officials told us that addressing IQA requests is considered to be part of their agencies’ day-to-day business, and because of the multifaceted nature of some requests, allocating time and resources to one specific issue or linking work exclusively to IQA requests would be difficult. For example, Fish and Wildlife Service officials stated that when agency biologists work on IQA requests, they are also frequently working on broad biological, environmental, and related issues that go beyond a given request and relate to other agency work, so it would be difficult to allocate the biologists’ time among various codes. In their view, selecting a specific code would be somewhat arbitrary, and time or other codes would not necessarily accurately reflect the cross-cutting nature of the biologists’ work. Moreover, according to agency officials and OMB staff, neither the agencies nor OMB have mechanisms in place to track the effects of implementing the law. Agency IQA officials and OIRA staff and officials told us that administering IQA has not been overly burdensome and that it has not adversely affected agencies’ overall operations to date. Agencies IQA officials told us they gave IQA responsibilities to various staff within their agencies—generally in offices already responsible for information-related issues—and that no staff are dedicated exclusively to administering IQA. For example, most agencies have folded responsibilities for IQA, including setting up guidelines, into the office of the chief information officer or their public affairs unit. In addition, although they track the status of IQA correction requests, they do not track changes resulting from IQA requests or appeals. Although there is a lack of comprehensive IQA-related cost or resource data, evidence suggests that certain program staff or units involved in creating IQA guidelines, including the correction mechanism, and addressing IQA correction requests have seen their workloads increase without any corresponding increase in resources. For example, officials at the Fish and Wildlife Service, HHS’s National Institutes of Health, the Department of Commerce’s National Oceanic and Atmospheric Administration, and the Department of Defense’s Army Corps of Engineers estimate the costs of addressing IQA requests are “many thousands of dollars” because of the number of high salary professional staff, such as biologists, toxicologists, engineers, and managers, who review and respond to substantive requests and appeals and the extensive time involved. According to agency IQA officials and OMB staff, agencies did not receive funds for IQA, and the act did not specify any funds for implementing IQA. Moreover, our analysis of IQA requests shows that agencies have taken from 1 month to more than 1 year to produce a final decision on substantive IQA requests and appeals, while 2 appeals made during fiscal years 2003 and 2004 are still ongoing after 2 years or longer. However, evidence does not exist showing the resources allotted to those appeals over the 2-year period in question. The following IQA requests illustrate the length of time it can take to address an IQA correction, regardless of the final outcome. On March 10, 2004, a group of trade associations and organizations primarily representing the residential and commercial properties sector submitted an IQA request to EPA challenging the accuracy of an EPA statement that water allocation (submetering) billing systems in apartment buildings and other multifamily housing did not encourage water conservation. This statement was in a Federal Register notice regarding the applicability of the Safe Drinking Water Act to submetered properties. The group did not consider the statement to be correct regarding one type of allocation system in particular—Ratio Utility Billing Systems. According to EPA documents and officials, EPA’s response to the request and subsequent appeal involved a number of EPA staff, including senior executives, scientists, and others in the Office of Water and other headquarters units. The appeal itself was reviewed by a three-member panel of senior executives. EPA took a total of almost 5 months (146 days) to respond to the initial correction request, well over the 90-day goal stated in EPA’s IQA guidelines, and almost 11 months (323 days) more to decide on the appeal, over three times longer than the 90-day appeals goal in EPA’s guidelines, according to our analysis of EPA IQA requests. The nearly 15-month total response time was not unusual compared to other EPA processing times for IQA requests. The lengthy response time was in part due to EPA waiting for the completion of a related study—under way at the time of the correction request—before making a final decision about revising its submetering policy. On September 28, 2005, EPA ultimately denied the appeal and did not change its statement, citing the results of the study as not showing that Ratio Utility Billing Systems encouraged water conservation. On May 4, 2004, a nonprofit organization representing public sector employees involved in the environment and an individual federal employee submitted an IQA request to the Fish and Wildlife Service about alleged errors in agency documents, including the Multi-Species Recovery Plan and the draft Landscape Conservation Strategy, which are intended to protect the endangered Florida panther. The request and subsequent appeal involved previously identified errors in peer- reviewed research associated with the definition of panther habitat, as well as estimates of panther population and models used to determine strategies to help the panther species survive and recover in Florida. Fish and Wildlife Service staff who evaluated and responded to the initial request and to the appeal included senior executives, attorneys, field biologists, and other professional staff from a number of offices within headquarters, including the program offices, the Solicitor’s Office, the External Affairs Office, and the Director’s Office, as well as field offices in Vero Beach and Jacksonville, Florida, and the regional office in Atlanta. The administrative appeals panel for the correction request consisted of executives from Fish and Wildlife Service headquarters and its Northwest Regional Office and Interior’s U.S. Geological Survey. Although the service responded to the initial request 2 months after its receipt, it took more than 7-½ months (over 230 calendar days) to respond to the appeal. While the initial response was consistent with the Service’s 45-business day response time stated in the guidelines, the appeal took over 6 months more than the guideline’s 15- business day appeal time frame, according to our analysis. The nearly 300-day total response time was not unusual compared to other Fish and Wildlife Service processing times for IQA requests. On March 16, 2005, the Fish and Wildlife Service suspended the draft conservation strategy for the panther, corrected other key documents, posted notices on the regional and Vero Beach agency field office Web sites about these actions, and revised and published for public comment the panther section of the agency’s recovery plan. According to OMB staff and agency IQA officials, IQA correction requests have not adversely affected agency rulemaking procedures to date, partly because agencies handled most IQA requests related to rulemaking as public comments to proposed rules under the Administrative Procedure Act rather than as IQA requests. This approach, described in a number of agencies’ IQA guidelines, including EPA’s and the Department of Agriculture’s, was followed to avoid duplicating the rulemaking comment process and diverting resources away from the rulemaking process. It should be recognized that IQA correction requests could affect rulemaking outside of the formal rulemaking process. For example, IQA correction requests that are filed before an agency’s formal rulemaking process begins could affect when or if an agency initiates a rulemaking. We found 16 requests for corrections submitted during fiscal years 2003 and 2004 to be related to agency rulemaking. According to our analysis of IQA requests, annual IQA reports sent to OMB, and OMB’s own reports, and as later confirmed by OMB, five agencies reported having received 16 IQA requests related to rulemaking for the 2-year period. These five agencies were EPA, the Fish & Wildlife Service, the Department of Agriculture’s Forest Service, the Department of the Treasury’s Alcohol and Tobacco Tax and Trade Bureau, and DOT. These 16 requests—touching on a diverse range of issues, such as air safety, alcohol, chemicals, and the environment—accounted for almost 1 in 5 substantive requests for the 2 years. The Fish and Wildlife Service received the largest number of rulemaking-related IQA requests out of the 16 requests related to regulations or rules during fiscal years 2003 and 2004. Seven of the Service’s 11 requests were related to proposed rulemaking. These 7 requests represented 44 percent of all rulemaking-related IQA requests received by all agencies during the 2 years. The agencies treated 10 of the 16 requests that they received during the 2-year period as comments to proposed rules rather than processing them as IQA requests, and the agencies so informed the IQA petitioner. For example, the Alcohol and Tobacco Tax and Trade Bureau considered an IQA request regarding flavored malt beverages and related proposals as comments to a proposed rule. The bureau informed the IQA petitioner that it was handling the request as a public comment under the procedures of the Administrative Procedure Act, rather than as an IQA correction request. Agencies similarly processed the other nine requests related to regulations or rulemaking. As for the other six IQA requests related to rulemaking or regulations, agencies rejected two, are developing responses to two, and were—as of the end of March 2006—awaiting additional information or court decisions before responding to the remaining two. OMB’s governmentwide IQA guidelines provide agencies with flexibility to develop their own guidelines to suit their missions. Having executive branch agencies use the Internet to inform the public about the existence of their IQA guidelines, including the IQA correction mechanism, is a step toward improving the transparency of how agencies develop and disseminate information and address information errors, as well as how information users can seek correction of information. Given the current status of IQA at agencies, OMB has before it additional opportunities to build on its efforts in implementing IQA so far, a mission on which it embarked a few years ago. For example, it could draw from its experience of working with cabinet and many independent agencies to put additional agency-specific guidelines in place. Likewise, OMB could apply the knowledge from the lessons it and agencies have learned about posting accessible, user-oriented information on agency Web sites. By working with agencies and tapping into public input, OMB could enhance agencies’ and the public’s involvement in promoting high-quality agency information as well as increasing the public’s access to and confidence in that information, thereby helping to further the goal of disseminating quality information. To help ensure that all agencies covered by IQA fulfill their requirements, including implementing IQA guidelines and helping to promote easier public access to IQA information on agency Web sites, we recommend that the Director of OMB take the following three actions: work with DHS to help ensure it fulfills IQA requirements and set a deadline for doing so; identify other agencies that do not have IQA guidelines and work with them to develop and implement IQA requirements; and clarify guidance to agencies on improving the public’s access to online IQA information, including suggestions about clearer linkages to that information, where appropriate. In written comments on a draft of this report, the Acting Administrator of OMB's OIRA responded to our recommendations. Regarding our draft report's recommendation to OMB to work with DHS and other agencies not meeting IQA requirements, the Acting Administrator stated that OMB fully supports our recommendation that DHS develop IQA guidelines and that OMB would continue to work with DHS to that end. In our draft report, we had one recommendation for OMB to work with DHS and other agencies to develop IQA guidelines. Based on OIRA's comments, in our final report we made two separate recommendations regarding DHS and the other agencies developing IQA guidelines. Further, we believe that as OIRA continues to work with DHS—which has 22 component agencies—setting a deadline for DHS to implement IQA guidelines is important. As for the other agencies (many of which are small) without IQA guidelines, OIRA stated it would work with them as they develop and implement information quality measures. OIRA stated that in those efforts, it would consider the resources that would be needed and the potential benefits that would be achieved by having IQA guidelines in place. Regarding our recommendation about public access to online IQA information, OIRA noted it shares GAO's interest in improving public access and will continue to work with agencies to improve dissemination of IQA information. OIRA also provided separate technical corrections and suggestions to the draft of our report, which we have incorporated as appropriate. The written comments are reprinted in appendix IV. As agreed with your offices, unless you release its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time we will send copies to other interested congressional committees and the Acting Administrator of OIRA. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me on (202) 512-6806 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report were Robert Goldenkoff, Assistant Director; Ernie Hazera, Assistant Director; Andrea Levine; Keith Steck; and Margit Willems Whitaker. To assess the Office of Management and Budget’s (OMB) role in implementing the Information Quality Act (IQA), we reviewed OMB’s IQA documents, including memorandums sent to agencies, and interviewed Office of Information and Regulatory Affairs (OIRA) staff involved with IQA. In addition, we reviewed IQA documents—including guidelines, requests and appeals, agency decisions, and related documents—and interviewed IQA and other knowledgeable officials at the 17 federal agencies identified in table 5. While we reviewed IQA guidelines at all cabinet-level agencies, we conducted interviews at 5 independent agencies and 12 of the 15 federal cabinet agencies and at least one component of each, as shown in table 5. We selected these agencies to obtain a cross section of agencies that reflect the diverse range of government activities. We made our selection to cover a wide range of criteria, including the organization’s size (number of employees in fiscal year 2004); its mission (regulatory versus statistical, for example); and the nature of issues covered by the agency—such as the environment, health, and safety. We discussed with agency officials the development of their IQA guidelines, whether they had received requests for correction of information and how they addressed them, and what role OMB played in all of this. To further evaluate OMB’s role in the implementation of IQA, we reviewed OMB and agency IQA documents for all 15 cabinet agencies and the 5 independent agencies we contacted. These documents included online information, such as OMB memorandums and agency IQA guidelines, related IQA information, and OMB and agency IQA Web sites. Additionally, we reviewed the Web sites of 86 other independent agencies, including commissions, boards, and other entities, covered by the Paperwork Reduction Act to determine whether they had IQA guidelines online, but we did not survey them. Further, we reviewed the Federal Register for notices about these agencies’ IQA guidelines, as OMB required. We did not contact these 86 individual agencies or survey users of their Web sites, as this was beyond the scope of our review. Regarding the second objective of determining the number, type, and source of IQA requests, including who submitted them, for fiscal years 2003 and 2004, we contacted agency IQA officials and OMB staff and obtained relevant information from them. We also reviewed OIRA’s two reports to Congress to validate data collected through other sources. To the extent the information was available online, we reviewed IQA requests on agency Web sites. To supplement and verify the accuracy and completeness of this information, we interviewed agency and OMB IQA staff and officials. In addition, to categorize the sources of the requests by type of entity, such as business, trade group, or nonprofit advocacy organization, we relied on information from the sources and agency descriptions. We made our determination when information was contradictory or not available. Moreover, to determine the final status of IQA requests and any appeals, we reviewed related agency documents, including agency notification letters, and spoke with agency IQA officials about their status. We determined that OMB and agency data were sufficiently reliable for the purposes of this review. The results of our analysis differ from information in OMB’s two reports to Congress discussing IQA because of (1) differences between report information about IQA requests and information on agency Web sites and (2) minor report errors, including errors reported by agencies to OMB—such as IQA requests reported for calendar year 2003 instead of fiscal year 2003—that OMB repeated. In addition, we tracked the status of appeals to the end of March 2006 to provide current information, going beyond the end of fiscal year 2004, which is the date OMB used as the cutoff for appeal information in its December 2005 report. Regarding the third objective of examining whether the implementation of IQA has adversely affected agencies’ or overall operations in general and the rulemaking process in particular, we contacted agency IQA and other knowledgeable officials and OMB staff. We also attempted to determine the resources that OMB and agencies committed to implementing IQA by obtaining IQA cost and staff allocation data, but agency officials told us they do not track such information, although the Department of Labor had cost information on setting up a system on the status of IQA requests. In addition, we reviewed the annual IQA reports submitted to OMB by the cabinet-level agencies and the 5 independent agencies with guidelines where we conducted interviews. Moreover, to better understand specific aspects of IQA requests and how agencies addressed them, as well as to illustrate specific points, we reviewed in detail selected IQA requests at four agencies—the Environmental Protection Agency, the Department of Health and Human Services’ National Institutes of Health, the Department of Agriculture’s Forest Service, and the Department of the Interior’s Fish and Wildlife Service. Because OMB was still developing its IQA peer review policies at the time of our review, we did not discuss with agency officials their plans for carrying out these future requirements. In addition, although agencies have other mechanisms to correct information, we evaluated only the IQA information correction mechanism. We conducted our work in Washington, D.C., from March 2005 through July 2006 in accordance with generally accepted government auditing standards. and on Web site? Advisory Council on Historic Preservation AMTRAK (National Railroad Passenger Corporation) 10 Armed Forces Retirement Home 11 Broadcasting Board of Governors 13 Chemical Safety and Hazard Investigation Board 14 Christopher Columbus Fellowship Foundation 15 Commission Regarding Weapons of Mass Destruction 16 Commission on International Religious Freedom 17 Commission on Ocean Policy 18 Commodities Futures Trading Commission 19 Consumer Product Safety Commission 20 Corporation for National and Community Service 21 Court Services and Offender Supervision Agency 22 Defense Nuclear Facilities Safety Board 25 Equal Employment Opportunity Commission 26 Export-Import Bank of the United States Farm Credit System Insurance Corporation Federal Mediation and Conciliation Service Federal Mine Safety and Health Review Commission Federal Retirement Thrift Investment Board Federal Energy Regulatory Commission (Continued From Previous Page) and on Web site? Institute of Museum and Library Services 45 Merit Systems Protection Board 46 Migratory Bird Conservation Commission 49 National Aeronautics and Space Administration 50 National Archives and Records Administration 51 National Commission on Libraries and Information 52 National Capital Planning Commission 53 National Council on Disability 54 National Credit Union Administration 55 National Endowment for the Arts 56 National Endowment for the Humanities 57 National Indian Gaming Commission 58 National Labor Relations Board 61 National Transportation Safety Board 62 Northwest Power Planning Council 64 Nuclear Waste Technical Review Board 65 Occupational Safety and Health Review Commission 66 Office of Navajo and Hopi Indian Relocation 67 Office of Federal Housing Enterprise Oversight 68 Office of Government Ethics 69 Office of Personnel Management (Continued From Previous Page) and on Web site? W.K. Olsen and Associates, LLC Earth Island Institute, etc. (2) Sierra Club, etc. Center for Regulatory Effectiveness—same as Department of Health and Human Services filing Alliance for the Wild Rockies Competitive Enterprise Institute—same as Office of Science and Technology Policy filing Atlantic Salmon of Maine—same as Department of the Interior filing Associated Fisheries of Maine, Inc., etc. Center for Regulatory Effectiveness, et al. Public Employees for Environmental Responsibility Public Interest Group (identity not provided) National Wrestling Coaches Association, etc. Department of Health and Human Services Center for Regulatory Effectiveness, etc. (3)— one same as Department of Agriculture filing Animal Health Institute (2) SafeBlood Technologies, etc. Chemical Products Corporation (2) Styrene Information and Research Center, Inc. Salt Institute, etc. McNeil Consumer and Specialty Products National Legal and Policy Center American Chemistry Council (2) (Continued From Previous Page) Atlantic Salmon of Maine—same as Department of Commerce filing Chilton Ranch and Cattle Company Public Employees for Environmental Responsibility (2) National Association of Home Builders National Coalition for Asian Pacific American Community Development Diageo North America, Inc. Competitive Enterprise Institute (2) Association of Home Appliance Manufacturers McDowell Owings Engineering, Inc. Office of Science and Technology Policy (Executive Office of the President) Competitive Enterprise Institute—same as Department of Commerce filing Center for Regulatory Effectiveness, etc. (2) Friends of Massachusetts Military Reservation Morgan, Lewis & Bockius, LLP Geronimo Creek Observatory (4) Perchlorate Study Group (Continued From Previous Page) National Multi-Housing Council, etc. National Paint and Coatings Association, etc. National Association of Home Builders NPC Services, Inc.

The importance and widespread use of federal information makes its accuracy imperative. The Information Quality Act (IQA) required that the Office of Management and Budget (OMB) issue guidelines to ensure the quality of information disseminated by federal agencies by fiscal year 2003. GAO was asked to (1) assess OMB's role in helping agencies implement IQA; (2) identify the number, type, and source of IQA correction requests agencies received; and (3) examine if IQA has adversely affected agencies' overall operations and, in particular, rulemaking processes. In response, GAO interviewed OMB and agency officials and reviewed agency IQA guidelines, related documents, and Web sites. OMB issued governmentwide guidelines that were the basis for other agencies' own IQA guidelines and required agencies to post guidelines and other IQA information to their Web sites. It also reviewed draft guidelines and undertook other efforts. OMB officials said that OMB primarily concentrated on cabinet-level and regulatory agencies, and 14 of the 15 cabinet-level agencies have guidelines. The Department of Homeland Security (DHS) does not have department-level guidelines covering its 22 component agencies. Also, although the Environmental Protection Agency and 4 other independent agencies posted IQA guidelines and other information to their Web sites, 44 of 86 additional independent agencies that GAO examined have not posted their guidelines and may not have them in place. As a result, users of information from these agencies may not know whether agencies have guidelines or know how to request correction of agency information. OMB also has not clarified guidance to agencies about posting IQA-related information, including guidelines, to make that information more accessible. Of the 19 cabinet and independent agencies with guidelines, 4 had "information quality" links on their home pages, but others' IQA information online was difficult to locate. From fiscal years 2003 to 2004, three agencies shifted to using IQA to address substantive requests--those dealing with the underlying scientific, environmental, or other complex information--which declined from 42 to 38. In fiscal year 2003, the Federal Emergency Management Agency and two other agencies used IQA to address flood insurance rate maps, Web site addresses, photo captions, and other simple or administrative matters. But, in fiscal year 2004, these agencies changed their classification of these requests from being IQA requests and instead processed them using other correction mechanisms. As a result, the total number of all IQA requests dropped from over 24,000 in fiscal year 2003 to 62 in fiscal year 2004. Also, of the 80 substantive requests that agencies received during the 2-year period--over 50 percent of which came from businesses, trade groups, or other profit-oriented organizations--almost half (39) of the initial agency decisions of these 80 were appealed, with 8 appeals resulting in changes. The impact of IQA on agencies' operations could not be determined because neither agencies nor OMB have mechanisms to determine the costs or impacts of IQA on agency operations. However, GAO analysis of requests shows that agencies can take from a month to more than 2 years to resolve IQA requests on substantive matters. According to agency IQA officials, IQA duties were added into existing staff responsibilities and administering IQA requests has not been overly burdensome nor has it adversely affected agencies' operations, although there are no supporting data. But evidence suggests that certain program staff or units addressing IQA requests have seen their workloads increase without a related increase in resources. As for rulemaking, agencies addressed 16 correction requests related to rulemaking under the Administrative Procedure Act, not IQA.

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Both mutual fund companies and banks are financial intermediaries, that is, they raise funds from savers and channel these funds back to the economy by investing them. Banks generally use their deposits either to make loans or to invest in certain debt securities, principally government bonds. Mutual funds do not make loans, but they do invest in securities, primarily bonds and stocks. Money from these funds, in turn, flows either directly (through primary securities markets) or indirectly (through secondary securities markets) to the issuers of such securities. Long before the recent mutual fund boom, the relative importance of bank loans as a source of finance had been declining. As early as the 1960s, some large businesses had been replacing their usage of bank loans by issuing short-term securities called commercial paper. Subsequently, more companies found ways to tap the securities markets for their financial needs, lessening their dependence on bank loans. For example, corporations’ reliance on bank loans as a percentage of their credit market debt declined from 28 percent in 1970 to 20 percent in 1994. The household sector (generally residential and consumer borrowers) also has become less dependent on bank loans for the ultimate source of financing. Beginning in the mid-1970s, and to a much greater extent since the early 1980s, major portions of home mortgage portfolios have been sold by banks and thrifts to financial intermediaries who use them as collateral for marketable securities and then sell the securities to investors. More recently, significant amounts of consumers’ credit card debt and automobile loans have been similarly financed by securities instead of bank credit. Through securitization, banks and thrifts provide the initial financing for these mortgage, credit card, and automobile loans. However, once the loans are sold, it is the securities market that is the ultimate source of financing. More broadly, the term securitization describes a process through which securities issuance supplants bank credit as a source of finance, even if the borrower originally received funds from a bank. In addition, the relative importance of bank loans has been further diminished by the increased provision of direct loans by nonbank financial intermediaries, including securities firms, insurance companies, and finance companies. In this report, discussion of the “impact of mutual funds on deposits” or of the “movement of money from deposits to mutual funds” refers not merely to direct withdrawal of deposits by customers for the sake of investing in mutual fund shares but also to customers’ diversion into mutual funds of new receipts that otherwise might have been placed in deposits. To assess the impact of mutual funds on deposits, we examined and compared available data published by industry sources and the bank regulators. Data on deposits in banks are routinely reported to and published by the bank regulators. Data on mutual funds are gathered and published by an industry association, the Investment Company Institute (ICI). Moreover, the Federal Reserve maintains and publishes the Flow of Funds Accounts, which is an attempt to capture the entire framework of financial transactions in the economy, including all major groupings of participants and instruments. This publication includes the bank data and mutual funds data that we used (the Federal Reserve obtains the mutual fund data from ICI). In the Flow of Funds Accounts, the Federal Reserve presents statistics on (1) the amounts outstanding at the end of each quarter and each year and (2) the net flows during each quarter and each year. For bank deposit information, the change of the level from one period to the next is used to determine the net flows into or out of deposits during that period. The same method is used for money market mutual funds, where the funds’ managers intend to maintain the value of a share constant at one dollar on a daily basis. For longer-term mutual funds, however, the period-to-period change in the fund’s value generally does not equal the net flows during the period because the value fluctuates with (1) the flows of customer money, (2) the changing prices of the stocks and bonds held by the mutual funds, and (3) the reinvestment of dividends and interest in the fund. In the Flow of Funds Accounts, the net flows into mutual funds are calculated from industry data on changes in amounts outstanding and adjusted for movements of security-price averages. To assess the impact of mutual funds’ growth on the total supply of loanable and investable funds, we examined the Flow of Funds Accounts data on the sources of finance for the economy. In addition, we did a literature search for research articles examining (1) how residential, consumer, and business borrowers obtain financing, not only from bank loans or securities issuance but also from other sources and (2) how lenders, including banks as well as nonbank providers such as finance companies, funded the financing they provided and whether they sold or securitized their finance. We supplemented our search of the statistical sources with other material. We used research articles published by the Federal Reserve and documents published by securities industry sources over the last 5 years. In addition, we interviewed Federal Reserve experts on the previously mentioned topics. We also drew upon information gathered from banks and mutual fund specialists who were interviewed for an ongoing related GAO assignment. The Federal Reserve provided written comments on a draft of this report. These comments are discussed on page 15. We did our review in Washington, D.C., from March 1994 to November 1994 in accordance with generally accepted government auditing standards. The Federal Reserve and the Securities Industry Association (SIA) agreed that the flow of funds into mutual funds has had a significant impact on bank deposits. Although some observers dispute the magnitude of this impact, the evidence we reviewed supports the view that mutual funds have attracted sizable amounts of money that otherwise might have been placed in bank deposits. At year-end 1994, the amount of money in mutual funds ($2,172 billion) was considerably less than that in bank deposits ($3,462 billion). The mutual fund total, however, had risen by almost $1.2 trillion since year-end 1989, most of it from net new inflows, while the deposit total was $89 billion less than at year-end 1989. Despite these data, some observers maintain that deposits have not been a major source of the flow of money into mutual funds in recent years. For example, one study by a securities firm claims that “mutual fund inflows do not depend on outflows from the banking system,” arguing that “net new savings” are more important. ICI, a mutual funds industry association, stated that “CD proceeds play minor role as source for investment in stock and bond mutual funds,” and that “current income” and “the proceeds from other investments” were far more important. Nonetheless, most observers whose studies we reviewed agree that mutual funds have had a significant effect on bank deposits. Federal Reserve publications state that there has been a movement from deposits into mutual funds. The same view is propounded by SIA. Moreover, in a 1994 survey of 205 bank chief executives, nearly half said that their banks had started selling mutual funds in order to retain customers. We did not find any reliable quantification of the full impact of mutual funds on deposits, including both the direct withdrawals and customers’ diversion of new receipts that otherwise might have been placed in deposits. We assessed two quantitative approaches: (1) the total net flows into mutual funds and (2) ICI’s estimate of the impact on deposits. Because both approaches were incomplete, we examined a third alternative: the relationship between deposits and overall economic activity. This third approach also has limitations because there are a variety of factors that affect the relationship between deposits and gross domestic product (GDP). Nonetheless, it provided a more comprehensive look than the other approaches. Using the ratio of deposits to GDP as a benchmark, we estimated that—for the period 1990 through 1994—the total impact of mutual funds on deposits may have been sizable, but probably less than $700 billion. The total net flows into mutual funds from all sources during 1990 through 1994 were $1,067 billion. (See table 1.) The impact on deposits had to be less than this amount because the evidence indicated there were also flows into mutual funds from nondeposit sources. For example, some of the money placed in mutual funds by the household sector probably derived from the sales of stocks and bonds since, in 1991 and 1993, the household sector sold more individual securities than it bought. (See table 2.) Another possible source of flows into mutual funds was the frequent occurrence of sizable lump-sum distributions to individuals from retirement plans and job-termination arrangements. According to both the Federal Reserve and SIA, much of this money was placed in mutual funds by the recipients. SIA’s estimate of the impact of mutual funds on deposits was incomplete because it dealt only with the direct impact, i.e., the withdrawal of existing deposits for the sake of investing in mutual funds. Even this estimate of the direct impact was incomplete because it was primarily based on net withdrawals of banks’ time deposits, rather than total deposits. Using time deposits as a measure, SIA stated that the flow from deposits into mutual funds could have been about $200 billion in 1992 and 1993 combined. In fact, during this period declines in time deposits were largely offset by increases in demand deposits. Since there is no reporting of either the destinations of deposit withdrawals or of the origins of deposit placements, we cannot be certain whether time deposit withdrawals went into mutual funds or if part of them went into demand deposits. In any event, we found no estimates of the indirect effects, i.e., the diversion of new receipts into mutual funds rather than into deposits. Such a measure is more important in a growing economy because, even if deposits are growing, they may not be growing as fast as they would absent the diversion to mutual funds. We attempted to derive a reasonable estimate of the combined direct and indirect impact of mutual funds on deposits by examining the relationship of deposits to total economic activity, as measured by GDP. In figure 1, the solid line shows that the relationship of deposits to GDP remained fairly stable for most of the last 30 years. With only one exception, it stayed within a band of 63 percent to 73 percent every year from 1963 through 1990. Large flows into mutual funds in the 1980s (shown in figure 1 by the gap between the solid line and the dotted line) did not push the deposit-to-GDP ratio outside this band. However, in the early 1990s the deposit-to-GDP ratio moved significantly below the band, dropping to 51 percent in 1994. The ratio of mutual funds to GDP has been rising since the early 1980s, but only since the late 1980s has the rise in mutual funds-to-GDP ratio been roughly equal to the decline in the deposit-to-GDP ratio. This apparent substitution or movement of money into mutual funds rather than bank deposits has been, at least in part, the result of historically low interest rates paid on bank deposits compared to expected risk-adjusted returns on mutual fund investments. If the gap between deposit rates of return and expected mutual fund rates of return narrows, this movement of funds out of deposits could slow or even reverse itself. We calculated what the deposit volumes would have been had the deposit-to-GDP ratio stayed at the lower end of its previous band, i.e., 63 percent. Using this benchmark, total deposits would have grown $695 billion during 1990 through 1994. Because deposits actually declined by $89 billion, this indicates a potential impact of $784 billion. Comparing actual deposits with the low end of the previous band is conservative. A deposit-to-GDP ratio nearer the middle of the band would indicate a larger shortfall. Nonetheless, it must be stressed that the deposit-to-GDP ratio has been pushed down by a number of factors in addition to a movement of deposits into mutual funds. These factors include a dramatic downsizing of the savings-institution industry, a decline in loans at commercial banks, and a shift by banks into greater use of nondeposit funding sources. We were unable to determine exactly how much of the decline in the deposits-to-GDP ratio can be attributed to the impact of mutual funds. Nonetheless, on the basis of the above analysis, we concluded that a reasonable estimate of the impact was sizable but probably less than $700 billion. The movement of money from bank deposits to mutual funds should have little if any effect on the total supply of loanable and investable funds available to the economy, even though this movement may have shifted the intermediaries through which finance flows. Both types of intermediaries (banks and mutual fund companies) generally invest a substantial portion of the funds they receive. As noted earlier, the share of bank loans in total finance was being reduced by securitization of assets long before mutual funds surged to prominence as competitors for customers’ dollars. Mutual funds have further advanced this securitization process. Both mutual funds and banks generally invest a substantial portion of the funds they receive, with the mutual funds investing mainly in securities and the banks investing in loans and certain kinds of securities. Thus, at the same time that a sizable amount of customer money went from bank deposits to mutual funds, the funds’ purchases of securities became a greater source of new finance to the economy than bank lending. In 1992 and 1993, about two-fifths of the net new funds flowing to the domestic nonfinancial sectors of the economy came via mutual funds, while the share that flowed via banks was about one-fourth of the net new funds. By and large, it was not possible to determine who “receives” the mutual funds’ investments. Unlike bank lending, where the money goes directly from the lending bank to the borrower, mutual funds’ investments largely flow through the securities markets, since most of the funds’ purchases are of tradable securities. (A relatively small but interesting exception occurs with so-called “prime-rate” mutual funds, which purchase securitized bank loans.) As large amounts of customers’ money flowed into mutual funds in the early 1990s, the funds’ investments in securities added liquidity to the securities markets generally. This liquidity not only improved conditions for existing issuers desiring to raise additional money but also may have made it easier for a broader range of borrowers to tap the securities-issuance markets. Availability of finance for the three different borrower sectors—residential, consumer, and business—could be disproportionally affected by the movement of funds out of bank deposits and into mutual funds, even when the total supply of loanable and investable funds is not affected. Because mutual funds invest mainly in securities, it is possible that those who issue securities might increase their access to finance at the expense of those who do not. Unfortunately, there is no way to measure the extent to which this has occurred from the statistical information available. All three sectors obtain some of their financing through the securities markets, either through their own issues or via the intermediaries from which they obtain credit. Because significant amounts of finance flow through the latter intermediaries, we were unable to determine to what extent, or even whether, any of these sectors may face more difficulty in obtaining finance than they had previously experienced. However, we were able to determine that all three sectors increased their access to finance raised in the securities markets, although the degree varies by sector. In addition, we can describe the indirect channels through which securitization affects the availability of credit for these sectors, even though these indirect effects cannot be quantified. Residential finance has been extensively securitized. Although individual homeowners go to banks, thrifts, or mortgage companies for their mortgages, most residential mortgages are written in a way to facilitate their subsequent securitization. By the end of 1994, only 34 percent of the total value of home mortgages outstanding was directly held by commercial banks and thrifts, down from a two-thirds share in 1980 (see table 3). Nonetheless, banks and thrifts are now also providing indirect financing to homeowners: in addition to their (reduced) direct holdings of mortgages, they invest in mortgage-backed securities. Consumer credit is still largely provided by commercial banks. As of year-end 1994, 63 percent of consumer debt (nonmortgage) was held by depository institutions. Banks continue to actively originate consumer credit. Since the late 1980s, however, banks and other providers of consumer finance have securitized some of their automobile loans and credit card receivables, resulting in the securitized portion of consumer debt rising from zero in 1985 to 14 percent in 1994. (See table 4.) Moreover, consumers have another avenue of indirect access to the securities markets: borrowing from finance companies. These companies obtain two-thirds of their funds by issuing their own securities. We examined the supply of finance to the corporate sector for the years 1990 through 1994, when the greatest inflow into mutual funds occurred and when deposit growth was small or negative. During the first 4 years of this period, the amount of outstanding bank credit to nonfinancial corporations declined every year. (See table 5.) Not all corporations reduced their bank loans, of course, but the declines outweighed the increases. In 1994, for the first time during this period, there was an increase in outstanding bank credit to nonfinancial corporations. In the first year of this period, 1990, the corporate sector did not offset declining bank loans by increased issuance of securities. In fact, the sector redeemed more securities than it issued. Thereafter, however, corporations far surpassed previous records for raising new funds on the securities markets. Net issuance averaged $100 billion annually in 1991 through 1993, compared with a previous single-year record of $55 billion. In 1994 there was a sharp falloff of net securities issuance by the corporate sector along with renewed growth in bank loans. The flow of liquidity from mutual funds into the securities markets enhanced the capacity of the securities markets to absorb these new issues. From 1990 through 1994, mutual funds made net purchases of corporate securities averaging $104 billion annually. Mutual funds not only purchased the securities of large corporations. They also were major purchasers of shares of smaller companies issuing stock for the first time as well as major purchasers of bonds issued by companies whose debt was not highly rated (so-called junk bonds). For those business borrowers who are unable to issue securities, there are indirect ways in which funding from the securities markets can flow to them. For example, just as finance companies channel funds from the securities markets to consumers, it is common for finance companies to lend to middle-sized companies that otherwise would borrow from banks. Even in the “noncorporate, nonfarm business sector,” where the borrowers tend to be quite small, finance companies supply about a fifth of total market debt. As another example, some business financing is funded by certain mutual funds that invest primarily in business loans bought from the originating banks. There is a possibility that those small businesses that are primarily dependent on small banks for their loans could experience reduced credit availability if their banks lost deposits to mutual funds. This could happen if neither these businesses nor their banks could readily obtain financing from other credit suppliers or from the capital markets. Available evidence shows that small businesses are more dependent on bank loans than large businesses. Whereas bank loans comprise about one-eighth of the debt of the corporate sector as a whole, a 1989 survey cited by the Federal Reserve suggested that small businesses get almost half of their debt financing from banks. Nonetheless, by implication, the average small business gets about half of its debt financing from nonbank sources. Some small businesses raise money by issuing securities. According to the Federal Reserve, many of these firms probably benefitted from the more receptive conditions in the markets in recent years. However, small businesses with less than $100 million in annual sales generally would not be able to sell securities. Nonetheless, small businesses can be indirect beneficiaries of mutual funds’ investments, via the securities issued by finance companies that extend credit to small businesses. As another conduit, one securities firm has extended about $1 billion in credit lines to small businesses. Regarding the access of small businesses to bank loans, the movement of money out of deposits and into mutual funds does not necessarily mean that the availability of bank loans will be reduced. If the lenders are regional banks or larger, they may be losing some of their loan volume to securitization either because they are securitizing their own assets or because their corporate customers are turning to securities issuance. In this case, more of the remaining deposits of these banks should be available for lending to small businesses. Nonetheless, presumably there is some portion of small businesses that is solely or heavily dependent on small banks for their credit. These borrowers might be affected if their banks lose deposits to mutual funds. Because some small banks’ borrower base is concentrated in small business, their clientele is not likely to reduce loans by switching to securities issuance. Thus, a cutback of these banks’ funding sources would probably not be accompanied by a reduction of loan demand. Therefore, some small banks might have to respond to a loss of deposits by cutting back on loans outstanding. However, such cutbacks are only a hypothetical possibility. Recently, banks with $250 million or less in assets have had ample liquidity in the form of their holdings of bonds and other securities in their investment accounts. The ratio of securities to total assets averaged over 33 percent in 1993 and 1994 compared with an average of about 28 percent for much of the 1980s. If faced with a loss of deposits, a number of small banks presumably could fund existing and new loans by selling these securities. In sum, the channels of financing are quite varied; for the most part, a shift of customers’ money from deposits into mutual funds need not reduce credit availability for any group of borrowers. There remains the possibility that some borrowers from small banks might face credit availability constraints in certain circumstances, but it is not clear whether those circumstances currently exist. We received written comments on a draft of this report from the Federal Reserve. In its letter, the Federal Reserve stated that the report provides a timely review of the flow of funds between mutual funds and bank deposits and the effect of these flows on credit availability. The Federal Reserve said it had no further comment regarding the report or its content because the report made no recommendations to the Federal Reserve. We are sending copies of this report to the Chairman of the Board of Governors of the Federal Reserve System and other interested parties. We will also make copies available to others upon request. The major contributors to this report were John Treanor, Banking Specialist, Stephen Swaim, Assistant Director, and Robert Pollard, Economist. If you have any questions, please contact me at (202) 512-8678. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO examined whether the movement of funds from bank deposits into mutual funds affects the availability of credit for residential, consumer, or commercial purposes. GAO found that: (1) the amount of money in mutual funds grew from $994 billion at year-end 1989 to $2,172 billion at year-end 1994, mainly due to an increase of net customer inflows; (2) during the same period, bank deposits declined from $3.55 billion to $3.46 billion; (3) as much as $700 billion of the growth in mutual funds may have come at the expense of bank deposits between 1990 and 1994; (4) the movement of money into mutual funds has resulted partly from the relatively lower interest rates paid on bank deposits, but this should have little effect on the total supply of loanable and investable funds, since mutual funds also lend or invest a major portion of the funds they receive; (5) there was insufficient data on whether the different categories of borrowers were affected by the shift of money from bank deposits to mutual funds; (6) all categories of borrowers have recently increased their access to financing obtained through the securities markets; and (7) flows of deposits out of smaller banks could reduce the availability of finance for small businesses whose primary source of finance is loans from such banks.

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On June 12, 2002, Congress passed the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which requires specific activities related to bioterrorism preparedness and response. For example, it calls for steps to improve the nation’s preparedness for bioterrorism and other public health emergencies by increasing coordination and planning for such events; developing priority countermeasures; and improving state, local, and hospital preparedness and response. The Secretary of HHS is required to provide for the establishment of an integrated system or systems of public health alert communications and surveillance networks among (1) federal, state, and local public health officials; (2) public and private health-related laboratories, hospitals, and other health care facilities; and (3) any other entities that the Secretary determines are appropriate. These networks are to allow for secure and timely sharing and discussion of essential information concerning bioterrorism and other public health emergencies, as well as recommended methods for responding to such an attack or emergency. In addition, no later than 1 year after the enactment of the law, the Secretary, in cooperation with health care providers and state and local public health officials, was to establish any additional technical and reporting standards, including those for network interoperability. Since fiscal year 2002, HHS has funded over $2.7 billion for public health preparedness efforts through grants administered by CDC and just over $1 billion for hospital preparedness grants administered by the Health Resources and Services Administration. To encourage the integration of health care system response plans with public health department plans, HHS has incorporated both public health preparedness and hospital performance goals into the agreements that the department uses to fund state and local public health preparedness improvements. The funding guidance provided by HHS to state and local governments calls for improvements in seven key areas: preparedness planning and readiness assessment, surveillance and epidemiology capacity, laboratory capacity for handling biological agents, laboratory capacity for handling chemical agents, health alert network/communication and IT, risk communication and health information dissemination, and education and training. Over the past year, federal actions to encourage the use of IT for health care delivery and public health have been accelerated. In April 2004, the President established the goal that health records for most Americans should be electronic within 10 years and issued an executive order to “provide leadership for the development and nationwide implementation of an interoperable health information technology infrastructure to improve the quality and efficiency of health care.” As part of this effort, the President tasked the Secretary of HHS to appoint a National Coordinator for Health Information Technology—which he subsequently did 1 week later. The President’s executive order called for the Coordinator to develop a strategic plan to guide the implementation of interoperable health IT in the public and private health care sectors. In July 2004, HHS issued a framework for strategic action that includes four broad goals; goal four of that framework is directed at improvements in public health. Further, DHS released the National Response Plan this past January, under which HHS is to continue to lead the federal government in providing public health and medical services during major disasters and emergencies. In this role, HHS is to coordinate all federal resources related to public health and medical services that are made available to assist state, local, and tribal officials during a major disaster or emergency. As we reported in May 2003, IT can play an essential role in supporting federal, state, local, and tribal governments in public health preparedness and response. Development of IT can build upon the existing systems capabilities of state and local public health agencies, not only to provide routine public health functions, but also to support public health emergencies, including bioterrorism. In addition, according to the Institute of Medicine, the rapid development of new IT offers the potential for greatly improved surveillance capacity. Finally, for public health emergencies in particular, the ability to quickly exchange data between providers and public health agencies—or among providers—is crucial in detecting and responding to naturally occurring or intentional disease outbreaks. Because of the dynamic and unpredictable nature of public health emergencies, various types of IT systems may be used during the course of an event. These include surveillance systems, which facilitate the performance of ongoing collection, analysis, and interpretation of disease-related and environmental data so that responders and decision makers can plan, implement, and evaluate public health actions (these systems include devices to collect and identify biological agents from environmental samples, and they make use of IT to record and transmit data); and communications systems, which facilitate the secure and timely exchange of information to the relevant responders and decision makers so that appropriate action can be taken. Other types of IT may also be used, such as diagnostic systems, which identify particular pathogens and those that include data from food, water, and animal testing, but such systems are not among the major federal public health IT initiatives. Although state health departments have primary responsibility for disease surveillance in the United States, total responsibility for surveillance is shared among health care providers: more than 3,000 local county, city, and tribal health departments; 59 state and territorial health departments; more than 180,000 public and private laboratories; and public health officials from multiple federal agencies. In addition, the United States is a member of the World Health Organization, which is responsible for coordinating international disease surveillance and response actions. While health care providers are responsible for the medical diagnosis and treatment of their individual patients, they also have a responsibility to protect public health—a responsibility that includes helping to identify and prevent the spread of infectious diseases. Because health care providers are typically the first health officials to encounter cases of infectious diseases—and have the opportunity to diagnose them—these professionals play an important role in disease surveillance. Generally, state laws or regulations require health care providers to report confirmed or suspected cases of notifiable diseases to their state or local health department. States publish lists of the diseases they consider notifiable and therefore subject to reporting requirements. According to the Institute of Medicine, most states also require health care providers to report any unusual illnesses or deaths, especially those for which a cause cannot be readily established. However, according to CDC, despite state laws requiring the reporting of notifiable diseases, a significant proportion of these cases are not reported, which is a major challenge in public health surveillance. Health care providers rely on a variety of public and private laboratories to help them diagnose cases of notifiable diseases. In some cases, only laboratory results can definitively identify pathogens. Every state has at least one public health laboratory to support its infectious diseases surveillance activities and other public health programs. State laboratories conduct testing for routine surveillance or as part of clinical or epidemiologic studies. For rare or unusual pathogens, these laboratories provide diagnostic tests that are not always available in commercial laboratories. State public health laboratories also provide specialized testing for low-incidence but high-risk diseases such as tuberculosis and botulism. Results from state public health laboratories are used by epidemiologists to document trends and identify events that may indicate an emerging problem. Upon diagnosing a case involving a notifiable disease, local health care providers are required to send the reports to state health departments through state and local disease-reporting systems, which range from paper-based reporting to secure, Internet-based systems. States, through their state and local health departments, have principal responsibility for protecting the public’s health and therefore take the lead in conducting disease surveillance and supporting response efforts. Generally, local health departments are responsible for conducting initial investigations into reports of infectious diseases, employing epidemiologists, physicians, nurses, and other professionals. Local health departments are also responsible for sharing information that they obtain from providers or other sources with the state department of health. State health departments are responsible for collecting surveillance information statewide, coordinating investigations and response activities, and voluntarily sharing surveillance data with CDC and others. States vary in their requirements governing who should report notifiable diseases; in addition, the deadlines for reporting these diseases after they have been diagnosed vary by disease. State health officials conduct their own analyses of disease data to verify cases, monitor the incidence of diseases, and identify possible outbreaks. In reporting their notifiable disease data to CDC, states use multiple and sometimes duplicative systems. States are not legally required to report information on notifiable diseases to CDC, but CDC officials explained that the agency makes such reporting from the states a prerequisite for receiving certain types of CDC funding. Generally, the federal government’s role in disease surveillance is to collect and analyze national disease surveillance data and maintain disease surveillance systems. Federal agencies investigate the causes of infectious diseases and maintain their own laboratory facilities. They also use communications systems to share disease surveillance information. In addition, federal agencies provide funding and technical expertise to support disease surveillance at the state, local, and international levels. Federal agencies such as CDC, the Food and Drug Administration, and DOD conduct disease surveillance using systems that gather data from various locations throughout the country to monitor the incidence of infectious diseases. In addition to using surveillance systems to collect and analyze notifiable disease data reported by states, federal agencies use other surveillance systems to collect data on different diseases or from other sources (e.g., international sources). These systems supplement the state data on notifiable diseases by monitoring surveillance information that states do not collect. In general, surveillance systems are distinguished from one another by the types of infectious diseases or syndromes they monitor and the sources from which they collect data. Some disease surveillance systems rely on groups of selected health care providers who have agreed to routinely supply information from clinical settings on targeted diseases. A relatively new type of surveillance system, known as a syndromic surveillance system, monitors the frequency and distribution of health-related symptoms—or syndromes—among people within a specific geographic area. These syndromic surveillance systems are designed to detect anomalous increases in certain syndromes, such as skin rashes, that may indicate the beginning of an infectious disease outbreak. Some monitor data from hospital and emergency room admissions or data from over-the- counter drug sales. Other data sources may include poison control centers, health plan medical records, first-aid stations, emergency medical service data, insurer claims, and discharge diagnosis information. For syndromic data to be analyzed effectively, information must be timely, and the analysis must take into account the context of the locality from which the data were generated. Because syndromic surveillance systems monitor symptoms and other signs of disease outbreaks instead of waiting for clinically confirmed reports or diagnoses of a disease, some experts believe that syndromic surveillance systems could help public health officials increase the speed with which they may identify outbreaks. However, as we reported last September, syndromic surveillance systems are relatively costly to maintain compared with other types of disease surveillance and are still largely untested. Two federal agencies are involved in major public health IT initiatives that focus on disease surveillance and communications. CDC, one of HHS’s divisions, has primary responsibility for conducting national disease surveillance and developing epidemiological and laboratory tools to enhance surveillance of disease, including public health emergencies. It also provides an array of technical and financial support for state infectious disease surveillance. DHS’s mission involves, among other things, protecting the United States against terrorist attacks, including bioterrorism. Its Science and Technology (S&T) Directorate serves as the department’s primary research and development arm. Its focus is on catastrophic terrorism— threats to the security of the United States that could result in large- scale loss of life and major economic impact. S&T’s work is designed to counter those threats, both by improvements to current technological capabilities and development of new ones. (Other federal agencies’ roles in public health are described in app. II.) CDC’s major IT initiative, known as PHIN, is a national initiative to implement a multiorganizational business and technical architecture for public health information systems. After the 2001 anthrax incidents, CDC was mandated to increase national preparedness and capabilities to respond to naturally occurring diseases and conditions and the deliberate use of all threats, including biological, chemical, and radiological agents. CDC sees PHIN as an essential part of its strategy to achieve this mandate. According to CDC, the PHIN architecture defines and documents the systems needed to support public health identifies the industry standards that are necessary to make these develops the specifications necessary to make these standards do the work of public health; defines integration points for systems to work together to meet the establishes tools and components that support standards-based supports the certification process necessary to establish interoperability. To help achieve its goals, PHIN is also intended to integrate and coordinate existing systems, and CDC makes PHIN software available for optional use by state and local public health agencies. PHIN has substantial size and scope, because it is intended to serve as a comprehensive architecture, information exchange network, and set of services that will integrate existing capabilities and advance the ways in which IT can support public health. It is intended to improve public health systems and networks and to provide a means for exchanging data with other federal agencies, state and local government agencies, the private health care sector, and others. As part of PHIN, CDC has established the PHIN Preparedness initiative, which it describes as striving to accelerate the pace at which jurisdictions acquire or acquire access to public health preparedness systems. This initiative focuses on the near-term aspects of PHIN. According to CDC, the agency and its public health partners have identified a set of functional requirements defining the core capabilities for preparedness systems; these are categorized into six broad functional areas: Early event detection: The early identification of bioterrorism and naturally occurring health events in communities. Outbreak management: The capture and management of information associated with the investigation and containment of a disease outbreak or public health emergency. Connection of laboratory systems: The development and adoption of common specifications and processes to enable public health laboratories to electronically exchange information with public health agencies. Countermeasure and response administration: The management and tracking of measures taken to contain an outbreak or event and to provide protection against a possible outbreak or event. Partner communications and alerting: The development of a nationwide network of integrated communications systems capable of rapid distribution of health alerts and secure communications among public health professionals involved in an outbreak or event. Cross-functional components: Technical capabilities, or components, common across functional areas that are necessary to fully support PHIN Preparedness requirements. CDC officials stated that by September 2005, the agency will expect states to meet PHIN Preparedness requirements in these areas as a condition for receiving public health preparedness funding; CDC expects that this condition on funding will promote a wider adoption of PHIN standards. Table 1 presents communications and surveillance applications that are part of the PHIN initiative (some of which are significant system development efforts in themselves), along with the PHIN Preparedness functional areas that they support. Many of these applications are associated with larger initiatives that predated PHIN (see table 2), which are now incorporated under the PHIN umbrella. For example, the origins of NEDSS date to 1995, when CDC co- authored a report that documented the problems of fragmentation and incompatibility in the nation’s disease surveillance systems. The recommendations in this report led CDC to develop the NEDSS initiative, which was begun in October 1999 and incorporated into PHIN in 2002. As part of its mission to protect the nation against terrorist attacks (including possible bioterrorism), DHS is also pursuing major public health IT initiatives. These initiatives and associated programs, which are primarily focused on signal interpretation and biosurveillance, are described in table 3. Figure 1 illustrates a simplified flow of existing surveillance information and health alerts among local, state, and federal agencies. This diagram does not show all flows of information that would occur in the case of an outbreak. For example, local health agencies may send alerts to health care providers. According to CDC, costs for its PHIN initiatives and applications for fiscal years 2002 through 2005, totaling almost $362 million, are summarized in table 4. Most of these costs support local, state, and federal public health activities. According to DHS, IT costs for its biosurveillance initiatives for fiscal years 2003 through 2005 total about $45 million; these are summarized in table 5. This table does not reflect the total costs for the programs supporting these IT initiatives. CDC and DHS have made progress on federal public health IT initiatives, including CDC’s PHIN initiative, which is intended to provide the nation with integrated public health information systems to counter national civilian public health threats, and two major initiatives at DHS—primarily focused on signal interpretation and biosurveillance—one of which is associated with three other programs. However, while progress has been made, more work remains, particularly in surveillance and data exchange. PHIN communications systems are being used, and improvements to surveillance systems (disease, syndromic, and environmental monitoring) are still being developed. Other PHIN applications are available for optional use by state and local public health officials, but they are not widely used because of system limitations. DHS’s two major biosurveillance IT initiatives are still in the development stage, and one of the associated programs—BioWatch—is operational. However, as initially deployed, BioWatch required modification, because its three IT components did not communicate with each other, requiring redundant data entry. According to DHS, it has developed a solution to this interoperability problem and implemented it at two locations; DHS plans to install that solution in the remaining BioWatch locations. Table 6 briefly describes the status of CDC’s PHIN applications, including operational status, number of installations or users, and future plans. Of the various PHIN applications, one is still in the planning process, two are partially operational, and five are operational. Figure 2 shows the time frames for the planning, development, and implementation of the PHIN applications; these applications vary considerably both in complexity and in time needed to complete implementation. Health Alerting. The Health Alerting application, which is used to broadcast e-mail alerts to state and local public health officials about disease outbreaks, became operational in October 2000. This application provides full-time (24 hours a day, 7 days a week) Internet access and broadcast e-mail and fax capabilities. The Health Alerting application is part of the Health Alert Network initiative, which provides grant funding to states and local public health agencies for enhancement of their IT infrastructures. Using these funds, states and localities have either built their own Health Alert Networks or acquired commercial systems for alerting state and local officials. Some state Health Alert Networks use more sophisticated applications than the CDC Health Alerting application, providing various kinds of alerts based on user profiles and allowing document sharing. Epi-X. Epi-X, which is designed to be a secure, Web-based communications system through which public health professionals share information on public health emergencies, was implemented in December 2000 and is being used by state and local public health officials. Epi-X includes multiple mechanisms for alerting; secure, moderated communications and discussion about disease outbreaks and other acute health events as they evolve; and a searchable report database. Most of the state and local health officials with whom we spoke were satisfied with the system. However, some officials questioned the need for both Health Alerting and Epi-X, since both applications have similar functionality and are used by some of the same public health officials. According to CDC, it is planning to create a common platform for use by both applications. The National Electronic Disease Surveillance System (NEDSS). The NEDSS initiative promotes the use of data and information systems standards for the development of interoperable surveillance systems at federal, state, and local levels. It is intended to minimize the problems of fragmented, disease-specific surveillance systems; however, this goal is still years away from being achieved. A primary goal of NEDSS is the ongoing, automatic capture and analysis of data that are already available electronically. Its system architecture is designed to integrate and replace several current CDC surveillance systems, including the National Electronic Telecommunications System for Surveillance, the HIV/AIDS reporting system, and the systems for vaccine preventable diseases, tuberculosis, and other infectious diseases. In previous fiscal years, CDC funded 50 states and 7 localities. These states and localities can use CDC’s NEDSS Base System or build systems compatible with NEDSS/PHIN standards. The initiative includes an architecture to guide states and CDC as they build NEDSS-compatible systems, which can be either commercial or custom developed. The initiative is also intended to promote the use of data standards to advance the development of interoperable disease surveillance systems at federal, state, and local levels. Besides providing a secure, accurate, and efficient way to collect, process, and transmit data to CDC, the NEDSS Base System is intended to provide a platform upon which program area modules can be built to meet state and program area data needs. (Programs may be focused on specific diseases, populations, or other areas—such as smoking or obesity.) Program area modules are critical to eventually reducing the many program-specific surveillance systems that CDC currently maintains by consolidating the data collection of the various programmatic disease surveillance activities that are currently in place. Although CDC has been developing the NEDSS Base System since 2000, it is still only partially deployed. There are no clear milestones and plans for when the Base System will become fully deployed, although multiple versions of the Base System have been developed and deployed in several states. According to CDC, the NEDSS Base System has been deployed in 5 states since December 2004, and it expects implementation to continue with the 11 remaining states that are planning to use the Base System, but the implementation time frames will depend on when these states are ready to accept the system. Table 7 summarizes the status of NEDSS system implementation across the nation, which shows that about half of the states and localities have operational NEDSS systems. In addition, four NEDSS program area modules are being used, and six are in the process of being developed. Additional program area modules will be developed for other disease-specific areas in the coming years. BioSense. CDC’s BioSense, which the agency describes as an early event detection system, is designed to provide near real-time event detection by using data (without patient names or medical numbers) from existing health-related databases. Although CDC began using BioSense data in late 2003, the BioSense application was implemented for state and local use in May 2004. BioSense is continuously being updated, and current plans for phase two of BioSense development call for enhancements to begin in May 2005. BioSense is a Web-based application that currently provides CDC and state and local users with the ability to view syndromic and prediagnostic data: specifically, Defense and Veterans Affairs ambulatory care data, BioWatch laboratory results, and national clinical labs data. Initially, CDC also provided data on sales of over-the-counter medication, but these were later discontinued. BioSense data are provided in the form of data reports displayed in various ways, rather than as raw data that can be input to analytical systems. Although CDC uses BioSense for a number of federal bioterrorism preparedness activities, BioSense is not extensively used by the state and local public health officials with whom we spoke, primarily because of limitations in the data and its presentation. These officials stated that the DOD and VA data were not useful to them, either because they were in locations without large military or veteran populations, or because they could get similar data elsewhere. For instance, many of these officials have access to local syndromic surveillance systems, which better fit their needs because the systems have better capabilities or because they provide data that are more timely than BioSense data. Some of these officials stated that they would prefer CDC to provide data for them to conduct their own analyses, especially data from national sources such as clinical laboratories, rather than displaying the data on the BioSense Web site. According to CDC officials, they will provide raw data to public health agencies upon request, have increased the number of data sets available, and have expanded the scope of user support by (1) increasing communications with state and local public health departments in the use of and response to daily surveillance data patterns, (2) monitoring data during special events (e.g., a presidential inauguration and sporting events) at state and local request, and (3) contracting with John Hopkins University for development of a standard operating procedure for monitoring and using early event detection. National Environmental Public Health Tracking Network (NEPHTN). Initiated in 2001, NEPHTN is still in the planning stage. CDC is planning to begin development of the network in 2006 and implementation of phase one in 2008. This initiative involves intra- and interagency collaboration among CDC and other federal agencies. CDC established a memorandum of understanding in 2003 with the Environmental Protection Agency (EPA) to coordinate activities relating to EPA’s National Environmental Information Exchange Network and CDC’s National Environmental Public Health Tracking Network. To date, three collaborative projects have been initiated: (1) a demonstration project in the Atlanta metropolitan area to test data linkage methods and utility of linked data; (2) a project to evaluate how different types of air quality characterization data can be used to link environmental and public health data; and (3) a project in New York to examine specific technical interoperability issues that would affect data exchange between EPA’s and CDC’s networks. As envisioned, NEPHTN will be a distributed, secure, Web-based network that will provide access to environmental and health data that are collected by a wide variety of agencies, such as individual state networks. Once established, it should also provide access to environmental, health, and linked environmental-health data from both centralized and decentralized data stores and repositories, implementing a common data vocabulary to support electronic data exchanges within states, and across state, regions, and nationally. Outbreak Management System. The Outbreak Management System is an application designed for case tracking during the investigation of disease outbreaks. Initially developed for use by CDC, the system is now available for use by state and local public health agencies. The project began as the Bioterrorism Field Response Application and was scoped to include only requirements related to bioterrorism response by CDC-deployed field teams. Since its inception in 2002, the scope has been broadened to include any epidemiologic investigation where standard data collection and data sharing would be advantageous. However, although the system is in use at CDC, none of the state and local public health officials with whom we spoke use the system—either because it cannot exchange data with other software applications, or because these agencies have their own capability for tracing cases of infectious diseases. According to CDC officials, the use of the Outbreak Management System is provided as an option for state and local public health agencies. Although only CDC and one state agency have used the application in support of outbreaks, four state agencies and one federal entity have evaluated the software for potential use and may implement it in the future. LRN Results Messenger. CDC’s LRN Results Messenger utility is used by DHS’s BioWatch initiative for transmitting data to CDC; however, it is burdensome to use, according to the BioWatch cities included in our review (BioWatch is discussed in more detail in the next section of this report). According to CDC, it anticipates releasing the next version of the LRN Results Messenger in September 2005, which should address the usability issues. PHIN Messaging System. The PHIN Messaging System is available for use, but only CDC and a few states and local public health agencies use it. As of March 1, 2005, 51 organizations used it, according to CDC. As yet, only BioWatch, the NEDSS Base System, and the Laboratory Response Network use PHIN Messaging; according to CDC, these are the major systems that support preparedness needs, and it is focusing on these systems first. DHS is also pursuing two major biosurveillance IT initiatives—the National Biosurveillance Integration System and the Biological Warning and Incident Characterization System (BWICS). The BWICS initiative, in addition, is associated with three other biosurveillance programs. Of these five, one is operational, but it has interoperability and other limitations, one is a demonstration project, and three are in development. All five were initially under the oversight of DHS’s S&T Directorate; one is now the responsibility of the directorate for Information Analysis and Infrastructure Protection. Table 8 briefly describes the status and plans of DHS’s biosurveillance IT initiatives for the current fiscal year. Most of DHS’s biosurveillance IT initiatives are still being planned or developed. Figure 3 shows time lines for the five DHS IT initiatives. The one DHS surveillance initiative that is operational—BioWatch—is an environmental monitoring system that was developed and implemented within a 3-month period, according to DHS officials. DHS originally intended for local public health agencies to process and analyze all BioWatch data; however, at CDC’s request, DHS agreed to share data with CDC for inclusion in BioSense. BioWatch consists of three IT components: One component of BioWatch tracks the environmental samples as they are collected; it was developed by the Department of Energy’s Los Alamos National Laboratory. A second component performs sample testing and reports the results; this is a commercial product. The third component, CDC’s LRN Results Messenger, transmits the test results from the laboratory that processes the samples to CDC for analysis. As deployed, none of these three components could exchange data electronically, so that redundant, manual data entry has been required to transfer data among the three systems. State and local public health officials in BioWatch locations told us that they were dissatisfied with the deployment of BioWatch because of this need for repetitive data entry and because they were not involved in the system’s planning and implementation. DHS hired a contractor to resolve BioWatch’s interoperability problem, and DHS officials now report that they have begun implementing the resulting technical improvements in BioWatch laboratories. Additionally, EPA’s Inspector General’s Office recently reported that the agency did not provide adequate oversight of sampling operations for BioWatch to ensure that quality assurance guidance was adhered to, potentially affecting the quality of the samples taken; DHS officials state that this oversight issue has now been resolved. In the broader context of environmental monitoring, questions exist about detection capabilities for environmental surveillance. As we reported in May 2003, real-time detection and measurement of biological agents in the environment is challenging because of the number of potential agents to be identified, the complex nature of the agents themselves, the countless number of similar micro-organisms that are a constant presence in the environment, and the minute quantities of pathogen that can initiate infection. In May 2004, the Department of Defense reported that the capability for real-time detection of biological agents is currently unavailable and is unlikely to be achieved in the near to medium term. A second initiative, the BioWatch Signal Interpretation and Integration Program (BWSIIP), was established to respond to user needs regarding BioWatch. According to DHS, the initiative is intended to develop a system that will help BioWatch jurisdictions to better understand the public health or national security implications of a confirmed positive result for a biological agent from BioWatch, as well as to respond appropriately. BWSIIP is to be implemented by a consortium, initiated in 2004, that includes Carnegie Mellon University, the University of Pittsburgh, and the John Hopkins University Applied Physics Laboratory. The current BWSIIP pilot is scheduled for completion in fiscal year 2006. After DHS transitions BWSIIP to the BWICS initiative, local public health agencies will use locally available applications or tools provided by DHS for that function. For the two remaining major biosurveillance IT initiatives, DHS is still developing requirements (lessons learned from its one demonstration project, BioNet, are being incorporated into BWICS). BWICS, is to integrate data from environmental monitoring and health surveillance systems, and the pilot is expected to be completed in fiscal year 2006, according to DHS officials. DHS did not complete requirements development in the two pilot cities as scheduled, and it recently changed one of the original pilot cities, requiring a new start in requirements development in the new location. After the pilot, DHS is planning to expand BWICS beyond the two pilot cities to other BioWatch locations. The National Biosurveillance Integration System is intended to connect the various federal surveillance systems to DHS’s Homeland Security Operations Center. DHS S&T developed the system requirements and design and transferred the initiative to the Directorate for Information Analysis and Infrastructure Protection in December 2004 for implementation. Despite federal, state, and local government efforts to strengthen the public health infrastructure and improve the nation’s ability to detect, prevent, and respond to public health emergencies, important challenges continue to constrain progress. First, the national health care IT strategy and federal health architecture are still being developed; CDC and DHS will face challenges in integrating their public health IT initiatives into these ongoing efforts. Second, although federal efforts continue to promote the adoption of data standards, developing such standards and then implementing them are challenges for the health care community. Third, these initiatives involve the need to coordinate among federal, state, and local public health agencies, but establishing effective coordination among the large number of disparate agencies is a major undertaking. Finally, CDC and DHS face challenges in addressing specific weaknesses in IT planning and management that may hinder progress in developing and deploying public health IT initiatives. In May 2003, we recommended that the Secretary of HHS, in coordination with other key stakeholders, establish a national IT strategy for public health preparedness and response that should identify steps toward improving the nation’s ability to use IT in support of the public health infrastructure. Among other things, we stated that HHS should set priorities for information systems, supporting technologies, and other IT initiatives. Since then, HHS appointed a National Coordinator for Health IT in May 2004 and issued a framework for strategic action in July 2004. This framework is a first step in the development of a national health IT strategy. Goal four of the framework is directed at improvements in public health and states that these improvements require the collection of timely, accurate, and detailed clinical information to allow for the evaluation of health care delivery and the reporting of critical findings to public health officials. Two of the strategies outlined by HHS are aimed at achieving this goal: (1) unifying public health surveillance architectures to allow for the exchange of information among health care organizations, organizations they contract with, and state and federal agencies and (2) streamlining quality and health status monitoring to allow for a more complete look at quality and other issues in real time and at the point of care. The framework for strategic action states that the key challenge in harmonizing surveillance architectures is to identify solutions that meet the reporting needs of each surveillance function, yet work in a single integrated, cost- effective architecture. Like the national health care IT strategy, the federal health architecture is still evolving, according to HHS officials in the Office of the National Coordinator for Health IT. Initially targeting standards for enabling interoperability, the federal health architecture is intended to provide a structure for bringing HHS’s divisions and other federal agencies together. As part of achieving HHS’s public health goal of unifying public health surveillance architectures, the federal health architecture program established a work group on public health surveillance that is responsible for recommending a target architecture related to disease surveillance to serve as the framework within the federal sector for developing and implementing public health surveillance systems. The newly formed work group, chaired by CDC and the Department of Veterans Affairs, met for the first time in December 2004. Because the new work group is so recently formed, plans are still being developed to address how CDC’s PHIN initiative and DHS’s IT initiatives will integrate with the national health IT strategy, such as plans to establish regional health information organizations. In the absence of a completed strategy for public health surveillance efforts, state and local public health officials have raised concerns about duplication of effort across federal agencies. Some of the surveillance initiatives in our review address similar functionality and may duplicate ongoing efforts at other federal, state, and local agencies: for example, the use and development of syndromic surveillance systems. CDC is implementing BioSense at the national level, DHS is assisting local public health agencies in implementing local syndromic surveillance systems such as ESSENCE or RODS as part of its biosurveillance initiatives, and many state and local public health agencies have their own ongoing syndromic surveillance systems. As we have reported, syndromic surveillance systems are relatively costly to maintain compared with other types of disease surveillance and are still largely untested. According to HHS, with regard to BioSense, the agency is taking steps to mitigate costs and risk. State and local public health officials also expressed concern about the federal government’s ability to conduct syndromic surveillance, because they see this type of surveillance as an inherently local function. Furthermore, last year the Council of State and Territorial Epidemiologists reported that while state health departments are given some guidance and leeway to use federal funding to enhance and develop their own disease surveillance activities, no focused mechanism has been established for states to share ideas and experiences with each other and with CDC to determine what has or has not worked, and what efforts are feasible and worth expanding. The Council recommended that to enhance bioterrorism-related surveillance objectives, HHS and CDC form a bioterrorism surveillance initiative steering committee to review current federal surveillance initiatives affecting state and local health departments; to review state-developed surveillance systems; and to recommend surveillance priorities for continuation of funding, further development, or implementation. HHS and CDC have taken steps to respond to these recommendations, but according to the Council, it is not yet satisfied that HHS and CDC have fully addressed its concerns. While HHS and other key federal agencies are organizing themselves to develop a strategy for public health surveillance and interoperability, decisions regarding development and implementation are being made now without the benefit of an accepted national health IT strategy that integrates public health surveillance-related initiatives. In the case of BioSense, these decisions affect the spending of about $50 million this fiscal year and an unknown amount in future years. Until a strategy and accompanying architecture are developed, major public health IT initiatives will continue to be developed without an overall, coordinated plan and are at risk of being duplicative, lacking interoperability, and exceeding cost and schedule estimates. In May 2003, we recommended that the Secretary of HHS, as part of his efforts to develop a national strategy, (1) define activities for ensuring that the various standards-setting organizations coordinate their work and reach further consensus on the definition and use of standards, (2) establish milestones for defining and implementing all standards, and (3) create a mechanism to monitor the implementation of standards throughout the health care industry. To support the compatibility, interoperability, and security of federal agencies’ many planned and operational IT systems, the identification and implementation of data, communications, and security standards for health care delivery and public health are essential. As we testified in July 2004, HHS has made progress in identifying standards. While federal action to promote the adoption of these standards continues, the identification and implementation of these standards are an ongoing process. Despite progress in defining health care IT standards, several implementation challenges remain to be worked out, including the establishment of milestones. Currently, no formal mechanisms are in place to ensure coordination and consensus among these initiatives at the national level. HHS officials agree that leadership and direction are still needed to coordinate the various standards-setting initiatives and to ensure consistent implementation of standards for health care delivery and public health. Within the federal health architecture structure, the Consolidated Health Informatics initiative is focused on the adoption of data and communication standards to be used by federal agencies to achieve interoperability of IT within health IT initiatives. In March 2003, the Consolidated Health Informatics initiative announced the adoption of 5 standards, and in May 2004, it announced the adoption of another 15 standards. Some of these standards are included as PHIN standards. As of March 1, 2005, CDC has adopted several industry standards and published specifications for PHIN; these standards are grouped by type in table 9. CDC has also initiated a PHIN certification process for its partners (e.g., state and local public health agencies), which is intended to establish whether state and local systems can meet standards for the PHIN preparedness functional areas. In the future, CDC plans to require system owners to first perform self-assessment reviews to ensure that systems meet PHIN standards, followed by reviews by CDC certification teams to confirm PHIN compatibility. To be functionally compatible, systems must be capable of supporting the standards outlined for each PHIN functional area; accordingly, partners must demonstrate that their systems have this capability. In general, state and local public health officials consider the PHIN initiative to be a good framework for organizing the necessary standards for public health interoperability. Most of the state and local officials we spoke with agreed that CDC has done a commendable job of adopting and promoting standards for IT in selected programs. In addition, they agreed that CDC should continue to take a leadership role in pressing for industry standards and providing guidance to states and local entities. However, several officials stated that CDC should focus more of its attention on setting standards and less on developing software applications, which generally do not meet their needs and are not compatible with their specific IT environments. CDC officials say that it is important both to promote the use of industry standards and to develop software applications, especially for state and local public health agencies that have limited IT resources. Although federal efforts to promote the adoption of these standards continue, their identification and implementation are an ongoing process. Several implementation challenges remain, including coordination of the various efforts to ensure consensus on standards and establishment of milestones. Until these challenges are addressed, federal agencies will not be able to ensure that their systems can exchange data with other systems when needed. In defining system requirements, federal agencies are challenged by the need to involve such key stakeholders as state and local public health agencies, which are expected to use these systems for reporting data to the federal government. For example, most participating local government agencies and state public health laboratories were told to implement the BioWatch initiative in their metropolitan areas and were given the procedures and software to use for sample management and data collection. According to some public health officials, BioWatch was implemented without a plan for how states and localities would respond to a positive test result, and they were left to develop a response plan after BioWatch had been deployed. One metropolitan area did not implement BioWatch for a year after it became operational, because officials did not have a response plan in place and did not want to be responsible for responding to a potential incident without a plan for handling positive test results. According to DHS officials, since local officials had received funds for emergency preparedness, it was their understanding that BioWatch locations had response plans in place; DHS officials have since developed a methodology to target funds for specific purposes, such as response plans. CDC has been challenged by the need to coordinate with a diverse range of state and local public health agencies. For example, CDC has found that it is difficult to implement “standard” systems that would address the full range of different needs and levels of IT resources available at the state level. HHS officials told us that the agency strives to address this challenge by developing applications that are based on industry standards. It also provides the standards and specifications to state and local agencies so that they can build or purchase their own systems that can conform to PHIN standards. Nonetheless, there was consensus among many of the state and local officials in our review that federal agencies did not obtain adequate input from state and local officials. A few state officials with whom we spoke said that CDC does not appropriately consider their need to comply with existing state IT architectures. In addition, in an informal e-mail survey, a small group of state chief information officers agreed that federal agencies do not take into consideration state IT architectures. According to the Council of State and Territorial Epidemiologists, no mechanism has yet been established for state and federal partners to collaboratively review initiatives developed over the past 3 years and plan for the future. Instead, the approach to system design and implementation remains top-down, mainly focused on expanding federally designed syndromic surveillance for early outbreak detection without critical review of its usefulness and cost and without systematic review of state-originated systems and needs. The result is that public health responders may not buy in to and use the federally designed systems, potentially constructive state- originated ideas may not get recognition and wider application, and national bioterrorism-related surveillance will be suboptimal. According to CDC, as part of its efforts to obtain state and local input, it hosts an annual PHIN conference and holds meetings with business partner organizations, such as a recent series of meetings on PHIN preparedness requirements with selected state and local officials. In addition, under CDC’s new organizational structure, the new National Center for Public Health Informatics has a division for communications and collaboration with its partners. Further, CDC and DHS have coordinated with each other on specific projects, but that coordination has not been optimal, according to officials from both agencies. According to DHS officials, federal agencies are planning to meet within the next few months to discuss this issue. When asked about their experiences with coordination between CDC and DHS on public health IT initiatives, some of the state and local public health officials included in our review expressed concerns about coordination between the two agencies; one expressed confusion about their roles. Until CDC and DHS establish close coordination on federal public health IT, and state and local public health agencies are more actively involved in the definition and coordination of federal efforts, the effectiveness of the information systems intended to improve disease surveillance and communications may be inadequate. A challenge that both HHS and DHS face in implementing public health IT initiatives is ensuring their effective planning and management. This requires mature, repeatable systems development and acquisition processes to increase the likelihood that projects will be delivered on time and within budget. Key elements of information and technology management include (1) IT investment management and (2) systems development and acquisition management. To help federal agencies address these key elements, we and the Office of Management and Budget have developed guidance that provides a framework on the use of rigorous and disciplined processes for planning, managing, and controlling IT resources. We have previously reported on specific weaknesses at both HHS and DHS, including the lack of robust processes for IT investment management and immature systems development and acquisition practices. We made recommendations to HHS and DHS aimed at improving these practices. HHS and CDC have recently taken steps to improve their control over IT projects, which is an important aspect of IT investment management. Because PHIN and some of its initiatives (i.e., BioSense, NEDSS, the Health Alert Network, and NEPHTN) are considered major investments for fiscal year 2006, they required review by HHS. The HHS IT Investment Review Board conducted budgetary reviews for these applications in June 2004 and recommended that the projects move forward as major IT investments; however, there is no documentation that additional HHS reviews were conducted on PHIN and its major applications until this past February, when HHS began implementing procedures for better monitoring of system development projects. In January 2004, CDC announced its intention to provide greater executive level oversight of IT investments, but it had been reorganizing and did not begin conducting control reviews for major PHIN investments until recently. In May 2004, CDC announced its new center for public health informatics to better coordinate IT projects; this center was formally recognized as operational as of mid-April 2005 when Congress approved CDC’s reorganization. Until CDC and HHS management provides a systematic method for IT investment reviews, they will have difficulty minimizing risks while maximizing returns on these critical public health investments. Regarding CDC’s systems development and acquisition practices, we observed weaknesses in project management that may hinder progress toward achieving PHIN objectives. For some of the projects in this review, we received limited documentation of project managers’ tracking actual dates against baseline schedules, and it appeared that a number of projects had missed internal schedule dates. In November 2004, CDC started requiring project managers to provide status reports to its program management activity office on a biweekly basis. These reports are now required for five of the systems in our review. CDC officials acknowledged that project dates had to be rebaselined; after the rebaselining, CDC officials stated that their projects met official release dates. Early last year, CDC recognized the need for more direct executive involvement in IT governance and management. This fiscal year, CDC began implementing a project management office to oversee public health informatics projects. Establishing this office and institutionalizing its processes while managing new and ongoing IT projects will be a challenge. The new office has initiated new processes to manage project interdependencies, document and track milestones for projects, and formalize project change requests. For example, the office is beginning to track projects biweekly—asking project managers to report on upcoming milestones, their confidence that those milestones will be met, issues for executive attention, staffing problems, and other potential problems. CDC is also implementing a process to standardize project management across the agency. This process is designed to incorporate, among other things, program and project management, capital planning, security certification and accreditation, and system development life-cycle processes. DHS has been operational for just over 2 years, and the department has made progress in establishing key information and technology disciplines. However, as we have reported, these disciplines are not yet fully established and operational. For example, DHS has established an IT investment management process, but this process is still maturing. DHS has also had problems consistently employing rigorous systems development and acquisition practices. DHS did not provide documentation of its oversight of its public health IT investments. According to DHS officials, they plan to submit a capital asset plan and business case for the BWICS initiative this year for review and approval by the DHS IT review board. However, until DHS follows through on its initial actions to address its management, programmatic, and partnering challenges, its IT investments remain at risk. The federal government has made progress on major public health IT initiatives, but significant work remains to be done. CDC’s PHIN initiative includes applications at various stages of implementation; as a whole, however, it remains years away from fully achieving its planned improvement to the public health IT infrastructure. In addition, DHS’s initiatives are still in such early stages that it is uncertain how they will improve public health preparedness. Federal agencies face many challenges in improving the public health infrastructure. CDC and DHS are pursuing related initiatives, but there is little integration among them, and until the national health IT strategy is completed, it is unknown how their integration will be addressed. Implementing health data standards across the health care community is still a work in progress, and until these standards are implemented, information sharing challenges will remain. In addition, state and local public health agencies report that their coordination with federal initiatives is often limited. Until state and local public health agencies are more actively involved in coordination with their federal counterparts, disease surveillance systems will remain fragmented and their effectiveness will be impeded. Finally, the development of robust practices for IT investment management and for systems development and acquisition is a continuing challenge for HHS and DHS, about which we have previously made recommendations. Until agencies address all these challenges, progress toward building a stronger public health infrastructure will be limited, as will the ability to share essential information concerning public health emergencies and bioterrorism. In order to improve the development and implementation of major public health IT initiatives, we recommend that the Secretary of Health and Human Services take the following two actions: ensure that the federal initiatives are (1) aligned with the national health IT strategy, the federal health architecture, and ongoing public health IT initiatives and (2) coordinated with state and local public health initiatives and ensure federal actions to encourage the development, adoption, and implementation of health care data and communication standards across the health care industry to address interoperability challenges associated with the exchange of public health information. We also recommend that the Secretary of Homeland Security align existing and planned DHS IT initiatives with other ongoing public health IT initiatives at HHS, including adoption of data and communications standards. We received written comments on a draft of this report from the Acting Inspector General at HHS and Director of the Departmental GAO/OIG Liaison at DHS (these comments are reproduced in app. III and IV). HHS generally concurred with our recommendations, while DHS did not comment specifically on the recommendations. Both agencies provided additional contextual information and technical comments, which we have incorporated in this report as appropriate. We provided DOD officials with the opportunity to comment on a draft of this report, which they declined. Among its comments, HHS officials stated that this report does not adequately represent the department’s accomplishments in implementing standards and specifications for health IT or the benefits of pursuing a standards-based approach. We concur with HHS on the importance of standards for health information technology and have been calling for federal leadership in expediting standards since 1993. Page 61 lists GAO reports on health IT, several of which address the benefits of standards and the need for a national health IT strategy. In response to HHS’s comment that we suggest that early event detection is duplicative or irrelevant at the federal level, neither we nor the state and local public health officials suggest that early event detection at the federal level is irrelevant. Rather, we are reporting the concerns of state and local public health officials regarding the federal government’s role, which merits further discussion and more involvement of state and local health officials. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of the report to other congressional committees. We will also send copies to the Secretaries of Health and Human Services, Homeland Security, Defense, and Energy. In addition, copies will be sent to the state and local public health agencies that were included in our review. Copies will also be made available at no charge on our Web site at www.gao.gov. If you have any questions on matters discussed in this report, please contact me at 202-512-9286 or by e- mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The objectives of our review were to assess the progress of major federal information technology (IT) initiatives designed to strengthen the effectiveness of the public health infrastructure and describe the key IT challenges facing federal agencies responsible for improving the public health infrastructure. To address these objectives, we conducted our work at Health and Human Services (HHS), Department of Homeland Security (DHS), and Department of Defense (DOD) offices in Washington, D.C., and the Centers for Disease Control and Prevention (CDC) in Atlanta. We selected specific IT initiatives to review from systems we identified in previous work, focusing on major public health IT initiatives in surveillance and communication systems. We excluded food safety systems and DOD disease surveillance systems that did not include civilian populations. We discussed our selection with federal officials to help ensure that we were addressing the most relevant major initiatives. To assess the progress of major federal IT initiatives designed to strengthen the effectiveness of the public health infrastructure, we analyzed agency documents such as Office of Management and Budget’s Exhibit 300s, minutes of executive council meetings, and system development documents, including project plans, functional requirements, and cost-benefit analyses. We supplemented our evaluation of agency documents with interviews of federal officials. Through interviews with these officials and with state and local public health officials, we also assessed CDC’s and DHS’s interaction and coordination with each other on their IT initiatives. Because these federal initiatives affect state and local public health agencies, we supplemented our analysis of agency documentation by interviewing officials from six state and six local public health agencies on progress being achieved by CDC and DHS. We conducted our work at the San Diego County Health and Human Services Agency; the California Department of Health Services in Sacramento; the Thurston County Public Health and Social Services and the Washington State Department of Health in Olympia; the Austin/Travis County Health and Human Services Department and the Texas Department of State Health Services in Austin; the Milwaukee City Health Department; the Wisconsin Department of Health and Family Services in Madison, Wisconsin; the Boston Public Health Commission and the Commonwealth of Massachusetts Department of Public Health in Boston; the New York State Department of Health in Albany; and the New York City Department of Health and Mental Hygiene. The states and local public health agencies were selected because they were actively involved in implementing at least one of CDC’s Public Health Information Network IT applications. We interviewed them on the impact of federal IT initiatives on state and local public health operations and lessons they learned from integrating federal IT initiatives into their local public health infrastructure. If they had systems similar to the federal systems in our review, we discussed how their systems compared with the federal initiatives. We also interviewed representatives of several public health professional organizations, which CDC considers its partners, such as the National Association of County and City Health Officials, the Association of State and Territorial Health Officials, the Council for State and Territorial Epidemiologists and the Association of Public Health Laboratories. We also had a discussion with the National Association of State Chief Information Officers. To identify key IT challenges facing federal agencies responsible for improving the public health infrastructure, we analyzed published GAO reports, agency documents, and other information obtained during interviews and site visits. We summarized the results of our evaluation and identified the key challenges that CDC and DHS have consistently encountered as they implement the IT initiatives included in our review. Our work was performed from July 2004 through April 2005 in accordance with generally accepted government auditing standards. The Department of Health and Human Services (HHS) has primary responsibility for coordinating the nation’s response to public health emergencies, including bioterrorism. HHS divisions responsible for bioterrorism preparedness and response, and their primary responsibilities, include the following: The Office of the Assistant Secretary for Public Health Emergency Preparedness coordinates the department’s work to oversee and protect public health, including cooperative agreements with states and local governments. States and local governments can apply for funding to upgrade public health infrastructure and health care systems to better prepare for and respond to bioterrorism and other public health emergencies. The office maintains a command center where it can coordinate the response to public health emergencies from one centralized location. This center is equipped with satellite teleconferencing capacity, broadband Internet hookups, and analysis and tracking software. The Centers for Disease Control and Prevention (CDC) has primary responsibility for nationwide disease surveillance for specific biological agents, developing epidemiological and laboratory tools to enhance disease surveillance, and providing an array of scientific and financial support for state infectious disease surveillance, prevention, and control. CDC has an emergency operations center to organize and manage all of its emergency operations, allowing for immediate communication with HHS, the Department of Homeland Security, federal intelligence and emergency response officials, and state and local public health officials. CDC also provides testing services and consultation that are not available at the state level; training on infectious diseases and laboratory topics, such as testing methods and outbreak investigations; and grants to help states conduct disease surveillance. In addition, CDC provides state and local health departments with a wide range of technical, financial, and staff resources to help maintain or improve their ability to detect and respond to disease threats. The Food and Drug Administration is responsible for safeguarding the food supply, ensuring that new vaccines and drugs are safe and effective, and conducting research on diagnostic tools and treatment of disease outbreaks. It is increasing its food safety responsibilities by improving its laboratory preparedness and food monitoring inspections. The Agency for Healthcare Research and Quality is responsible for supporting research designed to improve the outcomes and quality of health care, reduce its costs, address safety and medical errors, and broaden access to effective services, including antibioterrorism research. It has initiated several major projects and activities designed to assess and enhance linkages between the clinical care delivery system and the public health infrastructure. Research focuses on emergency preparedness of hospitals and health care systems for bioterrorism and other public health events; technologies and methods to improve the linkages among the personal health care system, emergency response networks, and public health agencies; and training and information needed to prepare clinicians to recognize the symptoms of bioterrorist agents and manage patients appropriately. The National Institutes of Health is responsible, among other things, for conducting medical research in its own laboratories and for supporting the research of nonfederal scientists in universities, medical schools, hospitals, and research institutions throughout the United States and abroad. Its National Institute of Allergy and Infectious Diseases has a program to support research related to organisms that are likely to be used as biological weapons. The Health Resources Services Administration is responsible for improving the nation’s health by ensuring equal access to comprehensive, culturally competent, quality health care. Its Bioterrorism Hospital Preparedness program administers cooperative agreements to state and local governments to support hospitals’ efforts toward bioterrorism preparedness and response. The Department of Homeland Security (DHS) is responsible for, among other things, protecting the United States against terrorist attacks. One activity undertaken by DHS is coordination of surveillance activities of federal agencies related to national security. The Science and Technology Directorate serves as the primary research and development arm of DHS, using our nation’s scientific and technological resources to provide federal, state, and local officials with the technology and capabilities to protect the nation. The focus is on catastrophic terrorism—threats to the security of our homeland that could result in large-scale loss of life and major economic impact. The directorate’s work is designed to counter those threats, both by improvements to current technological capabilities and development of new, revolutionary technological capabilities. The Information Analysis and Infrastructure Protection Directorate is responsible for helping to deter, prevent, and mitigate acts of terrorism by assessing vulnerabilities in the context of continuously changing threats. It strengthens the nation’s protective posture and disseminates timely and accurate information to federal, state, local, private, and international partners. The Emergency Preparedness and Response Directorate is responsible for the National Incident Management System, which establishes standardized incident management processes, protocols, and procedures that all responders—federal, state, local and tribal—will use to coordinate and conduct response actions. The Department of Defense, while primarily responsible for the health and protection of its service members, contributes to global disease surveillance, training, research, and response to emerging infectious disease threats. The Defense Threat Reduction Agency provides technical expertise and capabilities in combat support, technology development, threat control and threat reduction, including chemical and biological defense. The United States Army Medical Research Institute of Infectious Diseases conducts biological research dealing with militarily relevant infectious diseases and biological agents. It also provides professional expertise on issues related to technologies and other tools to support readiness for a bioterrorist incident. The Department of Energy is developing new capabilities to counter chemical and biological threats. It expects the results of its research to be public and possibly lead to the development of commercial products in the domestic market. The Chemical and Biological National Security Program has conducted research on biological detection, modeling and prediction, and biological foundations to support efforts in advanced detection, attribution, and medical countermeasures. The national research laboratories (e.g., Lawrence Livermore, Los Alamos, and Sandia) are developing new capabilities for countering chemical and biological threats, including biological detection, modeling, and prediction. The Department of Agriculture (USDA) is responsible for protecting and improving the health and marketability of animals and animal products in the United States by preventing, controlling, and eliminating animal diseases. USDA’s disease surveillance and response activities are intended to protect U.S. livestock and ensure the safety of international trade. In addition, USDA is responsible for ensuring that meat, poultry, and certain processed egg products are safe and properly labeled and packaged. USDA establishes quality standards and conducts inspections of processing facilities in order to safeguard certain animal food products against infectious diseases that pose a risk to humans. The Agricultural Research Service conducts research to improve onsite rapid detection of biological agents in animals, plants, and food and has improved its detection capability for diseases and toxins that could affect animals and humans. The Food Safety Inspection Service provides emergency preparedness for foodborne incidents, including bioterrorism. The Animal and Plant Health Inspection Service has a role in responding to biological agents that cause zoonotic diseases (i.e., diseases transmitted from animals to humans). It also has veterinary epidemiologists to trace the source of animal exposures to diseases. The Environmental Protection Agency (EPA) has responsibilities to prepare for and respond to emergencies, including those related to biological materials. EPA can be involved in detection of agents by environmental monitoring and sampling. It is also responsible for protecting the nation’s water supply from terrorist attack and for prevention and control of indoor air pollution. The Department of Veterans Affairs (VA) manages one of the nation’s largest health care systems and is the nation’s largest drug purchaser. The department purchases pharmaceuticals and medical supplies for the Strategic National Stockpile and the National Medical Response Team stockpile. The VA Emergency Preparedness Act of 2002 directed VA to establish at least four medical emergency preparedness centers to (1) carry out research and develop methods of detection, diagnosis, prevention, and treatment for biological and other public health and safety threats; (2) provide education, training, and advice to health care professionals inside and outside VA; and (3) provide laboratory and other assistance to local health care authorities in the event of a national emergency. The following are GAO’s comments on the Department of Health and Human Services letter dated June 3, 2005. 1. We agree with HHS that the cost benefits of a standards-based approach to public health systems are potentially considerable. However, as we have reported before, the Center for Information Technology Leadership acknowledges that their cost estimates are based on a number of assumptions and inhibited by limited data that are neither complete nor precise. 2. We agree with HHS that standards-based systems provide important benefits. In our May 2003 report, we made several recommendations regarding the establishment and use of standards that are highlighted in this report. We also state that to support the compatibility, interoperability, and security of federal agencies’ many planned and operational IT systems, the identification and implementation of data, communications, and security standards for health care delivery and public health are essential. 3. HHS states that our report does not mention a number of activities related to the Federal Health Architecture and the Consolidated Health Informatics initiative. We described the status of workgroup efforts specific to public health surveillance. In terms of the standards adopted by the Consolidated Health Informatics initiative, we presented the relevant standards in our table of industry standards used by the Public Health Information Network. We disagree with HHS that the paragraph needs to be revised. While the development of standards and policies is a key component of progress toward the implementation of a national health IT strategy, the development of a national strategy and corresponding federal architecture is equally important. 4. We disagree with HHS that we should delete our discussion of the concerns of state and local public health officials regarding duplication of effort across federal agencies. Neither we nor the state and local public health officials suggest that early event detection at the federal level is irrelevant. Rather, we are reporting the concerns of state and local public health officials regarding the federal government’s role, which merits further discussion and more involvement of state and local health officials. 5. We have adjusted our report to indicate that fiscal year 2006 costs for BioSense are unknown. 6. HHS comments that not moving forward with its technology initiatives presents greater risk than waiting for a completed national health IT strategy. We are not suggesting that HHS stop its ongoing activities; we only point out the risks associated with developing and implementing major IT initiatives without a coordinated strategy in place. The following is GAO’s comment on the Department of Homeland Security’s letter dated June 3, 2005. 1. We disagree with DHS’s statement that we erroneously categorize its initiatives as still in the early states. The initiatives that we are referring to as being in the early stages are the Biological Warning and Incident Characterization System and the National Biosurveillance Integration System, which according to DHS officials are considered their two major IT initiatives. DHS categorized them as being in development. In addition to those named above, Barbara S. Collier, Neil J. Doherty, Amanda C. Gill, M. Saad Khan, Gay Hee Lee, Mary Beth McClanahan, M. Yvonne Sanchez, and Morgan Walts made key contributions to this report. Health Information Technology: HHS Is Taking Steps to Develop a National Strategy. GAO-05-628. Washington, D.C.: May 27, 2005. Health and Human Services’ Estimate of Health Care Cost Savings Resulting from the Use of Information Technology. GAO-05-309R. Washington, D.C.: February 17, 2005. HHS’s Efforts to Promote Health Information Technology and Legal Barriers to its Adoption. GAO-04-991R. Washington, D.C.: August 13, 2004. Health Care: National Strategy Needed to Accelerate the Implementation of Information Technology. GAO-04-947T. Washington, D.C.: July 14, 2004. Information Technology: Benefits Realized for Selected Health Care Functions. GAO-04-224. Washington, D.C.: October 31, 2003. Bioterrorism: Information Technology Strategy Could Strengthen Federal Agencies’ Abilities to Respond to Public Health Emergencies. GAO-03-139. Washington, D.C.: May 30, 2003. Automated Medical Records: Leadership Needed to Expedite Standards Development. GAO/IMTEC-93-17. Washington, D.C.: April 30, 1993.

It has been almost 4 years since the anthrax events of October 2001 highlighted the weaknesses in our nation's public health infrastructure. Since that time, emerging infectious diseases have appeared--such as Severe Acute Respiratory Syndrome and human monkeypox--that have made our readiness for public health emergencies even more critical. Information technology (IT) is central to strengthening the public health infrastructure through the implementation of systems to aid in the detection, preparation for, and response to bioterrorism and other public health emergencies. Congress asked us to review the current status of major federal IT initiatives aimed at strengthening the ability of government at all levels to respond to public health emergencies. Specifically, our objectives were to assess the progress of major federal IT initiatives designed to strengthen the effectiveness of the public health infrastructure and describe the key IT challenges facing federal agencies responsible for improving the public health infrastructure. Federal agencies have made progress on major public health IT initiatives, although significant work remains to be done. These initiatives include one broad initiative at CDC--the Public Health Information Network (PHIN) initiative--which is intended to provide the nation with integrated public health information systems to counter national civilian public health threats, and two major initiatives at the Department of Homeland Security (DHS), which are primarily focused on biosurveillance. CDC's broad PHIN initiative encompasses a number of applications and initiatives, which show varied progress. Currently, PHIN's basic communications systems are in place, but it is unclear when its surveillance systems and data exchange applications will become fully deployed. Further, the overall implementation of PHIN does not yet provide the desired functionality, and so some applications are not widely used by state and local public health officials. For example, CDC's BioSense application, which is aimed at detecting early signs of disease outbreaks, is available to state and local public health agencies, but according to the state and local officials with whom we spoke, it is not widely used, primarily because of limitations in the data it currently collects. DHS is also pursuing two major public health IT initiatives--the National Biosurveillance Integration System and the Biological Warning and Incident Characterization System (BWICS). Both of these initiatives are still in development. The BWICS initiative, in addition, is associated with three other programs, one of which--BioWatch--is operational. This early- warning environmental monitoring system was developed for detecting trace amounts of biological materials and has been deployed in over 30 locations across the United States. Until recently, its three IT components were not interoperable and required redundant data entry in order to communicate with each other. As federal agencies work with state and local public health agencies to improve the public health infrastructure, they face several challenges. First, the national health IT strategy and federal health architecture are still being developed; CDC and DHS will face challenges in integrating their public health IT initiatives into these ongoing efforts. Second, although federal efforts continue to promote the adoption of data standards, developing such standards and then implementing them are challenges for the health care community. Third, these initiatives involve the need to coordinate among federal, state, and local public health agencies, but establishing effective coordination among the large number of disparate agencies is a major undertaking. Finally, CDC and DHS face challenges in addressing specific weaknesses in IT planning and management that may hinder progress in developing and deploying public health IT initiatives. Until all these challenges are addressed, progress toward building a stronger public health infrastructure will be impeded, as will the ability to share essential information concerning public health emergencies and bioterrorism.

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Our survey of the largest sponsors of DB pension plans reveals that they have made a number of revisions to their benefit offerings over approximately the last 10 years or so. Generally, respondents reported that they revised benefit formulas, converted some plans to hybrid plans (such as cash balance plans), or froze some of their plans. For example, 81 percent of responding sponsors reported that they modified the formulas of one or more of their DB plans. Respondents were asked to report changes for plans or benefits that covered only nonbargaining employees, as well as to report on plans or benefits that covered bargaining unit employees. Fifty-eight percent of respondents who reported on plans for collective- bargaining employees indicated they had generally increased the generosity of their DB plan formulas between January 1997 and the time of their response (see app. I, slide 12). In contrast, 48 percent of respondents reporting on plans for their nonbargaining employees had generally decreased the generosity of their DB plan formulas since 1997. “Unpredictability or volatility of DB plan funding requirements” was the key reason cited for having changed the benefit formulas of plans covering nonbargaining employees (see app. I, slide 14). “Global or domestic competitive pressures” in their industry was the key reason cited for the changes to the plans covering collectively bargained employees (see app. I, slide 13). With regard to plans for bargaining employees, however, a number of the sponsors who offered reasons for changes to bargaining unit plans also volunteered an additional reason for having modified their plans covering bargaining employees. Specifically, these sponsors wrote that inflation or a cost-of- living adjustment was a key reason for their increase to the formula. This suggests that such plans were flat-benefit plans that may have a benefit structure that was increased annually as part of a bargaining agreement. Meanwhile, sponsors were far more likely to report that they had converted a DB plan covering nonbargaining unit employees to a hybrid plan design than to have converted DB plans covering collectively bargained employees. For example, 52 percent of respondents who reported on plans for nonbargaining unit employees had converted one or more of their traditional plans to a cash balance or other hybrid arrangement (see app. I, slide 15). Many cited “trends in employee demographics” as the top reason for doing so (see app. I, slide 16). Among respondents who answered the cash balance conversion question for their collectively bargained plans, 21 percent reported converting one or more of their traditional plans to a cash balance plan. Regarding plan freezes, 62 percent of the responding firms reported a freeze, or a plan amendment to limit some or all future pension accruals for some or all plan participants, for one or more of their plans (see app. I, slide 18). Looking at the respondent’s plans in total, 8 percent of the plans were described as hard frozen, meaning that all current employees who participate in the plan receive no additional benefit accruals after the effective date of the freeze, and that employees hired after the freeze are ineligible to participate in the plan. Twenty percent of respondents’ plans were described as being under a soft freeze, partial freeze, or “other” freeze. Although not statistically generalizable, the prevalence of freezes among the large sponsor plans in this survey is generally consistent with the prevalence of plan freezes found among large sponsors through a previous GAO survey that was statistically representative. The vast majority of respondents (90 percent) to our most recent survey also reported on their 401(k)-type DC plans. At the time of this survey, very few respondents reported having reduced employer or employee contribution rates for these plans. The vast majority reported either an increase or no change to the employer or employee contribution rates, with generally as many reporting increases to contributions as reporting no change (see app. I, slide 21). The differences reported in contributions by bargaining status of the covered employees were not pronounced. Many (67 percent) of responding firms plan to implement or have already implemented an automatic enrollment feature to one or more of their DC plans. According to an analysis by the Congressional Research Service, many DC plans require that workers voluntarily enroll and elect contribution levels, but a growing number of DC plans automatically enroll workers. Additionally, certain DC plans with an automatic enrollment feature may gradually escalate the amount of the workers’ contributions on a recurring basis. However, the Pension Protection Act of 2006 (PPA) provided incentives to initiate automatic enrollment for those plan sponsors that may not have already adopted an automatic enrollment feature. Seventy- two percent of respondents reported that they were using or planning to use automatic enrollment for their 401(k) plans covering nonbargaining employees, while 46 percent indicated that they were currently doing so or planning to do so for their plans covering collective-bargaining employees (see app. I, slide 22). The difference in automatic enrollment adoption by bargaining status may be due to the fact that nonbargaining employees may have greater dependence on DC benefits. That is, a few sponsors noted they currently automatically enroll employees who may no longer receive a DB plan. Alternatively, automatic enrollment policies for plans covering collective-bargaining employees may not yet have been adopted, as that plan feature may be subject to later bargaining. Health benefits are a large component of employer offered benefits. As changes to the employee benefits package may not be limited to pensions, we examined the provision of health benefits to active workers, as well as to current and future retirees. We asked firms to report selected nonwage compensation costs or postemployment benefit expenses for the year 2006 as a percentage of base pay. Averaging these costs among all those respondents reporting such costs, we found that health care comprised the single largest benefit cost. Active employee health plans and retiree health plans combined to represent 15 percent of base pay (see app. I, slide 24). DB and DC pension costs were also significant, representing about 14 percent of base pay. All of the respondents reporting on health benefits offered a health care plan to active employees and contributed to at least a portion of the cost. Additionally, all of these respondents provided health benefits to some current retirees, and nearly all were providing health benefits to retirees under the age of 65 and to retirees aged 65 and older. Eighty percent of respondents offered retiree health benefits to at least some future retirees (current employees who could eventually become eligible for retiree benefits), although 20 percent of respondents offered retiree health benefits that were fully paid by the retiree. Further, it appears that, for new employees among the firms in our survey, a retiree health benefit may be an increasingly unlikely offering in the future, as 46 percent of responding firms reported that retiree health care was no longer to be offered to employees hired after a certain date (see app. I, slide 25). We asked respondents to report on how an employer’s share of providing retiree health benefits had changed over the last 10 years or so for current retirees. Results among respondents generally did not vary by the bargaining status of the covered employees (app. I, slide 27). However, 27 percent of respondents reporting on their retiree health benefits for plans covering nonbargaining retirees reported increasing an employer’s share of costs, while only 13 percent of respondents reporting on their retiree health benefits for retirees from collective-bargaining units indicated such an increase. Among those respondents with health benefits covering nonbargained retirees, they listed “large increases in the cost of health insurance coverage for retirees” as a major reason for increasing an employer’s share—not surprisingly. This top reason was the same for all of these respondents, as well as just those respondents reporting a decrease in the cost of an employer’s share. Additionally, a number of respondents who mentioned “other” reasons for the decrease in costs for employers cited the implementation of predefined cost caps. Our survey also asked respondents to report on their changes to retiree health offerings for future retirees or current workers who may eventually qualify for postretirement health benefits. As noted earlier, 46 percent of respondents reported they currently offered no retiree health benefits to active employees (i.e., current workers) hired after a certain date. Reporting on changes for the last decade, 54 percent of respondents describing their health plans for nonbargaining future retirees indicated that they had decreased or eliminated the firm’s share of the cost of providing health benefits (see app. I, slide 30). A smaller percentage (41 percent) of respondents reporting on their health benefits for collectively bargained future retirees indicated a decrease or elimination of benefits. The need to “match or maintain parity with competitor’s benefits package” was the key reason for making the retiree health benefit change for future retirees among respondents reporting on their collective-bargaining employees (app. I, slide 32). We asked respondents to report their total, future liability (i.e., present value in dollars) for retiree health as of 2004. As of the end of the 2004 plan year, 29 respondents reported a total retiree health liability of $68 billion. The retiree health liability reported by our survey respondents represents 40 percent of the $174 billion in DB liabilities that we estimate for these respondents’ DB plans as of 2004. According to our estimates, the DB liabilities for respondents reporting a retiree health liability were supported with $180 billion in assets as of 2004. We did not ask respondents about the assets underlying the reported $68 billion in retiree health liabilities. Nevertheless, these liabilities are unlikely to have much in the way of prefunding or supporting assets, due in large part to certain tax consequences. Although we did not ask sponsors about the relative sustainability of retiree health plans given the possible difference in the funding of these plans relative to DB plans, we did ask respondents to report the importance of offering a retiree health plan for purposes of firm recruitment and retention. Specifically, we asked about the importance of making a retiree health plan available relative to making a DB or DC pension plan available. Only a few respondents reported that offering DB or DC plans was less (or much less) important than offering a retiree health plan. Responding before October 2008—before the increasingly severe downturns in the national economy—most survey respondents reported they had no plan to revise benefit formulas or freeze or terminate plans, or had any intention to convert to hybrid plans before 2012. Survey respondents were asked to consider how their firms might change specific employee benefit actions between 2007 and 2012 for all employees. The specific benefit actions they were asked about were a change in the formula for calculating the rates of benefit accrual provided by their DB plan, a freeze of at least one DB plan, the conversion of traditional DB plans to cash balance or other hybrid designs, and the termination of at least one DB plan. For each possibility, between 60 percent and 80 percent of respondents said their firm was not planning to make the prospective change (see app I, slide 34). When asked about how much they had been or were likely to be influenced by recent legislation or account rule changes, such as PPA or the adoption of Financial Accounting Standards Board (FASB) requirements to fully recognize obligations for postretirement plans in financial statements, responding firms generally indicated these were not significant factors in their decisions on benefit offerings. Despite these legislative and regulatory changes to the pension environment, most survey respondents indicated that it was unlikely or very unlikely that their firms would use assets from DB plans to fund qualified health plans; increase their employer match for DC plans; terminate at least one DB plan; amend at least one DB plan to change (either increase or decrease) rates of future benefit accruals; convert a DB plan to a cash balance or hybrid design plan, or replace a DB plan with a 401(k)-style DC plan. Additionally, most respondents indicated “no role” when asked whether PPA, FASB, or pension law and regulation prior to PPA had been a factor in their decision (see app 1, slide 35). Though the majority of these responses indicated a trend of limited action related to PPA and FASB, it is interesting to note that, among the minority of firms that reported they were likely to freeze at least one DB plan for new participants only, most indicated that PPA played a role in this decision. Similarly, while only a few firms indicated that it was likely they would replace a DB plan with a 401(k)-style DC plan, most of these firms also indicated that both PPA and FASB played a role in that decision. There were two prospective changes that a significant number of respondents believed would be likely or very likely implemented in the future. Fifty percent of respondents indicated that adding or expanding automatic enrollment features to 401(k)-type DC plans was likely or very likely, and 43 percent indicated that PPA played a major role in this decision. This is not surprising, as PPA includes provisions aimed at encouraging automatic enrollment and was expected to increase the use of this feature. Forty-five percent of respondents indicated that changing the investment policy for at least one DB plan to increase the portion of the plan’s portfolio invested in fixed income assets was likely or very likely—with 21 percent indicating that PPA and 29 percent indicating that FASB played a major or moderate role in this decision (see app 1, slide 36). Our survey did not ask about the timing of this portfolio change, so we cannot determine the extent of any reallocation that may have occurred prior to the decline in the financial markets in the last quarter of 2008. Finally, responding sponsors did not appear to be optimistic about the future of the DB system, as the majority stated there were no conditions under which they would consider forming a new DB plan. For the 26 percent of respondents that said they would consider forming a new DB plan, some indicated they could be induced by such changes as a greater scope in accounting for DB plans on corporate balance sheets and reduced unpredictability or volatility of plan funding requirements (see app I, slides 38). Conditions less likely to cause respondents to consider a new DB plan included increased regulatory requirements of DC plans and reduced PBGC premiums (see app I, slide 39). Until recently, DB pension plans administered by large sponsors appeared to have largely avoided the general decline evident elsewhere in the system since the 1980s. Their relative stability has been important, as these plans represent retirement income for more than three-quarters of all participants in single-employer plans. Today, these large plans no longer appear immune to the broader trends that are eroding retirement security. While few plans have been terminated, survey results suggest that modifications in benefit formulas and plan freezes are now common among these large sponsors. This trend is most pronounced among nonbargained plans but is also apparent among bargained plans. Yet, this survey was conducted before the current economic downturn, with its accompanying market turmoil. The fall in asset values and the ensuing challenge to fund these plans places even greater stress on them today. Meanwhile, the survey findings, while predating the latest economic news, add to the mounting evidence of increasing weaknesses throughout the existing private pension system that include low contribution rates for DC plans, high account fees that eat into returns, and market losses that significantly erode the account balances of those workers near retirement. Moreover, the entire pension system still only covers about 50 percent of the workforce, and coverage rates are very modest for low-wage workers. Given these serious weaknesses in the current tax-qualified system, it may be time for policymakers to consider alternative models for retirement security. We provided a draft of this report to the Department of Labor, the Department of the Treasury, and PBGC. The Department of the Treasury and PBGC provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Labor, the Secretary of the Treasury, and the Director of the PBGC, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have or your staffs any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions are listed in appendix III. the nation’s largest private sector DB plans: 1) What recent changes have employers made to their pension and benefit offerings? 2) What changes might employers make with respect to their pensions in the future, and how might these changes be influenced by changes in pension law and other factors? generalizable to all DB plan sponsors. However, the sample can serve as an important indicator of the health of the private DB system and the sample’s possible importance to the Pension Benefit Guaranty Corporation (PBGC) The 44 sponsoring firms that responded represent an estimated: 25 percent (or $370 billion) of total DB system liabilities as of 19 percent (or 6 million) of the system’s DB participants (active, separated-vested, retired as of 2004) business line was manufacturing, with other key areas being finance and information. (Figure 1) These firms reported employing on average 75,000 employees in their U.S. operations in 2006. increased or did not change employer contributions to 401(k) plans for their NB employees. (Figure 8) Main reasons for change included redesigned matching formula as well as compensation adjustments to attract top employees. The vast majority of respondents reported that plans covering NB employees either increased or did not change employee contributions. Main reasons among respondents reporting increased contributions included addition of automatic enrollment feature to one or more plans. 72 percent of large sponsors reported either using or planning to use auto enrollment for plans covering NB employees (Figure 9). either increased or did not change employer contributions to 401(k) plans for their bargaining unit employees. (Figure 8) No single reason stood out for this result. Bargaining unit employees of most sponsors did not change employee contributions. (Figure 8) 50 percent of large sponsors with plans covering CB employees reported either not using or not planning to use auto enrollment (Figure 9). (Figure 10) All responding DB plan sponsors offered health insurance to active employees and contributed to the cost All responding DB plan sponsors offered health insurance to at least some current retirees—nearly all to both pre-age 65 and age 65-plus employees 80 percent provided health insurance to at least some active employees who become eligible for the benefit upon retirement 20 percent provided health insurance that was fully paid by the retired employee (Figure 11) Compared to respondents reporting on their benefits covering CB employees, respondents with NB employees reported decrease in the employer’s share of the cost of providing health benefits to current retirees (Figure 12) Main reasons were increases in cost of health insurance for retirees and for active employees (Figure 13) 46 percent of plan sponsors no longer offered retiree health benefits to active employees hired after a certain date. 54 percent decreased or eliminated the firm's share cost of providing health benefits for future retirees who were non-bargaining employees; (Figure 14) Primary reasons cited were large cost increases in health insurance for both retirees and active employees (Figure 15) 41 percent of sponsors with bargaining unit employees reported decrease in or elimination of firm's share of health care costs for future retirees (Figure 14) 26 percent reported no change Primary reason cited was match/maintain parity with competitor’s benefits package (Figure 16) them definitely consider forming a new DB plan 26 percent of sponsors reported that there were conditions under which they would have considered offering a new DB plan; the most common conditions selected were: Provide sponsors with greater scope in accounting for DB plans on corporate balance sheets DB plans became more effective as an employee retention Reduced unpredictability or volatility in DB plan funding requirements (Figure 17) To achieve our objectives, we conducted a survey of sponsors of large defined-benefit (DB) pension plans. For the purposes of our study, we defined “sponsors” as the listed sponsor on the 2004 Form 5500 for the largest sponsored plan (by total participants). To identify all plans for a given sponsor, we matched plans through unique sponsor identifiers. We constructed our population of DB plan sponsors from the 2004 Pension Benefit Guaranty Corporation’s (PBGC) Form 5500 Research Database by identifying unique sponsors listed in this database and aggregating plan- level data (for example, plan participants) for any plans associated with this sponsor. As a result of this process, we identified approximately 23,500 plan sponsors. We further limited these sponsors to the largest sponsors (by total participants in all sponsored plans) that also appeared on the Fortune 500 or Fortune Global 500 lists. We initially attempted to administer the survey to the first 100 plans that met these criteria, but ultimately, we were only able administer the survey to the 94 sponsoring firms for which we were able to obtain sufficient information for the firm’s benefits representative. While the 94 firms we identified for the survey are an extremely small subset of the approximately 23,500 total DB plan sponsors in the research database, we estimate that these 94 sponsors represented 50 percent of the total single-employer liabilities insured by PBGC and 39 percent of the total participants (active, retired, and separated-vested) in the single-employer DB system as of 2004. The Web-based questionnaire was sent in December 2007, via e-mail, to the 94 sponsors of the largest DB pension plans (by total plan participants as of 2004) who were also part of the Fortune 500 or Global Fortune 500. This was preceded by an e-mail to notify respondents of the survey and to test our e-mail addresses for these respondents. This Web questionnaire consisted of 105 questions and covered a broad range of areas, including the status of current DB plans; the status of frozen plans (if any) and the status of the largest frozen plan (if applicable); health care for active employees and retirees; pension and other benefit practices or changes over approximately the last 10 years and the reasons for those changes (parallel questions asked for plans covering collectively bargained employees and those covering nonbargaining employees); prospective benefit plan changes; the influence of laws and accounting practices on possible prospective benefit changes; and opinions about the possible formation of a new DB plan. The first 17 questions and last question of the GAO Survey of Sponsors of Large Defined Benefit Pension Plans questionnaire mirrored the questions asked in a shorter mail questionnaire (Survey of DB Pension Plan Sponsors Regarding Frozen Plans) about benefit freezes that was sent to a stratified random sample of pension plan sponsors that had 100 or more participants as of 2004. Sponsors in the larger survey were, like the shorter survey, asked to report only on their single-employer DB plans. To help increase our response rate, we sent four follow-up e-mails from January through November 2008. We ultimately received responses from 44 plan sponsors, representing an overall response rate of 44 percent. To pretest the questionnaires, we conducted cognitive interviews and held debriefing sessions with 11 pension plan sponsors. Three pretests were conducted in-person and focused on the Web survey, and eight were conducted by telephone and focused on the mail survey. We selected respondents to represent a variety of sponsor sizes and industry types, including a law firm, an electronics company, a defense contractor, a bank, and a university medical center, among others. We conducted these pretests to determine if the questions were burdensome, understandable, and measured what we intended. On the basis of the feedback from the pretests, we modified the questions as appropriate. The practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, or the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages for the purpose of minimizing such nonsampling errors. We took the following steps to increase the response rate: developing the questionnaire, pretesting the questionnaires with pension plan sponsors, and conducting multiple follow-ups to encourage responses to the survey. We performed computer analyses of the sample data to identify inconsistencies and other indications of error and took steps to correct inconsistencies or errors. A second, independent analyst checked all computer analyses. We initiated our audit work in April 2006. We issued results from our survey regarding frozen plans in July 2008. We completed our audit work for this report in March 2009 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions. Barbara D. Bovbjerg, (202) 512-7215 or [email protected]. In addition to the contact above, Joe Applebaum, Sue Bernstein, Beth Bowditch, Charles Ford, Brian Friedman, Charles Jeszeck, Isabella Johnson, Gene Kuehneman, Marietta Mayfield, Luann Moy, Mark Ramage, Ken Stockbridge, Melissa Swearingen, Walter Vance, and Craig Winslow made important contributions to this report.

The number of private defined benefit (DB) pension plans, an important source of retirement income for millions of Americans, has declined substantially over the past two decades. For example, about 92,000 single-employer DB plans existed in 1990, compared to just under 29,000 single-employer plans today. Although this decline has been concentrated among smaller plans, there is a widespread concern that large DB plans covering many participants have modified, reduced, or otherwise frozen plan benefits in recent years. GAO was asked to examine (1) what changes employers have made to their pension and benefit offerings, including to their defined contribution (DC) plans and health offerings over the last 10 years or so, and (2) what changes employers might make with respect to their pensions in the future, and how these changes might be influenced by changes in pension law and other factors. To gather information about overall changes in pension and health benefit offerings, GAO asked 94 of the nation's largest DB plan sponsors to participate in a survey; 44 of these sponsors responded. These respondents represent about one-quarter of the total liabilities in the nation's single-employer insured DB plan system as of 2004. The survey was largely completed prior to the current financial market difficulties of late 2008. GAO's survey of the largest sponsors of DB pension plans revealed that respondents have made a number of revisions to their retirement benefit offerings over the last 10 years or so. Generally speaking, they have changed benefit formulas; converted to hybrid plans (such plans are legally DB plans, but they contain certain features that resemble DC plans); or frozen some of their plans. Eighty-one percent of responding sponsors reported that they modified the formula for computing benefits for one or more of their DB plans. Among all plans reported by respondents, 28 percent of these (or 47 of 169) plans were under a plan freeze--an amendment to the plan to limit some or all future pension accruals for some or all plan participants. The vast majority of respondents (90 percent, or 38 of 42 respondents) reported on their 401(k)-type DC plans. Regarding these DC plans, a majority of respondents reported either an increase or no change to the employer or employee contribution rates, with roughly equal responses to both categories. About 67 percent of (or 28 of 42) responding firms plan to implement or have already implemented an automatic enrollment feature to one or more of their DC plans. With respect to health care offerings, all of the (42) responding firms offered health care to their current workers. Eighty percent (or 33 of 41 respondents) offered a retiree health care plan to at least some current workers, although 20 percent of (or 8 of 41) respondents reported that retiree health benefits were to be fully paid by retirees. Further, 46 percent of (or 19 of 41) responding firms reported that it is no longer offered to employees hired after a certain date. At the time of the survey, most sponsors reported no plans to revise plan formulas, freeze or terminate plans, or convert to hybrid plans before 2012. When asked about the influence of recent legislation or changes to the rules for pension accounting and reporting, responding firms generally indicated these were not significant factors in their benefit decisions. Finally, a minority of sponsors said they would consider forming a new DB plan. Those sponsors that would consider forming a new plan might do so if there were reduced unpredictability or volatility in DB plan funding requirements and greater scope in accounting for DB plans on corporate balance sheets. The survey results suggest that the long-time stability of larger DB plans is now vulnerable to the broader trends of eroding retirement security. The current market turmoil appears likely to exacerbate this trend.

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A refugee is generally defined as a person who is outside his or her country and who is unable or unwilling to return because of persecution or a well-founded fear of persecution on account of race, religion, nationality, membership in a particular social group, or political opinion. The Refugee Act of 1980, which amended the Immigration and Nationality Act, provided a systematic and permanent procedure for admitting refugees to the United States and maintains comprehensive and uniform provisions to resettle refugees as quickly as possible and to encourage them to become self-sufficient. Several federal, state, and local government agencies coordinate with private organizations to implement the admission and resettlement process. Each year the President, after appropriate consultation with the Congress and certain Cabinet members, determines the maximum number of refugees the United States may admit for resettlement in a given year. The number actually resettled is typically below this maximum number and has varied over time—sometimes due to security concerns (see fig. 1). The federal government gives private, voluntary agencies responsibility to determine where refugees will live in the United States, with approval from the Department of State. Refugees are assigned first to a national voluntary agency and then the voluntary agency decides where the refugee will live. More specifically, the nine national voluntary agencies, which maintain a network of about 350 affiliates in communities throughout much of the United States, meet weekly to allocate individual refugees based on an annual evaluation of the communities’ capacity to See figure 2 for the number of refugees that arrived in serve refugees.each state during fiscal year 2011. Appendix III provides additional detail about the countries of origin for arrivals to the 20 states with the largest refugee populations. In the last 10 years, refugees have come to the United States from an increasing number of countries, and the issues associated with these diverse populations have become more complex. For example, many refugees today arrive after having lived in refugee camps for years, and may have little formal education or work experience, or untreated medical or mental health conditions. In turn, receiving communities have needed to adjust their language capabilities and services in order to respond to the changing needs of these diverse refugee populations. Figure 3 shows the top 20 countries of origin for refugees arriving in the United States in fiscal year 2011. Three federal agencies are involved in the refugee resettlement process. The Department of Homeland Security (DHS) approves refugees for admission to the United States. State’s Bureau of Population, Refugees, and Migration (PRM) is responsible for processing refugees overseas. Once refugees are processed and arrive in the United States, PRM partially funds services to meet their immediate needs. PRM enters into cooperative agreements with national voluntary agencies under its Reception and Placement Program to provide funding that helps refugees settle into their respective communities during their initial 30 to 90 days and covers housing, food, clothing, and other necessities. Each local affiliate receives $1,850 per refugee to provide these services. Figure 4 illustrates the general path of refugee resettlement in the United States. Many refugees are then eligible to receive temporary resettlement assistance from the Office of Refugee Resettlement (ORR), located within HHS. In most states, ORR funds cash and medical assistance as well as social services to help refugees become economically self-sufficient. ORR provides these funds through grants to state refugee coordinators, who may be employed by a state agency or by a nonprofit organization depending on how a state’s program is set up.grants provide funding for employment and other support services. States also receive funding from ORR to award discretionary grants—including school impact, services to older refugees, and targeted assistance grants—to communities that are particularly affected by large numbers of refugees or to serve specific refugee populations such as the elderly. See table 1 for a list of selected refugee assistance programs. Voluntary agencies consider a variety of factors when they propose the number of refugees to be resettled in each community (see table 2). Before preparing their annual proposals for PRM’s Reception and Placement Program for approval, national voluntary agencies ask local voluntary agency affiliates to assess their own capacity and that of other service providers in the wider community and propose the number of refugees that they will be able to resettle that year. In making these assessments, local voluntary agency affiliates typically consider both their own internal capacity and the capacity of the community, with different For example, when determining levels of emphasis on one or the other.how many refugees their community can accommodate, local affiliates in one community told us that they primarily consider their internal capacity—such as staffing levels, staff skills, long-term funding needs, the number of refugees they have served in the past, and success in meeting refugee employment goals in the previous year. Local affiliates in another community explained that they primarily consider community-based factors, such as housing availability and employment opportunities. To help make this process more consistent, Refugee Council USA, a coalition of the nine national voluntary agencies, developed guidance and a list of factors that local affiliates could use when evaluating community capacity. However, national voluntary agencies do not require their local affiliates to use the guidance. Moreover, national voluntary agencies may adjust the numbers proposed by local affiliates. Because refugees are generally placed in communities where national voluntary agency affiliates have been successful in resettling refugees, the same communities are often asked to absorb refugees year after year. One state refugee coordinator noted that local affiliate funding is based on the number of refugees they serve, so affiliates have an incentive to maintain or increase the number of refugees they resettle each year rather than allowing the number to decrease. Even though they are required to coordinate and consult with state and local governments about their resettlement activities, voluntary agencies have received only limited guidance from PRM on how to obtain input from these and other community stakeholders when assessing communities’ capacity. The Immigration and Nationality Act, as amended, states that it is the intent of Congress that local voluntary agency activities should be conducted in close cooperation and advance consultation with and the cooperative agreements that the state and local governments,Department of State enters into with national voluntary agencies require the agencies to conduct their reception and placement activities in this manner. Driven by concerns that voluntary agencies were not consulting sufficiently with state and local stakeholders when developing their proposals, PRM directed local voluntary agencies to do more to document consultations with state and local stakeholders regarding the communities’ capacity to serve refugees. However, PRM’s guidance on consultation with state and local governments does not provide detailed information regarding the agency’s expectations for the content of these discussions. While the guidance provides some examples of state and local stakeholders that the voluntary agencies could potentially consult, it does not state which stakeholders must be consulted. PRM officials said that they allow local voluntary agencies to decide whom to consult because the voluntary agencies know their communities best and because local circumstances vary. Most local voluntary agencies we visited have not taken steps to ensure that other relevant service providers are afforded the opportunity to provide input on the number and types of refugees that can be served. As a result, many local service providers experienced challenges in properly serving refugees. Most of the local voluntary agencies told us they generally consult with private stakeholders such as apartment landlords or potential employers prior to resettling refugees in an area. They also stated that they consult with some public entities, such as state refugee coordinators; however, most public entities such as public schools and health departments generally said that voluntary agencies notified them of the number of refugees expected to arrive in the coming year, but did not consult them regarding the number of refugees they could serve before proposals were submitted to PRM. Moreover, service providers in one community noted that because the local voluntary agencies did not consult them on the numbers and ethnicities of refugees they were planning to resettle, there were no interpreters or residents that spoke the language of some of the refugees who were resettled there, even though the providers could have served refugees that spoke other languages. Voluntary agencies may not consult with relevant stakeholders if they perceive them to be unaware of the resettlement process or if they believe that refugees do not use certain services. For example, local voluntary agency staff in one community said they did not consult with certain stakeholders because they believed that they were not well informed about the resettlement process and might unnecessarily object to the proposed number of refugees to be resettled. In fact, one local, elected official we spoke to was unaware that refugees were living in the community. Other elected officials noted that it was difficult to tell if or when refugees accessed services, even though school and health department officials in those same communities had frequent interactions with refugees and wanted opportunities to provide input. Although they bear much of the responsibility for providing services to refugees, some of the health care providers and schools that had not been consulted on, or even notified of, the number of refugees that were to be resettled sometimes felt unprepared to do so. For example, health care providers in two communities told us that they were not notified in advance that refugees would be arriving in their communities, and thus, had no time to set up screening procedures. They were also unaware of the specific needs and health challenges of the communities they were serving. In addition, in some instances when voluntary agencies were unable to adequately prepare the community as a whole for the new arrivals and provide refugees with the services they needed, some community members expressed opposition toward the refugees. For example, in Fort Wayne, Indiana, a few case studies show that the community, which had been receiving fewer than 500 refugees per year prior to 2007, experienced a rapid increase that more than tripled the number of refugees resettled in the community. The community, in turn, was forced on short notice to obtain new sources of funding and establish a new infrastructure in order to serve their new arrivals. This unplanned increase in refugees, combined with a growing unemployment rate, engendered frustrations that resulted in backlash from the community. Moreover, a number of other factors, including the high frequency of communicable diseases among certain populations, unmet needs for mental health services, overcrowding in homes, and cultural practices caused existing residents to become concerned or even hostile. Similarly, officials in Clarkston, Georgia, another community that was not initially consulted regarding the resettlement of thousands of refugees beginning in 1996, described the flight of long-time residents from the town in response to refugee resettlement and the perceived deterioration of the quality of schools. In a few of the communities we visited, after reaching a crisis point due to the influx of refugees, stakeholders took the initiative to develop formal processes for providing input to the local voluntary agencies on the number of refugees they could serve. For example, an influx of refugees in Fargo, North Dakota, in the 1990s overwhelmed local service providers. In response, those service providers and the local voluntary agency formed a Refugee Advisory Committee to provide a formal, community-based structure for finding solutions to challenges in resettling refugees. The committee includes representatives from the local voluntary agency, state and county social services departments, various city departments, school districts, as well as local health care providers, nonprofit organizations, and the assistant state refugee coordinator. The local voluntary agency solicits input from the committee annually on the number of refugees the community has the capacity to serve in the coming year and also meets quarterly to address other issues such as the needs of service providers. Committee members told us that the number of new refugees arriving in Fargo declined after the committee was developed. Committee members and voluntary agency officials said that their close communication allows them to better educate the community and better serve the refugees, and both believe the number being resettled is manageable. Similarly, in Boise, Idaho, city officials formed a roundtable group to develop a Refugee Resource Strategic Community Plan in 2009 to work with the local voluntary agencies, the state refugee coordinator’s office, and community organizations to identify strategies for successful resettlement of Boise’s refugees, in light of the most recent economic downturn. The group includes representatives from the state coordinator’s office, local voluntary agencies, various city departments, school district representatives, nonprofit organizations, as well as employers, health care providers, and other community stakeholders. The group meets quarterly to review progress on the objectives outlined in the strategic plan. The local voluntary agencies obtain input from the group members on the community’s capacity for serving refugees, but they do not discuss the specific number of refugees that will be proposed to the national voluntary agency and PRM for resettlement. Roundtable members told us that the local voluntary agencies have worked with their national offices to reduce the proposed number of refugees to resettle in Boise in 2011 based on community capacity. The state of Tennessee has passed legislation that creates formal processes for communication between voluntary agencies and local stakeholders. Specifically, the Refugee Absorptive Capacity Act,was passed in 2011, requires the state refugee program office to enter into a letter of agreement with each voluntary agency in the state. The which letter of agreement must contain a requirement that local stakeholders mutually consult and prepare a plan for the initial placement of refugees in a community as well as a plan for ongoing consultation. In addition, the state program office must ensure that local voluntary agencies consult upon request with local governments regarding refugee placement in advance of the refugees’ arrival. Communities can benefit socially and economically from refugee resettlement. In all of the communities we visited, stakeholders said that refugees enriched their cultural diversity. For example, local service providers in Fargo commented that refugees bring new perspectives and customs to a city with predominately Norwegian ancestry. Some city officials and business leaders we spoke with in several communities said that refugees help stimulate economic development by filling critical labor shortages as well as by starting small businesses and creating jobs. For instance, new refugee-owned businesses revitalized a neighborhood in Chicago after other businesses in the area closed. In addition, an official in Washington State told us that diverse resettlement communities with international populations attract investment from overseas businesses. According to ORR officials, refugees also bring economic benefits to communities by renting apartments, patronizing local businesses, and paying taxes, and the presence of refugees may increase the amount of federal funding that a community receives. In Boise, officials commented that the refugee students helped stabilize the public school population, which had been declining before the city established a refugee resettlement program. While refugees can benefit their communities, they can also stretch the resources of local service providers, such as school districts and health care systems. In several communities we visited, school district officials said that it takes more resources to serve refugee students than nonrefugee students, because they sometimes lack formal schooling or have experienced trauma, which can require additional supports, such as special training for school staff. In addition, newly arrived refugee students often have limited English proficiency, and hiring interpreters can be costly. Similarly, some health care providers expressed concerns about serving refugees, because they said that they are required to provide interpreter services to patients with limited English proficiency. One provider told us that their clinic spent more than $100,000 on interpreter services in the previous year, costs that were not reimbursed. In addition, in some communities we visited, school district officials and health care providers said that locating interpreters for certain languages can be difficult. ORR and PRM officials noted that these impacts are not unique to refugees and that serving immigrants may pose similar challenges. ORR offers discretionary grants to assist school districts that serve a large number of refugees, but we learned that district officials may be unaware of these grants or may decide that the effort involved in applying for them outweighs the potential benefits. For example, through its school impact grant, ORR funds activities for refugee students such as English as a Second Language instruction and after-school tutorials. However, school district officials in one community that was new to the refugee resettlement program said they had no information about where they could find assistance in serving refugee students. In another community, district officials were aware of the school impact grant, but said they did not apply for it because they found the application process to be burdensome and the funding level would have been insufficient to meet their needs. In addition to stretching school district resources, refugee students can also negatively affect district performance outcomes. School district performance is measured primarily by students’ test scores, including the scores of refugee students. School district officials in several communities said that even though refugee students often have limited English proficiency, they are evaluated against the same metrics as their native English-speaking peers, which can result in lower performance outcomes for the district. In one community, officials told us that the district had not demonstrated adequate yearly progress under the state standards in recent years, and they attributed this in part to the test scores of refugee students. Furthermore, refugees who exhaust federal refugee assistance benefits and are not self-sufficient can strain local safety nets. Refugees who are no longer eligible to receive cash and medical assistance from ORR after 8 months but are unemployed—or are working in low-wage jobs that do not provide sufficient income—may seek help from local service providers such as food pantries, organizations providing housing assistance, and even homeless shelters. If service providers are unprepared to serve these refugees in addition to their other clients, it can stretch their budgets and diminish the safety net resources available to others in the community. Table 3 lists the benefits and challenges of refugee resettlement identified by stakeholders in the communities we visited. Migration from one community to another after initial resettlement— referred to as secondary migration—can unexpectedly increase the refugee population in a community, and communities that attract large numbers of secondary migrants may not have adequate, timely funding to provide resettlement services to the migrants who need them. According to ORR, refugees relocate for a variety of reasons: better employment opportunities, the pull of an established ethnic community, more welfare benefits, better training opportunities, reunification with relatives, or a more congenial climate. Not all refugees who migrate choose to access resettlement services in their new communities, according to PRM officials. However, for those migrants who need resettlement services, federal funding does not necessarily follow them to their new communities, even though refugees continue to be eligible for some resettlement services for 5 years after arrival. According to ORR officials, refugees who relocate while they are receiving cash assistance, medical assistance, or refugee social services are eligible to continue receiving those services in their new communities for a limited time.However, ORR does not coordinate this continuation of service, and state refugee coordinators must communicate with one another to determine eligibility for each refugee who relocates. In addition, ORR provides grants to communities and states affected by secondary migration, but the annual cycle of these grants may not provide ORR the flexibility to respond in a timely manner. ORR uses secondary migration data submitted by states once a year, among other data, to inform refugee social services funding allocations for future fiscal years. According to ORR officials, these formula grants are awarded annually to states based on the number of refugee arrivals during the previous 2 years. As a result, a year may pass before states experiencing secondary migration receive increased funding. For example, Minnesota reported to ORR that 1,999 refugees migrated into the state during fiscal year 2010, but under ORR’s current formula funding process, the state would not have received increased funding until fiscal year 2011. In another example, social services funding did not keep pace with a large number of arrivals of both newly resettled refugees and secondary migrants in Detroit in fiscal year 2008. According to a report commissioned by ORR, after this rapid influx of arrivals, caseloads rose to 150 clients per caseworker in the employment and training program, and caseworkers were forced to devote a majority of their time to paperwork and case management, which limited their ability to provide job development and training services. Further, ORR will not adjust a state’s level of social services funding to account for secondary migration until it verifies that the refugees migrated to the state. According to one state refugee coordinator, ORR rejects the data states submit if the refugee’s information does not match the information in ORR’s database or if two or more states claim to have served the same refugee. ORR officials said that, while their process allows states to update missing data and correct formatting errors, it does not allow states to resubmit data that does not match the information in ORR’s database or that was submitted by two or more states. ORR offers supplemental, short-term funding to help communities affected by secondary migration. For example, the Supplemental Services for Recently Arrived Refugees grant is designed to help communities provide services to secondary migrants or newly arriving refugees when the communities are not sufficiently prepared in terms of linguistic or culturally appropriate services or do not have sufficient service capacity. However, this grant is only available to communities that will serve a minimum of 100 refugees annually, and the funding is for a fixed period of time. Communities must apply and be approved for the grant, and funding may not arrive until many months after the influx began. For example, in a draft report on secondary migration commissioned by ORR, the Spring Institute for Intercultural Learning found that one community did not receive supplemental funding until 14 months after secondary migrant refugees began arriving. Without comprehensive secondary migration data, ORR cannot target supplemental assistance to communities and refugees in a timely way. Currently, the data that PRM and ORR collect on secondary migration are limited and little is known about secondary migration patterns. PRM collects data from local voluntary agencies regarding the number of refugees who move away from a community within the first 90 days after arrival, but does not collect data on the estimated number of refugees who enter the community during the same time period. PRM officials said that they use these out-migration data to assess the success of refugee placement decisions. In contrast, ORR collects secondary migration data annually from each state, but does not collect community-level data. Specifically, ORR collects information on the number of refugees who move into and out of each state every year. However, ORR officials explained that they can only collect these data when secondary migrants access services. As a result, refugees who move into or out of a state but do not use refugee services in their new communities are not counted. Even so, these refugees access other community services and their communities may need additional assistance to meet their needs. Secondary migration can strain local resources significantly. For example, the draft report on secondary migration prepared for ORR by the Spring Institute for Intercultural Learning found that refugees who migrate to new communities can overwhelm local service providers, such as health departments, that are unprepared to serve them. In addition, a report prepared for ORR by General Dynamics Information Technology, Inc. found that, in one community, the influx of a large number of secondary migrants who lacked resources led to a homelessness crisis that stressed the capacity of both the shelter system and the other agencies serving refugees. Some communities that face challenges in serving additional refugees have requested restrictions or even temporary moratoriums on refugee resettlement. According to PRM, the cities of Detroit and Fort Wayne, Indiana, requested restrictions on refugee resettlement due to poor economic conditions. In response, PRM limited resettlement in Detroit and Fort Wayne to refugees who already have family there.the mayor of Manchester, New Hampshire, asked in 2011 that PRM temporarily stop resettling refugees in the city because of a shortage of jobs and sufficient affordable housing. While PRM did not grant the requested moratorium, the agency reduced the number of refugees to be resettled there in fiscal year 2011 from 300 to about 200. PRM officials said that a moratorium on resettlement would not have made sense because nearly all of the refugees slated to be resettled in Manchester have family there and would likely relocate to Manchester eventually— even if they were initially settled in another location. Tennessee recently created a process by which communities could request a temporary moratorium on refugee resettlement for capacity reasons. The state’s Refugee Absorptive Capacity Act allows local governments to submit a request to the state refugee office for a 1-year moratorium on resettling additional refugees if they document that they lack the capacity to do so and if further resettlement would have an adverse impact on residents. The state refugee office may then forward this request to PRM. Passed in 2011, the law states that local governments should consider certain capacity factors—the capacity of service providers to meet existing needs of current residents, the availability of affordable housing, the capacity of the school district to meet the needs of refugee students, and the ability of the local economy to absorb new workers—before making such a request. According to PRM, to date, no community in Tennessee has submitted such a request. PRM conducts regular on-site monitoring of national voluntary agencies and about 350 local affiliates to ensure that the voluntary agencies deliver the services outlined in their cooperative agreements. Under the cooperative agreements, local voluntary agencies must provide certain services to refugees in the first 30 to 90 days after they arrive. PRM monitors national voluntary agencies annually and local affiliates once every 5 years, and requires national voluntary agencies to monitor their affiliates at least once every 3 years. During its local affiliate monitoring visits, PRM reviews case files and interviews staff. PRM officials also visit a small sample of refugees in their homes to ensure that the refugees received clean, safe housing and appropriate furniture. PRM also requires voluntary agencies to report certain outcome measures for each refugee they resettle. In recent years, PRM found most local affiliates generally compliant, and for those that were not, PRM made recommendations and required immediate corrective action. For fiscal years 2009 through 2011, according to PRM, it conducted 136 on-site monitoring visits. In over three-quarters of those visits, PRM determined that the local affiliate was compliant or mostly compliant. In about one-quarter of the cases, however, PRM determined that they were partially or mostly noncompliant (about 20 percent) or simply noncompliant (about 5 percent). PRM or national resettlement agencies can make return, on-site monitoring trips to assess the progress of affiliates when problems are identified. Furthermore, if the problems persist, national voluntary agencies can close an affiliate’s operation or PRM can decide not to allow placement of refugees at an affiliate. For fiscal year 2011, PRM determined that the most common recommendation made to local affiliates was that the local affiliate should document the reason core services could not be provided in the required time frames. (See table 4 for the top 10 recommendations made for fiscal year 2011.) Whereas PRM’s oversight focuses on services provided, ORR’s oversight focuses more on performance outcomes. In order to assess the performance of its programs that provide cash, medical assistance, and social services to refugees, ORR monitors employment outcomes and cash assistance terminations (see table 5). It uses a similar set of measures for its Matching Grant program. According to ORR, its focus on employment outcomes as a measure of effectiveness is based on the Immigration and Nationality Act, as amended, which requires ORR to help refugees attain economic self- sufficiency as soon as possible. ORR considers refugees self-sufficient if they earn enough income that enables the family to support itself without cash assistance—even if they receive other types of noncash public assistance, such as Supplemental Nutrition Assistance Program benefits or Medicaid. ORR conducts its on-site monitoring at the state level to ensure the program is able to collect and report accurate data and to ensure that the state is able to provide services to refugees. ORR’s on-site monitoring identifies deficiencies as well as best practices. ORR generally monitors state refugee coordinators onsite once every 3 years, as the state coordinator is responsible for administering and overseeing ORR’s major grants. During the on-site visit, ORR also monitors a sample of subgrantees. In monitoring reports from its most recent on-site monitoring in the states we visited, ORR identified a number of deficiencies including: failure to inform refugees that they were eligible for certain services for up to 5 years, failure to ensure that medical assistance was terminated at the end of the 8-month eligibility period, failure to ensure that translators were available when providing services to refugees, and missing documentation in case files. The monitoring reports contained ORR’s recommendations and noted when corrective action was required. ORR’s monitoring reports also identified program strengths and best practices that monitors observed while on site. For example, one ORR monitoring report noted that having a state refugee housing coordinator was a program strength, because this coordinator can locate affordable housing and research funding sources, which saves the caseworkers time and effort. In the same state, ORR found that having an employment specialist at a voluntary agency who can help refugees obtain job upgrades and pursue professional certificates was also a program strength. According to ORR officials, they supplement this on-site monitoring with desk monitoring, which may include reviews of case files, or reviews of information provided in periodic reports. Neither ORR nor PRM has formal mechanisms for collecting and sharing information gleaned during monitoring to improve services, such as solutions to common problems or promising practices. ORR and PRM officials identified some informal mechanisms for sharing such information with service providers, but relied mostly on service providers to network among themselves or share information during quarterly conference calls and annual consultations. ORR also relies on external technical assistance providers to disseminate best practices when training grantees and expects state refugee coordinators to share findings of monitoring reports with their local partners. However, monitoring reports are not publicly available, and, unless the state coordinators share this information, service providers may not be able to identify promising practices, track monitoring results, identify trends, and address common issues. As a result, service providers do not always get the information they need to improve services, whether by preventing a problem or implementing a best practice. ORR’s performance measures focus on short-term outcomes, even though refugees remain eligible for social services funded by ORR for up to 5 years. Because it is important for refugees to become employed before their cash assistance runs out—8 months or less, depending on the service delivery model—ORR’s performance measures provide incentives for service providers to focus on helping refugees gain and maintain employment quickly. Specifically, ORR requires grantees to measure entered employment at 6 months for the Matching Grant program or 8 months for statewide cash assistance programs. In addition, ORR requires grantees to measure job retention 90 days after employment. This focus on short-term employment, however, can result in a one-size-fits-all approach to employment services and may, in turn, limit service providers’ flexibility to provide services that may benefit refugees after the 6 to 8 month time frame. That is, with limited incentives to focus on longer-term employment and wages, service providers may not help refugees obtain longer-term services and training, such as on- the-job or vocational training, which could significantly boost their income or benefit the refugee in the long-term or after employment is measured.For example, when assisting refugees who arrive with college degrees and professional experience, service providers may not help them earn a credential valid in the United States, because the providers’ effectiveness is measured by whether the refugee is employed. Additionally, ORR does not allow skills certification training to exceed 1 year and requires the refugees to be employed when receiving training and services. Several service providers mentioned this as a challenge for highly skilled Iraqi refugees, in particular, some of whom include doctors and engineers. In addition, voluntary agency officials noted that ORR’s employment measures do not allow them to report on the longer-term or non- employment-related outcomes of the other refugee resettlement services they provide. As a result, services such as skills training, English language training, or mental health services—which provide longer-term benefits and benefits unrelated to employment—may not be emphasized. According to some local voluntary agency officials we spoke to, given the current performance measures, there is a disincentive to dedicate necessary time and resources to the nonemployment activities that create pathways to success for refugees. It may be particularly difficult to serve those who do not arrive in the United States ready to work due to trauma, illness, or lack of basic skills. While much of ORR’s grant funding focuses on short-term employment, ORR does have some discretionary grants that provide funding for particular purposes that may include services that focus on longer-term goals or more intensive case management. For example, the individual development account program provides matching funds to help refugees save money for the purchase of a vehicle or a home. For these relatively small competitively awarded discretionary grant programs, ORR gathers data on how much money was saved and what assets were purchased, but does not gather data on how these asset purchases affected earnings or self-sufficiency. Descriptions of discretionary grants that can be used to fund services beyond the initial resettlement period, as well as other selected ORR and PRM grant programs, can be found in appendix IV. In addition to the employment measures’ focus on short term outcomes, one state coordinator also noted that these employment measures leave room for interpretation. Specifically, some voluntary agencies may have a narrow definition of employment services while others may have a broader definition. In turn, the percentage of refugees who become employed after receiving employment services could vary based on what types of services are considered employment services. As a result, according to a state coordinator, measures may not provide consistent information about how well a program is performing in different communities. While federal refugee resettlement programs generally provide only short- term assistance, PRM and ORR both aim to prepare refugees for long- term integration into their communities. Although there is no single, generally accepted definition of integration in the literature, integration can be defined as a dynamic, multidirectional process in which newcomers and the receiving communities intentionally work together, based on a shared commitment to acceptance and justice, to create a secure, welcoming, vibrant, and cohesive society. The federal government’s efforts to facilitate integration begin before refugees even enter the United States, as PRM offers cultural orientation for all refugees and recently piloted English language training for refugees in certain overseas locations. According to PRM, this cultural orientation and language training is intended to lay the groundwork for refugees’ long- term integration into the United States. Integration is also a part of ORR’s mission and overall goal, and officials told us that they consider integration to be a central aspect of refugee resettlement. Although ORR only provides refugees with cash and medical assistance for a maximum of 8 months, officials noted that this initial assistance helps set the foundation for long-term integration. Other ORR programs provide longer- term services that are intended to further facilitate integration, but these services may not be as widely available as cash and medical assistance. For example, ORR’s social services grant program funds employment services and other support services to refugees for up to 5 years after arrival, but communities may choose to provide these services for a shorter period of time due to local resource constraints. ORR’s discretionary grants for micro-enterprise assistance and individual development accounts are also designed to facilitate integration by helping refugees start businesses in the communities where they live, among other goals. However, these discretionary grants are competitively awarded and are thus not available to all communities. ORR has studied approaches that facilitate refugee integration. In 2006, ORR created an integration working group to identify indicators of refugee integration and ways in which ORR could more fully support the integration process. In a 2007 interim report, the working group made both short-term and long-term recommendations to ORR, including that it (1) consider expanding ORR’s discretionary grant programs; (2) focus on integration in the areas of employment, English language acquisition, health, housing, and civic engagement; and (3) identify lessons learned from communities where refugee integration appears to be taking place. ORR officials told us that they have implemented many, but not all, of the working group’s recommendations due to funding constraints. For example, ORR commissioned a study to identify promising practices that appear to facilitate integration in four U.S. cities. Neither PRM nor ORR currently measure refugee integration as a program outcome. According to PRM, it does not measure refugee integration due to the short-term nature of the Reception and Placement Program. While refugee integration is part of ORR’s mission and overall goal, ORR officials said they have not measured it because there is no clear definition of integration, because it is unclear when integration should be measured, and because the Refugee Act focuses on self- sufficiency outcomes related to employment. Even so, ORR officials told us that they collect some data related to refugee integration. Specifically, as part of its annual report to Congress, ORR conducts a survey to gauge refugees’ economic self-sufficiency that includes integration-related measures such as employment, English language proficiency, participation in job training, attendance in a high school or university degree or certificate program, and home ownership. However, ORR officials noted that the survey is not designed to measure integration and should not be used for this purpose, especially since there is no clear definition of integration. In addition, the survey has had a low response rate, which may affect the quality of the data. Studies on refugee resettlement do not offer a broad assessment of how well refugees have integrated into the United States. Of the 13 studies we identified that addressed refugee integration, almost all were limited in scope in that they focused on particular refugee groups in specific geographic locations.of specific refugee groups, including factors that help refugees successfully integrate into their communities. However, because of the studies’ limited scope and differences in their methodologies, they provide limited insight into how refugees overall have integrated in the United States or how the experiences of different groups compare to one another. The studies describe the integration experiences Although the studies we reviewed were not directly comparable, together they identified a variety of indicators that can be used to assess progress toward integration for both individuals and communities, as well as common facilitators of integration. Indicators of integration include employment, English language acquisition, housing, physical and mental health, and social connections, as well as political involvement, citizenship status, and participation in community organizations. One study noted that when assessing integration, it is important to ask refugees whether they consider themselves to be integrated. The studies we reviewed also identified a range of barriers to integration. Some frequently cited barriers were a lack of formal education, illiteracy or limited English proficiency, and insufficient income from low-paying jobs. For example, refugees who are illiterate or have limited English proficiency may be limited to low-paying jobs such as hotel housekeepers and may not earn sufficient income to meet their needs. Furthermore, one study found that the timing of employment can be a barrier to integration. Specifically, the study found that taking a job soon after arrival can slow down the acquisition of English language skills because refugees may have less available time to attend language classes. In addition, the studies we reviewed identified facilitators of integration— circumstances and strategies that can help refugees integrate successfully into their communities. English language acquisition is an important facilitator of integration. For example, one study found that refugees who are proficient in English are better able to connect with nonrefugees in their communities, expanding their social connections and sources of support. Other facilitators of integration included employment, social support from other refugees, and affiliation with or sponsorship by a religious congregation. For example, religious congregations may provide refugees with language classes, social activities, emotional and financial support, and linkages with employment and educational opportunities, medical care, and transportation. See table 6 for additional examples of indicators of integration, barriers to integration, and facilitators of integration. While most of the communities we visited had not established formal goals or strategies to facilitate refugee integration, two of the eight communities had developed formal plans to promote integration. The City of Boise, for example, developed a plan to facilitate the successful resettlement of refugees that includes goals related to integration. Specifically, the plan aims to facilitate integration by (1) establishing refugee community centers, (2) using a media campaign to increase community awareness and support of refugees, and (3) creating a mentoring program for refugee youth, among other things. Similarly, the Village of Skokie, Illinois, a suburb of Chicago, created a strategic plan to help facilitate the integration of immigrants, including refugees, by (1) establishing a coordinating council of key service providers, (2) developing a system to improve providers’ access to interpreters, and (3) recruiting and training immigrant and refugee community leaders for government commissions and school boards, among other strategies. Additionally, in Lancaster, Pennsylvania, Franklin & Marshall College had taken a variety of steps to help facilitate the integration of refugees, including using student volunteers to teach refugees English, tutor refugee students, and help refugee families enroll their children in school and access public health services. In addition, at the time of our visit, the college was partnering with a local voluntary agency affiliate to plan a community conference on refugee integration with the goals of (1) better understanding and addressing the needs of refugees, (2) identifying strategies for fostering rapid integration, and (3) developing a broad coalition of organizations serving refugees that could continue to work together on these issues in the future. Each year, as part of its humanitarian role in the international community, the United States admits tens of thousands of refugees who add richness and diversity to our society but can also have a significant impact on the communities in which they live, particularly in cases where relevant state and local stakeholders are not consulted before refugees are resettled. Advance consultation is important because stakeholders need time to plan so that they can properly serve refugees when they arrive, and because their input on the number of refugees to be resettled can help communities avoid reaching a crisis point. Information about communities that have developed effective strategies for consultation would likely benefit other communities facing similar obstacles. Without more specific guidance and information on effective strategies for consultation, communities may continue to struggle to meet refugees’ needs, which may negatively affect both refugees and their communities and would likely deter integration. Similarly, while ORR has recognized that some service providers have particularly effective strategies for resettlement, neither ORR nor PRM disseminate this information to other service providers. As a result, not all communities are aware of ways they can do their work more effectively. Furthermore, while refugees can receive resettlement services for up to 5 years, some find it difficult to access those services when they relocate to another community. In addition, states do not receive increased funding for serving secondary migrants until the year after refugees relocate. As a result, in communities that experience high levels of secondary migration, voluntary agencies and service providers may not have the resources to provide services to the migrants who need them. Without a funding process that would respond more quickly to localities experiencing high rates of secondary migration, voluntary agencies may have to prioritize serving recently arrived refugees and communities may find their resources for refugees stretched too thin. As required by the Immigration and Nationality Act, as amended, ORR’s programs are designed to help refugees become employed as quickly as possible. ORR’s measures of effectiveness, which focus on whether refugees gain employment in the short term, in turn, influence the types of services that refugees receive. Specifically, service providers may choose to provide services that encourage short-term independence from cash assistance, but might not help refugees achieve long-term self- sufficiency. However, refugees may face unique challenges such as a lack of formal education or work experience, language barriers, and physical and mental health conditions that can make the transition to the United States difficult. Without some incentives to focus on long-term self- sufficiency in addition to short-term independence from cash assistance, refugees may be more likely to need government assistance again in the future, and it may take longer for both refugees and their communities to experience the benefits of integration. We are making the following four recommendations based on our review: To help ensure that state and local stakeholders have the opportunity to provide input on the number of refugees resettled in their communities, we recommend that the Secretary of State provide additional guidance to resettlement agencies and state coordinators on how to consult with local stakeholders prior to making placement decisions, including with whom to consult and what should be discussed during the consultations; and the Secretaries of State and of Health and Human Services collect and disseminate best practices related to refugee placement decisions, specifically on working with community stakeholders, as well as other promising practices from communities. To assist communities in providing services to secondary migrants, we recommend that the Secretary of Health and Human Services consider additional ways to increase the responsiveness of the grants designed for this purpose. This could include asking states to report secondary migration data more often than once a year, allowing resubmission of secondary migration data from states that was rejected because it did not match ORR’s database, creating a process for counting migrants who received services in more than one state, and establishing an emergency grant that could be used to more quickly identify and assist communities that are struggling to serve high levels of secondary migrants. To give service providers more flexibility to serve refugees with different needs and to create incentives to focus on longer term goals, including integration, independence from any government services, and career advancement, we recommend that the Secretary of Health and Human Services examine ORR’s performance measures in light of its goals and determine whether changes are needed. We shared a draft of this report with HHS and State for review and comment. In its written comments, reproduced in appendix VI, HHS generally concurred with our recommendations. Specifically, HHS stated that it supports our recommendation to disseminate best practices, including promising practices from communities, while noting that State and nonprofit community-based and faith-based organizations have traditionally taken the lead on resettling refugees. HHS highlighted the efforts it has made in conducting quarterly placement meetings, which include resettlement agencies and refugee coordinators. While these meetings may be helpful, we believe that HHS can also implement this recommendation by disseminating best practices and program strengths that it documents through its monitoring of states and service providers. In addition, HHS concurred with our recommendation that it consider additional ways to increase the responsiveness of grants that help communities provide services to secondary migrants, but noted that it already provides Supplemental Services grants, which provide short-term assistance to areas that are impacted by increased numbers of new arrivals or secondary migrants. In addition, it raised concerns that an increase in the frequency of data collection would significantly increase the reporting burden without a mandatory need for the data. HHS also stated that it has a process in place for notifying states of technical problems with population data submitted and allowing them to make corrections. While we recognize that HHS has strategies in place to serve secondary migrants, we continue to believe that (1) the Supplemental Services grants can be improved to be more responsive; (2) more up-to- date population data can help HHS respond more quickly to communities experiencing high levels of secondary migration; and (3) improvements can be made to the process for correcting population data. HHS also stated that it will consider modifying its performance measures and will also continue to assess the usefulness of data elements collected through required reporting to ensure that the program addresses both self-sufficiency and integration. HHS noted, for example, that it has already begun collecting more information about health through its annual survey of refugees and expanded the number of reporting elements pertaining to health in its program performance reporting form. In addition, it is developing approaches to increase the overall participation rates in its annual survey. In its written comments, reproduced in appendix VII, State generally concurred with our recommendations and outlined steps it will take to address them. HHS and State also provided technical comments that were incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to relevant congressional committees, the Secretary of Health and Human Services, the Secretary of State, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. To identify the factors resettlement agencies consider when deciding where refugees are initially placed, we reviewed relevant federal and state laws and regulations and other relevant documents, and conducted interviews with federal agency officials and national voluntary agency staff. We interviewed officials from the U.S. Department of State’s Bureau of Population, Refugees, and Migration (PRM) and the Department of Health and Human Services’ Office of Refugee Resettlement (ORR), as well as representatives from several national voluntary resettlement agencies. We also reviewed documents related to the refugee placement process, such as relevant federal and state laws and regulations, guidance for determining community capacity to resettle refugees, the terms of the cooperative agreements between PRM and national voluntary agencies, and funding opportunity announcements for PRM’s Reception and Placement Program. To understand the effects refugees have on their communities, we met with experts on refugee programs and conducted site visits to eight communities across the United States where we met with representatives from state and local government entities, voluntary agency affiliates, community-based organizations, local businesses, and other relevant individuals and groups, including refugees, professors from local universities, and a local church that provided assistance to refugees. For our site visits, we selected Boise, Idaho; Chicago, Illinois; Detroit, Michigan; Fargo, North Dakota; Knoxville, Tennessee; Lancaster, Pennsylvania; Owensboro, Kentucky; and Seattle, Washington. These eight communities represent a nongeneralizable sample that was selected to include geographically distributed communities with variations in their population sizes, levels of experience resettling refugees, and racial and ethnic diversity. In addition to these factors, several communities were selected because they are considered examples of best practices in refugee resettlement by federal officials. All of the selected communities were receiving refugees at the time we visited. We developed site selection criteria based on available literature that discussed factors that influence the impact of refugees on their respective communities and factors that either facilitate or hinder refugee integration. We used these criteria in combination with one another to arrive at a diverse set of communities with varying characteristics. To assess the effectiveness and integrity of refugee resettlement programs, we interviewed federal agency officials, state coordinators, and local voluntary agencies. We also reviewed federal agencies’ monitoring plans, protocols and selected monitoring reports for the communities we visited. We reviewed the terms of the cooperative agreements between PRM and national voluntary agencies, as well as reporting guidance, sample performance reports, and performance measures federal agencies use to monitor their programs. To determine what is known about refugees’ integration into the United States, we conducted a literature review of academic research on this topic. To identify relevant studies, we conducted searches of various databases including Academic OneFile, EconLit, Education Resources Information Center, National Technical Information Service, PAIS International, PASCAL, ProQuest, PsycINFO, Social Sciences Abstracts, Social Services Abstracts, Social SciSearch, Sociological Abstracts, and WorldCat. We conducted a search using the following criteria, which yielded 18 studies: Studies must address the integration of refugees into U.S. Studies must have been published from 1995 to the present; Studies must be in English; and Studies must be scholarly, such as peer-reviewed journal articles. We performed these searches and identified studies between August 2011 and October 2011. In addition, ORR officials provided us with an ORR-commissioned study of promising practices that appear to facilitate refugee integration, and this study met our selection criteria. To assess the methodological quality of the 18 studies that met our selection criteria, we evaluated each study’s research methodology, including whether the study was original research, the reliability of the data set, if applicable, and the study’s findings, assumptions, and limitations. We determined that 13 of the 18 studies were sufficiently reliable for our purposes. We then analyzed the findings of these 13 studies. In addition to conducting a literature review, we met with officials from ORR and PRM to determine what, if any, efforts the federal government has to define, measure, or facilitate refugees’ integration into the United States. We discussed refugee integration in our interviews with state and local entities during our site visits. We also reviewed the ORR integration working group’s 2007 interim report and ORR’s annual reports to Congress. We also obtained secondary migration data from ORR’s annual report. We assessed the reliability of this data by interviewing ORR officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purpose of background in this report. We conducted this performance audit from May 2011 through July 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Abu-Ghazaleh, F. “Immigrant Integration in Rural Communities: The Case of Morgan County.” National Civic Review, vol. 98, no. 1 (2009). Birman, D., and N. Tran. “Psychological Distress and Adjustment of Vietnamese Refugees in the United States: Association with Pre- and Postmigration Factors.” American Journal of Orthopsychiatry, vol. 78, no. 1 (2008). Duchon, D. A. “Home Is Where You Make It: Hmong Refugees in Georgia.” Urban Anthropology, vol. 26, no. 1 (1997). Franz, B. “Transplanted or Uprooted? Integration Efforts of Bosnian Refugees Based Upon Gender, Class and Ethnic Differences in New York City and Vienna.” The European Journal of Women’s Studies, vol. 10, no. 2 (2003). Grigoleit, G. “Coming Home? The Integration of Hmong Refugees from Wat Tham Krabok, Thailand, into American Society.” Hmong Studies Journal, vol. 7 (2006). Hume, S.E., and S.W. Hardwick. “African, Russian, and Ukrainian Refugee Resettlement in Portland, Oregon.” The Geographical Review, vol. 95, no. 2 (2005). ISED Solutions. Exploring Refugee Integration: Experiences in Four American Communities. A report prepared at the request of the Department of Health and Human Services Office of Refugee Resettlement. June 2010. Ives, N. “More than a ‘Good Back’: Looking for Integration in Refugee Resettlement.” Refuge, vol. 24, no. 2 (2007). Kenny, P., and K. Lockwood-Kenny. “A Mixed Blessing: Karen Resettlement to the United States.” Journal of Refugee Studies, vol. 24, no. 2 (2011). Patil, C.L., M. McGown, P.D. Nahayo, and C. Hadley. “Forced Migration: Complexities in Food and Health for Refugees Resettled in the United States.” NAPA Bulletin, vol. 34, issue 1 (2010). Shandy, D., and K. Fennelly. “A Comparison of the Integration Experiences of Two African Immigrant Populations in a Rural Community.” Journal of Religion & Spirituality in Social Work, vol. 25, no. 1 (2006). Smith, R.S. “The Case of a City Where 1 in 6 Residents is a Refugee: Ecological Factors and Host Community Adaptation in Successful Resettlement.” American Journal of Community Psychology, vol. 42, no. 3-4 (2008). Westermeyer, J.J. “Refugee Resettlement to the United States: Recommendations for a New Approach.” The Journal of Nervous and Mental Disease, vol. 199, no. 8 (2011). Description Provides financial support to partially cover resettlement services based on a fixed per capita sum per refugee resettled in the United States. Services include arranging for refugees’ placement and providing refugees with basic necessities and core services during their initial resettlement period. Reimburses states and alternative refugee assistance programs for the cost of cash and medical assistance provided to refugees during the first 8 months after their arrival in this country or grant of asylum. It does not provide reimbursement for refugees deemed eligible for Temporary Assistance for Needy Families, Supplemental Security Insurance, and Medicaid. Funds are provided on a matching basis to provide private, nonprofit organizations to fund an alternative to public cash assistance and to support case management, employment services, maintenance assistance, cash allowance, and social services for new arrivals for 4 to 6 months. Provides funding for employment and other social services to refugees for 5 years after their data of arrival or grant of asylum. Provides funding for employment-related and other social services for refugees in counties with large refugee populations and high refugee concentrations. Provides funds to provide medical screenings to newly arriving refugees, interpreter services, information and referral, and health education. Funds to states to implement special employment services not implemented with formula social services grants. Provides funding for employment-related and other social services for refugees in counties with large refugee populations and high refugee concentrations. Provides funds to subcontract with local school systems and nonprofits to support local school systems that are impacted by significant numbers of newly arrived refugee children. Provide funds to ensure that older refugees will be linked to mainstream aging services in their communities or to provide services directly to older refugees if they are not currently being provided for in the community. Description The Preferred Communities Program supports the resettlement of newly arriving refugees with the best opportunities for their self-sufficiency and integration into new communities, and supports refugees with special needs that require more intensive case management, culturally and linguistically appropriate linkages and coordination with other service providers to improve their access to services. Provides funding for a comprehensive program of support for survivors of torture, including rehabilitation, social and legal services, and training for providers. Funds projects to establish and manage Individual Development Accounts, which are matched savings accounts available for the purchase of specific assets. Matching funds, together with the refugee’s own savings, are available for purchasing one (or more) of four savings goals: home purchase; microenterprise capitalization; postsecondary education or training; and purchase of an automobile if necessary for employment or educational purposes. Grants to enable organizations with expertise in a particular area to provide assistance to ORR-funded agencies. Provides funding to assist refugees to become financially independent by helping them develop capital resources and business expertise to start, expand, or strengthen their own businesses. Microenterprise projects typically include components of training and technical assistance in business skills and business management, credit assistance, and credit in the form of micro loans. Provides agricultural and food related resources and technical information to refugee families that are consistent with their agrarian backgrounds, and results in rural and urban farming projects that supports increased incomes, access to quality and familiar foods, better physical and mental health, and integration into this society. Provides funds to provide services to newly arriving refugees or sudden and unexpected large secondary migration of refugees where communities are not sufficiently prepared in terms of linguistic or culturally appropriate services and/or do not have sufficient service capacity. Provides funds to support ethnic community based organizations in providing refugee populations with critical services to assist them in becoming integrated members of American society. For the purposes of this table, states refers to state agencies, state alternative programs, and state replacement designees. State alternative programs include (1) the Wilson/Fish program, which gives states flexibility in how they provide assistance to refugees, including whether to administer assistance primarily through local voluntary agencies, and (2) the Public Private Partnership program, which allows states to partner with local voluntary agencies to provide assistance. State replacement designees are authorized by ORR to administer assistance to refugees when a state withdraws from all or part of the refugee program. For the purposes of this table, refugees refers to refugees, certain Amerasians from Viet Nam, Cuban and Haitian entrants, asylees, victims of a severe form of trafficking, and Iraqi and Afghan Special Immigrants. In January 2007, ORR’s Integration Working Group made short-term and long-term recommendations regarding ways in which ORR could more fully support the integration process for refugees. Include integration language in all grant announcements. Review discretionary grant programs offered in the standing announcement, ensuring that they promote integration. Establish the Department of Health and Human Services as the lead federal agency for integration. Consider expanding ORR’s discretionary programs. Focus on integration in the areas of employment, English language acquisition, health, housing, and civic engagement. Focus technical assistance providers to support integration as an intentional process leading to civic engagement and citizenship. Seek and fund pilot programs such as the Building the New American Community project. Develop an initiative to support professional recertification and credentialing for qualified individuals. Identify and share best practices through a survey of states, mutual aid associations, and voluntary agencies. Identify lessons learned, including case studies, from communities in which integration appears to be working well and where there are challenges. Study the effect of ORR policy and funding initiatives to promote integration over a three to five year period. Refine/develop/disseminate an action model to be used for other immigrants and marginalized populations. Seek broader collaboration with nonfederal entities such as private foundations, businesses, financial institutions, and the United Way. In addition to the contact named above, Kathryn Larin, Assistant Director; Cheri Harrington and Lara Laufer, Analysts-in-Charge; James Bennett; David Chrisinger; Caitlin Croake; Bonnie Doty; Ashley McCall; Jean McSween; James Rebbe; and Carla Rojas made key contributions to this report. Sharon Hermes, Margaret Weber, and Amber Yancey Carroll verified our findings.

In fiscal year 2011, the United States admitted more than 56,000 refugees under its refugee resettlement program. Upon entry, a network of private, nonprofit voluntary agencies (voluntary agencies) selects the communities where refugees will live. The Department of State's PRM and the Department of Health and Human Services' ORR provide funding to help refugees settle in their communities and obtain employment and monitor implementation of the program. Congress has begun to reexamine the refugee resettlement program, and GAO was asked to examine (1) the factors resettlement agencies consider when determining where refugees are initially placed; (2) the effects refugees have on their communities; (3) how federal agencies ensure program effectiveness and integrity; and (4) what is known about the integration of refugees. GAO reviewed agency guidance, monitoring protocols, reports, and studies; conducted a literature review; reviewed and analyzed relevant federal and state laws and regulations; and met with federal and state officials, voluntary agency staff, and local stakeholders in eight selected communities. Voluntary agencies consider various factors when determining where refugees will be placed, but few agencies we visited consulted relevant local stakeholders, which posed challenges for service providers. When deciding how many refugees to place in each community, some voluntary agencies prioritize local agency capacity, such as staffing levels, while others emphasize community capacity, such as housing availability. Although the Immigration and Nationality Act states that it is the intent of Congress for voluntary agencies to work closely with state and local stakeholders when making these decisions, the Department of State's Bureau of Population, Refugees, and Migration (PRM) offers limited guidance on how this should occur. Some communities GAO visited had developed formal processes for obtaining stakeholder input after receiving an overwhelming number of refugees, but most had not, which made it difficult for health care providers and school systems to prepare for and properly serve refugees. State and local stakeholders reported that refugees bring cultural diversity and stimulate economic development, but serving refugees can stretch local resources, including safety net services. In addition, refugee students can negatively affect performance outcomes for school districts because they often have limited English proficiency. Furthermore, some refugees choose to relocate after their initial placement, and this secondary migration may stretch communities that do not have adequate resources to serve them. In fact, capacity challenges have led some communities to request restrictions or temporary moratoriums on resettlement. PRM and the Department of Health and Human Services' Office of Refugee Resettlement (ORR) monitor their refugee assistance programs, but weaknesses in performance measurement may hinder effectiveness. Although refugees are eligible for ORR services for up to 5 years, the outcome data that ORR collects focuses on shorter-term employment outcomes. ORR officials said that their performance measurement reflects the goals outlined by the Immigration and Nationality Act--to help refugees achieve economic self-sufficiency as quickly as possible. However, the focus on rapid employment makes it difficult to provide services that may increase refugees' incomes, such as helping them obtain credentials to practice their professions in the United States. Little is known about the extent of refugee integration into U.S. communities, but research offers a framework for measuring and facilitating integration. PRM and ORR both promote refugee integration, but neither agency currently measures integration as a program outcome. While integration is part of ORR's mission, ORR officials said one of the reasons they have not measured it is that there is no clear definition of integration. In addition, research on refugee resettlement does not offer an overall assessment of how well refugees have integrated into the United States. Most of the 13 studies GAO reviewed were limited in scope and focused on particular refugee groups in specific geographic locations. However, these studies identified a variety of indicators that can be used to assess integration as well as factors that can facilitate integration, such as English language acquisition, employment, and social support from other refugees. Despite limited national information, some U.S. communities have developed formal plans for refugee integration. GAO makes several recommendations to the Secretaries of State and Health and Human Services to improve refugee assistance programs in the United States. HHS and State generally concurred with the recommendations and each identified efforts they have under way or plan to undertake to address them.

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The National Flood Insurance Act of 1968 established NFIP as an alternative to providing direct assistance after floods. NFIP, which provides government-guaranteed flood insurance to homeowners and businesses, was intended to reduce the federal government’s escalating costs for repairing flood damage after disasters. FEMA, which is within the Department of Homeland Security (DHS), is responsible for the oversight and management of NFIP. Since NFIP’s inception, Congress has enacted several pieces of legislation to strengthen the program. The Flood Disaster Protection Act of 1973 made flood insurance mandatory for owners of properties in vulnerable areas who had mortgages from federally regulated lenders and provided additional incentives for communities to join the program. The National Flood Insurance Reform Act of 1994 strengthened the mandatory purchase requirements for owners of properties located in special flood hazard areas (SFHA) with mortgages from federally regulated lenders. Finally, the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized grant programs to mitigate properties that experienced repetitive flooding losses. Owners of these repetitive loss properties who do not mitigate may face higher premiums. To participate in NFIP, communities agree to enforce regulations for land use and new construction in high-risk flood zones and to adopt and enforce state and community floodplain management regulations to reduce future flood damage. Currently, more than 20,000 communities participate in NFIP. NFIP has mapped flood risks across the country, assigning flood zone designations based on risk levels, and these designations are a factor in determining premium rates. NFIP offers two types of flood insurance premiums: subsidized and full risk. The National Flood Insurance Act of 1968 authorizes NFIP to offer subsidized premiums to owners of certain properties. These subsidized premium rates, which represent about 40 to 45 percent of the cost of covering the full risk of flood damage to the properties, apply to about 22 percent of all NFIP policies. To help reduce or eliminate the long-term risk of flood damage to buildings and other structures insured by NFIP, FEMA has used a variety of mitigation efforts, such as elevation, relocation, and demolition. Despite these efforts, the inventories of repetitive loss properties—generally, as defined by FEMA, those that have had two or more flood insurance claims payments of $1,000 or more over 10 years—and policies with subsidized premium rates have continued to grow. In response to the magnitude and severity of the losses from the 2005 hurricanes, Congress increased NFIP’s borrowing authority from the Treasury to $20.8 billion. We have previously identified four public policy goals for evaluating the federal role in providing natural catastrophe insurance: charging premium rates that fully reflect actual risks, limiting costs to taxpayers before and after a disaster, encouraging broad participation in natural catastrophe insurance encouraging private markets to provide natural catastrophe insurance. Taking action to achieve these goals would benefit both NFIP and the taxpayers who fund the program but would require trade-offs. I will discuss the key areas that need to be addressed, actions that can be taken to help achieve these goals, and the trade-offs that would be required. As I have noted, NFIP currently does not charge all program participants rates that reflect the full risk of flooding to their properties. First, the act requires FEMA to charge many policyholders less than full-risk rates to encourage program participation. While the percentage of subsidized properties was expected to decline as new construction replaced subsidized properties, today nearly one out of four NFIP policies is based on a subsidized rate. Second, FEMA may “grandfather” properties that are already in the program when new flood maps place them in higher-risk zones, allowing some property owners to pay premium rates that apply to the previous lower-risk zone. FEMA officials told us that they made the decision to allow grandfathering because of external pressure to reduce the effects of rate increases, and considerations of equity, ease of administration, and the goals of promoting floodplain management. Similarly, FEMA recently introduced a new rating option called the Preferred Risk Policy (PRP) Eligibility Extension that in effect equals a temporary grandfathering of premium rates. While these policies typically would have to be converted to more expensive policies when they were renewed after a new flood map came into effect, FEMA has extended eligibility for these lower rates. Finally, we have also raised questions about whether NFIP’s full-risk rates reflect actual flood risks. Because many premium rates charged by NFIP do not reflect the full risk of loss, the program is less likely to be able to pay claims in years with catastrophic losses, as occurred in 2005, and may need to borrow from Treasury to pay claims in those years. Increasing premium rates to fully reflect the risk of loss—including the risk of catastrophic loss—would generally require reducing or eliminating subsidized and grandfathered rates and offers several advantages. Specifically, increasing rates could: result in premium rates that more fully reflected the actual risk of loss; decrease costs for taxpayers by reducing costs associated with postdisaster borrowing to pay claims; and encourage private market participation, because the rates would more closely approximate those that would be charged by private insurers. However, eliminating subsidized and grandfathered rates and increasing rates overall would increase costs to some homeowners, who might then cancel their flood policies or elect not to buy them at all. According to FEMA, subsidized premium rates are generally 40 to 45 percent of rates that would reflect the full risk of loss. For example, the projected average annual subsidized premium was $1,121 as of October 2010, discounted from the $2,500 to $2,800 that would be required to cover the full risk of loss. In a 2009 report, we also analyzed the possibility of creating a catastrophic loss fund within NFIP (one way to help pay for catastrophic losses). Our analysis found that in order to create a fund equal to 1 percent of NFIP’s total exposure by 2020, the average subsidized premium—which typically is in one of the highest-risk zones—would need to increase from $840 to around $2,696, while the average full-risk premium would increase from around $358 to $1,149. Such steep increases could reduce participation, either because homeowners could no longer afford their policies or simply deemed them too costly, and increase taxpayer costs for postdisaster assistance to property owners who no longer had flood insurance. However, a variety of actions could be taken to mitigate these disadvantages. For example, subsidized rates could be phased out over time or not transferred with the property when it is sold. Moreover, as we noted in our past work, targeted assistance could be offered to those most in need to help them pay increased NFIP premiums. This assistance could take several forms, including direct assistance through NFIP, tax credits, or grants. In addition, to the extent that those who might forego coverage were actually required to purchase it, additional actions could be taken to better ensure that they purchased policies. According to RAND Corporation, in SFHAs, where property owners with loans from federally insured or regulated lenders are required to purchase flood insurance, as few as 50 percent of the properties had flood insurance in 2006. In order to reduce expenses to taxpayers that can result when NFIP borrows from Treasury, NFIP needs to be able to generate enough in premiums to pay its claims, even in years with catastrophic losses—a goal that is closely tied to that of eliminating subsidies and other reduced rates. Since the program’s inception, NFIP premiums have come close to covering claims in average loss years but not in years of catastrophic flooding, particularly 2005. Unlike private insurance companies, NFIP does not purchase reinsurance to cover catastrophic losses. As a result, NFIP has funded such losses after the fact by borrowing from Treasury. As we have seen, such borrowing exposes taxpayers to the risk of loss. NFIP still owes approximately $17.8 billion of the amount it borrowed from Treasury for losses incurred during the 2005 hurricane season. The high cost of servicing this debt means that it may never be repaid, could in fact increase, and will continue to affect the program’s solvency and be a burden to taxpayers. Another way to limit costs to taxpayers is to decrease the risk of losses by undertaking mitigation efforts that could reduce the extent of damage from flooding. FEMA has taken steps to help homeowners and communities mitigate properties by making improvements designed to reduce flood damage—for example, elevation, relocation, and demolition. As we have reported, from fiscal year 1997 through fiscal year 2007, nearly 30,000 properties were mitigated using FEMA funds. Increasing mitigation efforts could further reduce flood damage to properties and communities, helping to put NFIP on a firmer financial footing and reducing taxpayers’ exposure. FEMA has made particular efforts to address the issue of repetitive loss properties through mitigation. These properties account for just 1 percent of NFIP’s insured properties but are responsible for 25 to 30 percent of claims. Despite FEMA’s efforts, the number of repetitive loss properties increased from 76,202 in 1997 to 132,100 in March 2011, or by about 73 percent. FEMA also has some authority to raise premium rates for property owners who refuse mitigation offers in connection with the Severe Repetitive Loss Pilot Grant Program. In these situations, FEMA can initially increase premiums to up to 150 percent of their current amount and may raise them again (by up to the same amount) on properties that incur a claim of more than $1,500. However, FEMA cannot increase premiums on property owners who pay the full-risk rate but refuse a mitigation offer, and in no case can rate increases exceed the full- risk rate for the structure. In addition, FEMA is not allowed to discontinue coverage for those who refuse mitigation offers. As a result, FEMA is limited in its ability to compel owners of repetitive loss properties to undertake flood mitigation efforts. Mitigation offers significant advantages. As I have noted, mitigated properties are less likely to be at a high risk for flood damage, making it easier for NFIP to charge them full-risk rates that cover actual losses. Allowing NFIP to deny coverage to owners of repetitive loss properties who refused to undertake mitigation efforts could further reduce costs to the program and ultimately to taxpayers. One disadvantage of increased mitigation efforts is that they can impose up-front costs on homeowners and communities required to undertake them and could raise taxpayers’ costs if the federal government elected to provide additional mitigation assistance. Those costs could increase still further if property owners who were dropped from the program for refusing to mitigate later received federal postdisaster assistance. These trade-offs are not insignificant, although certain actions could be taken to reduce them. For example, federal assistance such as low-cost loans, grants, or tax credits could be provided to help property owners pay for the up-front costs of mitigation efforts. Any reform efforts could explore ways to improve mitigation efforts to help ensure maximum effectiveness. For example, FEMA has three separate flood mitigation programs. Having multiple programs may not be the most cost-efficient and effective way to promote mitigation and may unnecessarily complicate mitigation efforts. Increasing participation in NFIP, and thus the size of the risk pool, would help ensure that losses from flood damage did not become the responsibility of the taxpayer. Participation rates have been estimated to be as low as 50 percent in SFHAs, where property owners with loans from federally insured and regulated lenders are required to purchase flood insurance, and participation in lower-risk areas is significantly lower. For example, participation rates outside of SFHAs have been found to be as low as 1 percent, leaving significant room to increase participation. Expanding participation in NFIP would have a number of advantages. As a growing number of participants shared the risks of flooding, premium rates could be lower than they would be with fewer participants. Currently, NFIP must take all applicants for flood insurance, unlike private insurers, and thus is limited in its ability to manage its risk exposure. To the extent that properties added to the program were in geographic areas where participation had historically been low and in low- and medium-risk areas, the increased diversity could lower rates as the overall risk to the program decreased. Further, increased program participation could reduce taxpayer costs by reducing the number of property owners who might draw on federally funded postdisaster assistance. However, efforts to expand participation in NFIP would have to be carefully implemented, for several reasons. First, as we have noted, NFIP cannot reject applicants on the basis of risk. As a result, if participation increased only in SFHAs, the program could see its concentration of high- risk properties grow significantly and face the prospect of more severe losses. Second, a similar scenario could emerge if mandatory purchase requirements were expanded and newly covered properties were in communities that did not participate in NFIP and thus did not meet standards—such as building codes—that could reduce flood losses. As a result, some of the newly enrolled properties might be eligible for subsidized premium rates or, because of restrictions on how much FEMA can charge in premiums, might not pay rates that covered the actual risk of flooding. Finally, historically FEMA has attempted to encourage participation by charging lower rates. However, doing so results in rates that do not fully reflect the risks of flooding and exposes taxpayers to increased risk. Moderating the challenges associated with expanding participation could take a variety of forms. Newly added properties could be required to pay full-risk rates, and low-income property owners could be offered some type of assistance to help them pay their premiums. Outreach efforts would need to include areas with low and moderate flood risks to help ensure that the risk pool remained diversified. For example, FEMA’s goals for NFIP include increasing penetration in low-risk flood zones, among homeowners without federally related mortgages in all zones, and in geographic areas with repetitive losses and low penetration rates. Currently, the private market provides only a limited amount of flood insurance coverage. In 2009, we reported that while aggregate information was not available on the precise size of the private flood insurance market, it was considered relatively small. The 2006 RAND study estimated that 180,000 to 260,000 insurance policies for both primary and gap coverage were in effect. We also reported that private flood insurance policies are generally purchased in conjunction with NFIP policies, with the NFIP policy covering the deductible on the private policy. Finally, we reported that NFIP premiums were generally less expensive than premiums for private flood insurance for similar coverage. For example, one insurer told us that for a specified amount of coverage for flood damage to a structure, an NFIP policy might be as low as $500, while a private policy might be as high as $900. Similar coverage for flood damage to contents might be $350 for an NFIP policy but around $600 for a private policy. Given the limited nature of private sector participation, encouraging private market participation could transfer some or all of the federal government’s risk exposure to the private markets and away from taxpayers. However, identifying ways to achieve that end has generally been elusive. In 2007, we evaluated the trade-offs of having a mandatory all-perils policies that would include flood risks. For example, it would alleviate uncertainty about the types of natural events homeowners insurance covered, such as those that emerged following Hurricane Katrina. However, at the time the industry was generally opposed to an all- perils policy because of the large potential losses a mandatory policy would entail. Increased private market participation is also not without potential disadvantages. First, if the private markets provide coverage for only the lowest-risk properties currently in NFIP, the percentage of high-risk properties in the program would increase. This scenario could result in higher rates as the amount needed to cover the full risk of flooding increased. Without higher rates, however, the federal government would face further exposure to loss. Second, private insurers, who are able to charge according to risk, would likely charge higher rates than NFIP has been charging unless they received support from the federal government. As we have seen, such increases could create affordability concerns for low-income policyholders. Strategies to help mitigate these disadvantages could include requiring private market coverage for all property owners— not just those in high-risk areas—and, as described earlier, providing targeted assistance to help low-income property owners pay for their flood coverage. In addition, Congress could provide options to private insurers to help lower the cost of such coverage, including tax incentives or federal reinsurance. As Congress weighs NFIP’s various financial challenges in its efforts to reform the program, it must also consider a number of operational and management issues that may limit efforts to meet program goals and impair NFIP’s stability. For the past 35 years, we have highlighted challenges with NFIP and its administration and operations. For example, most recently we have identified a number of issues impairing the program’s effectiveness in areas that include the reasonableness of payments to Write-Your-Own (WYO) insurers, the adequacy of financial controls over the WYO program, and the adequacy of oversight of non- WYO contractors. In our ongoing work examining FEMA’s management of NFIP—covering areas including strategic planning, human capital planning, intra-agency collaboration, records management, acquisition management, and information technology—some similar issues are emerging. For example, preliminary results of our ongoing work show that FEMA: does not have a strategic plan specific to NFIP with goals, objectives, and performance measures for guiding and measuring the program; lacks a strategic human capital plan that addresses the critical competencies required for its workforce; does not have effective collaborative practices that would improve the functioning of program and support offices; lacks a centralized electronic document management system that would allow its various offices to easily access and store documents; has only recently implemented or is still developing efforts to improve some acquisition management functions, making it difficult to assess the effects of these actions; and does not have an effective system to manage flood insurance policy and claims data, despite having invested roughly 7 years and $40 million on a new system whose development has been halted. While FEMA has begun to acknowledge and address some of these management challenges, additional work remains to be done to address these issues. Our final report will include recommendations to address them. Congressional action is needed to increase the financial stability of NFIP and limit taxpayer exposure. GAO previously identified four public policy goals that can provide a framework for crafting or evaluating proposals to reform NFIP. First, any congressional reform effort should include measures for charging premium rates that accurately reflect the risk of loss, including catastrophic losses. Meeting this goal would require changing the law governing NFIP to reduce or eliminate subsidized rates, limits on annual rate increases, and grandfathered or other rates that did not fully reflect the risk of loss. In taking such a step, Congress may choose to provide assistance to certain property owners, and should consider providing appropriate authorization and funding of such incentives to ensure transparency. Second, because of the potentially high costs of individual and community mitigation efforts, which can reduce the frequency and extent of flood damage, Congress may need to provide funding or access to funds for such efforts and consider ways to improve the efficiency of existing mitigation programs. Moreover, if Congress wished to allow NFIP to deny coverage to owners of properties with repetitive losses who refused mitigation efforts, it would need to give FEMA appropriate authority. Third, Congress could encourage FEMA to continue to increase participation in the program by expanding targeted outreach efforts and limiting postdisaster assistance to those individuals who choose not to mitigate in moderate- and high-risk areas. And finally, to address the goal of encouraging private sector participation, Congress could encourage FEMA to explore private sector alternatives to providing flood insurance or for sharing insurance risks, provided such efforts do not increase taxpayers’ exposure. For its part, FEMA needs to take action to address a number of fundamental operational and managerial issues that also threaten the stability of NFIP and have contributed to its remaining on GAO’s high-risk list. These include improving its strategic planning, human capital planning, intra-agency collaboration, records management, acquisition management, and information technology. While FEMA continues to make some progress in some areas, fully addressing these issues is vital to its long-term operational efficiency and financial stability. Chairman Biggert, Ranking Member Gutierrez, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any of the questions you or other members of the Subcommittee may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Orice Williams Brown at (202) 512-8678 or [email protected]. This statement was prepared under the direction of Patrick Ward. Key contributors were Tania Calhoun, Emily Chalmers, Nima Patel Edwards, and Christopher Forys. FEMA Flood Maps: Some Standards and Processes in Place to Promote Map Accuracy and Outreach, but Opportunities Exist to Address Implementation Challenges. GAO-11-17. Washington, D.C.: December 2, 2010. National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues. GAO-10-1063T. Washington, D.C.: September 22, 2010. National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues. GAO-10-631T. Washington, D.C.: April 21, 2010. Financial Management: Improvements Needed in National Flood Insurance Program’s Financial Controls and Oversight. GAO-10-66. Washington, D.C.: December 22, 2009. Flood Insurance: Opportunities Exist to Improve Oversight of the WYO Program. GAO-09-455. Washington, D.C.: August 21, 2009. Information on Proposed Changes to the National Flood Insurance Program. GAO-09-420R. Washington, D.C.: February 27, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Flood Insurance: Options for Addressing the Financial Impact of Subsidized Premium Rates on the National Flood Insurance Program. GAO-09-20. Washington, D.C.: November 14, 2008. Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention. GAO-09-12. Washington, D.C.: October 31, 2008. National Flood Insurance Program: Financial Challenges Underscore Need for Improved Oversight of Mitigation Programs and Key Contracts. GAO-08-437. Washington, D.C.: June 16, 2008. Natural Catastrophe Insurance: Analysis of a Proposed Combined Federal Flood and Wind Insurance Program. GAO-08-504. Washington, D.C.: April 25, 2008. National Flood Insurance Program: Greater Transparency and Oversight of Wind and Flood Damage Determinations Are Needed. GAO-08-28. Washington, D.C.: December 28, 2007. National Disasters: Public Policy Options for Changing the Federal Role in Natural Catastrophe Insurance. GAO-08-7. Washington, D.C.: November 26, 2007. Federal Emergency Management Agency: Ongoing Challenges Facing the National Flood Insurance Program. GAO-08-118T. Washington, D.C.: October 2, 2007. National Flood Insurance Program: FEMA’s Management and Oversight of Payments for Insurance Company Services Should Be Improved. GAO-07-1078. Washington, D.C.: September 5, 2007. National Flood Insurance Program: Preliminary Views on FEMA’s Ability to Ensure Accurate Payments on Hurricane-Damaged Properties. GAO-07-991T. Washington, D.C.: June 12, 2007. Coastal Barrier Resources System: Status of Development That Has Occurred and Financial Assistance Provided by Federal Agencies. GAO-07-356. Washington, D.C.: March 19, 2007. Budget Issues: FEMA Needs Adequate Data, Plans, and Systems to Effectively Manage Resources for Day-to-Day Operations. GAO-07-139. Washington, D.C.: January 19, 2007. National Flood Insurance Program: New Processes Aided Hurricane Katrina Claims Handling, but FEMA’s Oversight Should Be Improved. GAO-07-169. Washington, D.C.: December 15, 2006. GAO’S High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. Federal Emergency Management Agency: Challenges for the National Flood Insurance Program. GAO-06-335T. Washington, D.C.: January 25, 2006. Federal Emergency Management Agency: Improvements Needed to Enhance Oversight and Management of the National Flood Insurance Program. GAO-06-119. Washington, D.C.: October 18, 2005. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 2000. Standards for Internal Control in the Federal Government. GAO/AIMD-00-21.3.1. Washington, D.C.: November 1999. Budget Issues: Budgeting for Federal Insurance Programs. GAO/T-AIMD-98-147. Washington, D.C.: April 23, 1998. Budget Issues: Budgeting for Federal Insurance Programs. GAO/AIMD-97-16. Washington, D.C.: September 30, 1997. National Flood Insurance Program: Major Changes Needed If It Is To Operate Without A Federal Subsidy. GAO/RCED-83-53. Washington, D.C.: January 3, 1983. Formidable Administrative Problems Challenge Achieving National Flood Insurance Program Objectives. RED-76-94. Washington, D.C.: April 22, 1976. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The National Flood Insurance Program (NFIP) has been on GAO's high-risk list since 2006, when the program had to borrow from the U.S. Treasury to cover losses from the 2005 hurricanes. The outstanding debt is $17.8 billion as of March 2011. This sizeable debt, plus operational and management challenges that GAO has identified at the Federal Emergency Management Agency (FEMA), which administers NFIP, have combined to keep the program on the high-risk list. NFIP's need to borrow to cover claims in years of catastrophic flooding has raised concerns about the program's long-term financial solvency. This testimony 1) discusses ways to place NFIP on a sounder financial footing in light of public policy goals for federal involvement in natural catastrophe insurance and 2) highlights operational and management challenges at FEMA that affect the program. In preparing this statement, GAO relied on its past work on NFIP and on its ongoing review of FEMA's management of NFIP, which focuses on its planning, policies, processes, and systems. The management review includes areas such as strategic and human capital planning, acquisition management, and intra-agency collaboration. Congressional action is needed to increase the financial stability of NFIP and limit taxpayer exposure. GAO previously identified four public policy goals that can provide a framework for crafting or evaluating proposals to reform NFIP. These goals are: (1) charging premium rates that fully reflect risks, (2) limiting costs to taxpayers before and after a disaster, (3) encouraging broad participation in the program, and (4)encouraging private markets to provide flood insurance. Successfully reforming NFIP would require trade-offs among these often competing goals. For example, currently nearly one in four policyholders does not pay full-risk rates, and many pay a lower subsidized or "grandfathered" rate. Reducing or eliminating less than full-risk rates would decrease costs to taxpayers but substantially increase costs for many policyholders, some of whom might leave the program, potentially increasing postdisaster federal assistance. However, these trade-offs could be mitigated by providing assistance only to those who needed it, limiting postdisaster assistance for flooding, and phasing in premium rates that fully reflected risks. Increasing mitigation efforts to reduce the probability and severity of flood damage would also reduce flood claims in the long term but would have significant up-front costs that might require federal assistance. One way to address this trade-off would be to better ensure that current mitigation programs were effective and efficient. Encouraging broad participation in the program could be achieved by expanding mandatory purchase requirements or increasing targeted outreach to help diversify the risk pool. Such efforts could help keep rates relatively low and reduce NFIP's exposure but would have to be effectively managed to help ensure that outreach efforts were broadly based. Encouraging private markets is the most difficult challenge because virtually no private market for flood insurance exists for most residential and commercial properties. FEMA's ongoing efforts to explore alternative structures may provide ideas that could be evaluated and considered. Several operational and management issues also limit FEMA's progress in addressing NFIP's challenges, and continued action by FEMA will be needed to help ensure the stability of the program. For example, in previous reports GAO has identified weaknesses in areas that include financial controls and oversight of private insurers and contractors, and has made many recommendations to address them. While FEMA has made progress in addressing some areas, preliminary findings from GAO's ongoing work indicate that these issues persist and need to be addressed as Congress works to more broadly reform NFIP. GAO has made numerous recommendations aimed at improving financial controls and oversight of private insurers and contractors, among others.

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Section 287(g) of the INA, as amended, authorizes ICE to enter into written agreements under which state or local law enforcement agencies may perform, at their own expense and under the supervision of ICE officers, certain functions of an immigration officer in relation to the investigation, apprehension, or detention of aliens in the United States. The statute also provides that such an agreement is not required for state and local officers to communicate with ICE regarding the immigration status of an individual or otherwise to cooperate with ICE in the identification and removal of aliens not lawfully present in the United States. Thus, 287(g) agreements go beyond state and local officers’ existing ability to obtain immigration status information from ICE and to alert ICE to any removable aliens they identify. Under these agreements, state and local officers are to have direct access to ICE databases and act in the stead of ICE agents by processing aliens for removal. They are authorized to initiate removal proceedings by preparing a notice to appear in immigration court and transporting aliens to ICE-approved detention facilities for further proceedings. Section 287(g) and its legislative history do not detail the exact responsibilities to be carried out, the circumstances under which officers are to exercise 287(g) authority, or which removable aliens should be prioritized for removal, thus giving ICE the discretion to establish enforcement priorities for the program. The statute does, however, contain a number of detailed requirements or controls for the program. It requires that a written agreement be developed to govern the delegation of immigration enforcement functions (e.g., MOA), ICE determine that any officer performing such a function is qualified to do so (e.g., background security check), the officer have knowledge of, and adhere to, federal law relating to immigration (e.g., training), officers performing immigration functions have received adequate training regarding enforcement of federal immigration laws (e.g., written certification of training provided upon passing examinations), any officer performing such a function be subject to the direction and supervision of ICE, with the supervising office to be specified in the written agreement, and specific powers and duties to be exercised or performed by state or local officers be set forth in the written agreement. Currently, the 287(g) program is the responsibility of ICE’s Office of State and Local Coordination (OSLC). The OSLC is responsible for providing information about ICE programs, initiatives, and authorities available to state and local law enforcement agencies. In August 2007, OSLC organized its various programs to partner with state and local law enforcement agencies as Agreements of Cooperation in Communities to Enhance Safety and Security (ACCESS). ACCESS offers state and local law enforcement agencies the opportunity to participate in 1 or more of 13 programs, including the Border Enforcement Security Task Forces, the Criminal Alien Program, and the 287(g) program. More detailed descriptions of the ACCESS programs appear in appendix IV. Under ACCESS, OSLC officials are to work with state and local applicants to help determine which assistance program would best meet their needs. For example, before approving an applicant for 287(g) program participation, OSLC officials are to assess first whether ICE has the resources to support the applicant, such as available detention space and transportation assets based on what historical patterns indicate will be the approximate number of removable aliens apprehended per year by the applying law enforcement agency. Based on an overall assessment of these and other factors, such as the type of agreement requested, availability of training, congressional interest, and proximity to other 287(g) programs, ICE may suggest that one or more of the other assistance programs under ACCESS would be more appropriate. Within the 287(g) program, ICE has developed three models for state and local law enforcement participation. One model, referred to as the “jail model,” allows for correctional officers working in state prisons or local jails to screen those arrested or convicted of crimes by accessing federal databases to ascertain a person’s immigration status. Another option, referred to as the “task force model,” allows law enforcement officers participating in criminal task forces such as drug or gang task forces to screen arrested individuals using federal databases to assess their immigration status. ICE has approved some local law enforcement agencies to concurrently implement both models, an arrangement referred to as the “joint model.” The 287(g) program has grown rapidly in recent years as more state and local communities seek to address criminal activity by those in the country illegally with specialized training and tools provided by ICE. From its initiation 287(g) authority was viewed by members of Congress as an opportunity to provide ICE with more resources—in the form of state and local law enforcement officers—to assist ICE in the enforcement of immigration laws. In 2005, the conference committee report for DHS’s appropriation encouraged ICE to be more proactive in encouraging state and local governments to participate in the program. Beginning in fiscal year 2006, DHS appropriations acts expressly provided funds for the 287(g) program, and accompanying committee reports provided guidance on program implementation. In fiscal year 2006, the DHS Appropriations Act provided $5.0 million to facilitate 287(g) agreements, and the accompanying conference report noted full support for the program, describing it as a powerful force multiplier to better enforce immigration laws and, consequently, to better secure the homeland. In fiscal year 2007, ICE received $5.4 million for the 287(g) program in its regular appropriation and allocated $10.1 million in supplemental funding towards the program. In fiscal year 2008, ICE received $39.7 million for the program, and has received $54.1 million for fiscal year 2009 to support the program. Accompanying committee reports have emphasized that ICE should perform close monitoring of compliance with 287(g) agreements, extensive training prior to delegation of limited immigration enforcement functions, direct supervision of delegated officers by ICE, and enrollment of correctional facilities in the program to identify more removable aliens. Participating state and local law enforcement agencies in the 287(g) program may apply for financial assistance to cover some costs associated with the program either directly from ICE or through grants provided by the Department of Justice (DOJ). For example, for agencies with contractual reimbursement agreements, ICE can reimburse law enforcement agencies for (1) detention of incarcerated aliens in local facilities who are awaiting processing by ICE upon completion of their sentences and (2) transportation of incarcerated aliens, upon completion of their sentences, from a jurisdiction’s facilities to a facility or location designated by ICE. In addition, state and local law enforcement agencies may apply for grants from the DOJ’s State Criminal Alien Assistance Program (SCAAP) for a portion of the costs of incarcerating certain removable aliens convicted of a felony or two or more misdemeanors. The 287(g) program lacks several management controls that limit ICE’s ability to effectively manage the program. First, ICE has not documented the program’s objectives in program-related materials. Second, program- related documents, including the MOA, lack specificity as to how and under what circumstances participating agencies are to use 287(g) authority, or how ICE will supervise the activities of participating agencies. Third, ICE has not defined what program information should be tracked or ensured that program information is being consistently collected and communicated, which would help ensure that management directives are followed. And finally, ICE has not developed performance measures to assess the effectiveness of the 287(g) program and whether it is achieving its intended results. According to ICE senior program officials, the main objective of the 287(g) program is to enhance the safety and security of communities by addressing serious criminal activity such as violent crimes, human smuggling, gang/organized crime activity, sexual-related offenses, narcotics smuggling and money laundering committed by removable aliens. However, program-related documents, including the MOAs and program case files for the initial 29 participating agencies, the 287(g) brochure, training materials provided to state and local officers, and a “frequently asked questions” document do not identify this as the objective of the 287(g) program. Internal controls also call for agencies to establish clear, consistent objectives. In addition, GPRA requires agencies to consult with stakeholders to clarify their missions and reach agreement on their goals. Successful organizations we have studied in prior work involve stakeholders in program planning efforts, which can help create a basic understanding among the stakeholders of the competing demands that confront most agencies, the limited resources available to them, and how those demands and resources require careful and continuous balancing. The statute that established the 287(g) program and associated legislative history do not set enforcement priorities for the program, which leaves the responsibility to ICE. Therefore, ICE has the discretion to define the 287(g) program objectives in any manner that is reasonable. Although ICE has prioritized its immigration enforcement efforts to focus on serious criminal activity because of limited personnel and detention space, ICE officials told us they did not document the stated 287(g) program objectives as such because a situation could arise where detention space might be available to accommodate removable aliens arrested for minor offenses. We identified cases where participating agencies have used their 287(g) authority to process for removal aliens arrested for minor offenses. For example, of the 29 participating agencies we reviewed, 4 agencies told us they used 287(g) authorities to process for removal those aliens the officers stopped for minor violations such as speeding, carrying an open container of alcohol, and urinating in public. None of these crimes fall into the category of serious criminal activity that ICE officials described to us as the type of crime the 287(g) program is expected to pursue. Due to the rapid growth of the 287(g) program, an unmanageable number of aliens could be referred to ICE if all the participating agencies sought assistance to remove aliens for such minor offenses. Another potential consequence of not having documented program objectives is misuse of authority. The sheriff from a participating agency said that his understanding of the 287(g) authority was that 287(g)-trained officers could go to people’s homes and question individuals regarding their immigration status even if the individual is not suspected of criminal activity. Although it does not appear that any officers used the authority in this manner, it is illustrative of the lack of clarity regarding program objectives and the use of 287(g) authority by participating agencies. While agencies participating in the 287(g) program are not prohibited from seeking the assistance of ICE for aliens arrested for minor offenses, detention space is routinely very limited and it is important for ICE to use these and other 287(g) resources in a manner that will most effectively achieve the objective of the program—to process for removal those aliens who pose the greatest threat to public safety. According to ICE’s Office of Detention and Removal (DRO) strategic plan, until more alternative detention methods are available, it is important that their limited detention bed space is available for those aliens posing greater threats to the public. ICE’s former Assistant Secretary made this point in her congressional testimony in February 2008, stating that given the rapid growth of the program in the last 2 years, it is important to ensure that ICE’s bed space for the 287(g) program is used for the highest priority aliens. This may not be achieved if ICE does not document and communicate to participating agencies its program objective of focusing limited enforcement and detention resources on serious and/or violent offenders. ICE has not consistently articulated in program-related documents, such as MOAs, brochures and training materials, how participating agencies are to use their 287(g) authority, nor has it described the nature and extent of ICE supervision over these agencies’ implementation of the program. Internal control standards state that government programs should establish control activities to help ensure management’s directives are carried out. According to ICE officials, they use various controls to govern the 287(g) program, including conducting background checks on officers working for state and local law enforcement agencies that apply to participate in the 287(g) program, facilitating a training program with mandatory examinations to prepare law enforcement officers to carry out 287(g) program activities, and documenting agreements reached on program operations in the MOA. ICE has not consistently communicated, through its MOAs with participating agencies, how and under what circumstances 287(g) authority is to be used. Internal control standards state that government programs should establish control activities, including ensuring that significant events are authorized and executed only by persons acting within the scope of their authority. For the 287(g) program, ICE officials identified the MOA as a key control document signed by both ICE and participating agency officials. The MOA is designed to help ensure that management’s directives for the program are carried out by program participants. However, the MOAs we reviewed were not consistent with statements by ICE officials regarding the use of 287(g) authority. For example, according to ICE officials and other ICE documentation, 287(g) authority is to be used in connection with an arrest for a state offense; however, the signed agreement that lays out the 287(g) authority for participating agencies does not address when the authority is to be used. While all 29 MOAs we reviewed contained language that authorizes a state or local officer to interrogate any person believed to be an alien as to his right to be or remain in the United States, none of them mentioned that an arrest should precede use of 287(g) program authority. Furthermore, the processing of individuals for possible removal is to be in connection with a conviction of a state or federal felony offense. However, this circumstance is not mentioned in 7 of the 29 MOAs we reviewed, resulting in implementation guidance that is not consistent across the initial 29 participating agencies. Due to the rapid expansion of the 287(g) program in the last 2 years, it is important that ICE consistently communicate to participating agencies how this authority is to be used to help ensure that state and local law enforcement agents are not using their 287(g) authority in a manner not intended by ICE. ICE has also not defined in its program-related documents the responsibilities required of ICE agents directing and supervising local officers under the 287(g) program. Internal control standards state that a good internal control environment requires that an agency’s organizational structure define key areas of authority and responsibility. The statute that established the program specifically requires ICE to direct and supervise the activities of the state and local officers who participate in the 287(g) program. The statute and associated legislative history, however, do not define the terms of direction and supervision, which leaves the responsibility for defining them to ICE. Although ICE has the discretion to define these terms in any manner that it deems reasonable, it has not defined them in program documents. In our analysis of the 29 MOAs, we found little detail regarding the nature and extent of supervisory activities to be performed by ICE working with state and local law enforcement officers. For example, the MOAs state that participating officers will be supervised and directed by ICE regarding their immigration enforcement functions. The MOAs also state that participating officers cannot perform any immigration officer functions except when being supervised by ICE, and that those actions will be reviewed by ICE supervisory officers on an ongoing basis to ensure compliance and to determine if additional training is needed. The MOAs further state that the participating state or local agency retains supervisory responsibilities over all other aspects of the officers’ employment. However, details regarding the nature and extent of supervision, such as whether supervision is to be provided remotely or directly, the frequency of interaction, and whether reviews are conducted as written assessments or through oral feedback, are not described in the MOAs or in any documentation provided to us by ICE. In response to our inquiry, ICE officials did not provide a clear definition of the nature and extent of ICE supervision to be provided to participating agencies. These officials also cited a shortage of supervisory resources. The Assistant Director for the Office of State and Local Coordination that manages the 287(g) program said the ICE officer who supervises the activities of a participating agency’s officers is responsible for conducting general tasks, such as reviewing and providing oversight over the information added to immigration files; however, he also said the ICE official responsible for supervising the activities of a participating agency’s officers may not have a supervisory designation within ICE. He added that documentation of an ICE 287(g) supervisor’s responsibilities may be included in the position description of a Supervisory Detention and Deportation Officer. We examined seven position descriptions provided by ICE, including this position. Some of the activities described in this position description address such issues as level of supervision or direction and expectations setting for subordinates. For example, the position description for a Supervisory Detention and Deportation Officer establishes guidelines and performance expectations that are clearly communicated, observes workers’ performance and conducts work performance critiques, provides informal feedback, assigns work based on priorities or the capabilities of the employee, prepares schedules for completion of work, gives advice and instruction to employees, and identifies developmental and training needs, in addition to other duties. However, because supervision activities specific to the 287(g) program (or more generally, state and local law enforcement officers carrying out immigration enforcement activities) were not contained in the description, it is unclear the extent to which the supervisory activities enumerated in those position descriptions would apply to the supervision of state and local officers in the 287(g) program. Further, ICE officials in headquarters noted that the level of ICE supervision provided to participating agencies has varied due to a shortage of supervisory resources. The officials said it has been necessary in many instances for ICE to shift local resources or to utilize new supervisory officers to provide the required oversight and to manage the additional workload that has resulted from the 287(g) program. For example, agents from ICE’s Office of Investigations (OI) and DRO have been detailed to the 287(g) program to fulfill the requirement within section 287(g) of the INA, which mandates that ICE supervise officers performing functions under each 287(g) agreement. Officials explained that these detailees have been taken away from their permanent positions, which affects ICE’s ability to address other criminal activity. ICE officials noted that the small number of detailed agents does not have a significant impact on ICE’s overall ability to supervise the 287(g) program in the field. In addition to the views by ICE officers in headquarters, we asked ICE field officials about 287(g) supervision. There was wide variation in the perceptions of what supervisory activities are to be performed. For example, one ICE official said ICE provides no direct supervision over the local law enforcement officers in the 287(g) program in their area of responsibility. Conversely, another ICE official characterized ICE supervisors as providing frontline support for the 287(g) program. ICE officials at two additional offices described their supervisory activities as overseeing training and ensuring the computer systems are working properly. Officials at another field office described their supervisory activities as reviewing files for completeness and accuracy. We also asked state and local officers about ICE supervision related to this program. Officials from 14 of the 23 agencies that had implemented the program gave positive responses when asked to evaluate ICE’s supervision of their 287(g)-trained officers. Another four law enforcement agencies characterized ICE’s supervision as fair, adequate, or provided on an as- needed basis. Three agencies said they did not receive direct ICE supervision or that supervision was not provided daily, which one agency felt was necessary to assist with the constant changes in requirements for processing of paperwork. Officials from two law enforcement agencies said ICE supervisors were either unresponsive or not available. One of these officials noted that it was difficult to establish a relationship with the relevant managers at the local ICE office because there was constant turnover in the ICE agents responsible for overseeing the 287(g) program. Given the rapid growth of the program and ICE’s limited supervisory resources, defining supervision activities would improve ICE’s ability to ensure management directives are carried out appropriately. While ICE states in its MOAs that participating agencies are responsible for tracking and reporting data, the MOA did not provide details as to what data needs to be collected or in what manner data should be collected and reported. For example, in 20 of the 29 MOAs we reviewed, ICE generally required participating agencies to track data, but the MOA did not define what data should be tracked, or how data should be collected and reported to ICE. Specifically, the reporting requirements section in 20 of the MOAs states: The LEA will be responsible for tracking and maintaining accurate data and statistical information for their 287(g) program, including any specific tracking data requested by ICE. Upon ICE’s request, such data and information shall be provided to ICE for comparison and verification with ICE’s own data and statistical information, as well as for ICE’s statistical reporting requirements and to help ICE assess the progress and success of the LEA’s 287(g) program. Furthermore, results of our structured interview with 29 program participants indicated confusion regarding reporting requirements. For example, of the 20 law enforcement agencies we reviewed whose MOA contained a reporting requirement: 7 agencies told us they had a reporting requirement and reported data to ICE; 3 agencies told us they had a requirement, but were not sure what specific data was to be reported; 3 agencies told us they were not required to report any data; 2 agencies told us that while ICE did not require them to report data, they submitted data to ICE on their activities anyway; and 5 agencies did not respond directly regarding a reporting requirement. Of the nine program participants we interviewed without a reporting requirement in the MOA: 5 agencies told us they reported data to ICE; 2 agencies told us they were not required to report data to ICE, but did so anyway; 1 agency told us they do not report data to ICE; and 1 agency did not know if they were required to report data to ICE. According to internal control standards, pertinent information should be recorded and communicated to management and others within the entity that need it in a form and within a time frame that enables them to carry out internal control and other responsibilities. Consistent with these standards, agencies are to ensure that information relative to factors vital to a program meeting its goals is identified and regularly reported to management. For example, collecting information such as the type of crime for which an alien is detained could help ICE determine whether participating agencies are processing for removal those aliens who have committed serious crimes, as its objective states. Without clearly communicating to participating agencies guidance on what data is to be collected and how it should be gathered and reported, ICE management may not have the information it needs to ensure the program is achieving its objective. While ICE has defined the objective of the 287(g) program—to enhance the safety and security of communities by addressing serious criminal activity by removable aliens— the agency has not developed performance measures for the 287(g) program to track the progress toward attaining that objective. GPRA requires that agencies clearly define their missions, measure their performance against the goals they have set, and report on how well they are doing in attaining those goals. Measuring performance allows organizations to track the progress they are making toward their goals and gives managers critical information on which to base decisions for improving their programs. Our previous work has shown that agencies successful in evaluating performance had measures that demonstrated results, covered multiple priorities, provided useful information for decision making, and successfully addressed important and varied aspects of program performance. Internal controls also call for agencies to establish performance measures and indicators. ICE officials stated that they are in the process of developing performance measures, but have not provided any documentation or a time frame for when they expect to complete the development of these measures. In accordance with standard practices for program and project management, specific desired outcomes or results should be conceptualized and defined in the planning process as part of a road map, along with the appropriate projects needed to achieve those results, and milestones. ICE officials told us that, although they have not yet developed performance measures, in an effort to monitor how the program is being implemented, they are beginning to conduct compliance inspections based on information provided in the MOA in locations where the 287(g) program has been implemented. ICE’s Office of Professional Responsibility (OPR) was recently directed to conduct field inspections of all participating 287(g) program agencies. OPR officials state that the inspections are based on a checklist drawn from participating agencies’ MOAs as well as interviews with state and local law enforcement agencies and ICE officials who are responsible for overseeing these agencies. OPR’s checklists include items such as the review of the arrest and prosecution history of undocumented criminals, relevant immigration files, and ICE’s Enforcement Case Tracking System (ENFORCE) entries, as well as review of any complaints by those detained pursuant to the 287(g) program directed towards ICE, state and local law enforcement officers. OPR officials use this checklist to confirm whether the items agreed to in the MOA have been carried out. As discussed earlier in this report, the 29 MOAs we reviewed did not contain certain internal controls to govern program implementation consistent with federal internal control standards. According to OPR officials, they have completed six compliance inspections, and have a seventh inspection underway. In addition, OPR officials told us that they are planning to complete compliance inspections for the rest of the initial 29 program participants within the next 2 years. Although ICE has initiated compliance inspections for the 287(g) program, ICE officials stated that the compliance inspections do not include performance assessments of the program. ICE officials stated that developing performance measures for the program will be difficult because each state and local partnership agreement is unique, making it challenging to develop measures that would be applicable for all participating agencies. Nonetheless, these measures are important to provide ICE with a basis for determining whether the program is achieving its intended results. Without a plan for the development of performance measures, including milestones for their completion, ICE lacks a roadmap for how this project will be achieved. ICE and participating agencies used program resources mainly for personnel, training, and equipment. From fiscal years 2006 through 2008, ICE received approximately $60 million to provide 287(g) resources for 67 participating agencies nationwide as follows: Training. Once officers working for state and local law enforcement participating agencies pass a background investigation performed by ICE, they are also required to attend a 4-week course and pass mandatory examinations to be certified. Training is focused on immigration and nationality law, and includes modules on identifying fraudulent documents, understanding removal charges, cross-cultural communications, and alien processing (e.g., accessing federal databases). Of the 27 participating agencies that had received training at the time of our interviews 20 said the training prepared them to perform their 287(g) activities; four of these agencies also reported that their participation in the program was delayed due to problems with scheduling training. ICE provided information reflecting an average training cost per student of $2,622 using the on-site training facility—the Federal Law Enforcement Training Center—and $4,840 using off-site facilities. These average costs include travel, lodging, books, meals, and miscellaneous expenses. As of October 2008, ICE had trained and certified 951 state or local officers in the 287(g) program. Equipment. ICE is to provide the equipment necessary to link participating state and local law enforcement agencies with ICE to assist these agencies in performing their immigration enforcement activities. ICE estimates that, on average, for each participating agency it spends $37,000 for equipment set-up and installation, and about $43,000 for equipment hardware. These costs include installation of a secure transmission line, which connects the participating agency to ICE databases, one or more workstations, one or more machines that capture and transmit fingerprints electronically, and personnel labor and support costs. In addition, it spends on average about $107,000 annually for recurring equipment operations and maintenance costs for each participating agency. Supervision. ICE is to provide supervision to state and local law enforcement agencies participating in the 287(g) program. However, as mentioned earlier in this report, ICE has not identified what responsibilities are required of ICE agents directing and supervising local officers under the 287(g) program, and comments about program supervision from ICE officers at headquarters and in field offices, as well as officers from participating agencies, differ widely. Therefore, we are unable to provide more detail as to this 287(g) resource provided by ICE. In addition to the resources provided by ICE, state and local law enforcement agencies also provide resources to implement the 287(g) program. For example, state and local law enforcement agencies provide officers, space for equipment, and funding for any other expenses not specifically covered by ICE, such as office supplies and vehicles. Of the 29 state and local participating agencies we interviewed, 11 were able to provide estimates for some of their costs associated with participating in the 287(g) program; however, the data they provided was not consistent. Therefore, it was not feasible to total these costs. Those law enforcement agencies able to identify costs may be able to recover some of these expenses through an intergovernmental service agreement, or through DOJ’s SCAAP grant process. When we asked state and local law enforcement participating agencies whether they received federal reimbursement from any source for costs associated with the 287(g) program (e.g., detention or transportation), 18 of the 29 reported that they did not. Six participating state and local agencies said they received SCAAP funding for some of these costs, and another five said they received federal reimbursements for some costs related to detention, transportation, and hospitalization. The rapid growth of the 287(g) program has presented resource challenges that ICE has begun to address. For example, 11 of the 29 participating agencies we contacted told us of equipment-related problems. Specifically, two of these agencies did not have equipment to carry out the 287(g) program for several months after their staff had received training on how to use it, and they had concerns that refresher training would be needed, while another agency received more equipment than it needed. ICE has worked with participating agencies to address the problems with program equipment distribution. ICE headquarters and field staff also told us that their resources to supervise activities of program participants are being stretched to their maximum capacities to manage the increased growth of the program. To address these issues, ICE has detailed agents from OI and DRO to meet supervisory and other program requirements. ICE is also considering other ways to address the challenges presented by program growth. As discussed earlier in this report, the 287(g) program is 1 of 13 ICE programs to partner with state and local law enforcement agencies under ACCESS. ICE officials are working with state and local participants and applicants to help determine whether a different ACCESS program would better meet their needs, and as a result, ICE has reduced the backlog of applications to the 287(g) program from approximately 80 applications to 29 as of October 2008. Both ICE and state and local law enforcement agencies participating in the 287(g) program have reported activities, benefits, and concerns associated with the program. As of October 2008, ICE reported that 67 state and local law enforcement agencies had enrolled in the 287(g) program, and that about 25 state and local jurisdiction program applications were pending. In addition, ICE reported that 951 state and local officers received training in immigration law and enforcement functions and were certified to use 287(g) authority. ICE’s data show that for 25 of the 29 participating agencies we reviewed in fiscal year 2008 that about 43,000 aliens had been arrested under the 287(g) program authority, with individual agency participant arrests ranging from about 13,000 in one location to no arrests in two locations. Of those 43,000 aliens arrested by program participants pursuant to the 287(g) authority, ICE detained about 34,000 and placed about 14,000 (41 percent) of those detained in removal proceedings, and arranged for about 15,000 (44 percent) to be voluntarily removed. The remaining 5,000 (15 percent) arrested aliens detained by ICE were either given a humanitarian release, sent to a federal or state prison to serve a sentence for a felony offense, or not taken into ICE custody given the minor nature of the underlying offense and limited availability of detention space. State and local law enforcement agencies we interviewed have reported specific benefits of the 287(g) program, including the reduction of crime/making the community safer, identifying/removing repeat offenders, improving the quality of life for the community, and giving law enforcement officers a sense of accomplishment related to immigration enforcement. On the other hand, more than half of the 29 state and local law enforcement agencies we interviewed reported concerns that some members of their communities expressed about the 287(g) program, including concerns that law enforcement officers in the 287(g) program would be deporting removable aliens because of minor traffic violations (e.g., speeding); fear and apprehension in the Hispanic community about possible deportation; and concerns that officers would be performing increased enforcement of immigration laws at worksites and would engage in racial profiling. To help mitigate these fears and concerns, 27 of the 29 law enforcement agencies we reviewed reported that they had conducted outreach in their communities regarding the program (e.g., newspaper articles, press releases, TV and radio spots, speaking engagements, and public meetings). Removing aliens who have committed violent crimes is of great importance to the safety of the community at large. Through the 287(g) program and its partnerships with state and local agencies, ICE has an opportunity to identify and train additional law enforcement resources that could help it meet this challenge. However, the lack of internal controls governing the program limits ICE’s ability to take full advantage of this additional resource. For example, without documenting that the objective of the program is to remove aliens who have committed serious crimes or pose a threat to public safety, participating agencies may further burden limited detention resources by continuing to seek ICE assistance for aliens detained for minor crimes. According to ICE, it is important to ensure that their limited detention bed space is available for those aliens posing the greatest threat to the public. Moreover, without consistently communicating to participating agencies how and under what circumstances 287(g) authority is to be used, participating agencies may use this authority in a manner that is not intended by ICE. Additionally, given the rapid growth of the program, the lack of defined supervision activities could hamper ICE’s ability to ensure management directives are being carried out appropriately. Furthermore, without guidance for what data participating agencies are to collect and how this information is to be gathered and reported, ICE may not have the information it needs to help ensure participating agencies are adhering to program objectives. Finally, performance measures are important to provide ICE with a basis for determining whether the program is achieving its intended results. While it is encouraging that ICE is working to develop these measures, without establishing a plan, including a time frame for development, ICE lacks a roadmap for how it will achieve this goal. To help ensure that the ICE 287(g) program achieves the results intended, we are recommending that the Assistant Secretary for ICE take the following five actions: Document the objective of the 287(g) program for participants, Clarify how and under what circumstances 287(g) authority is to be used by state and local law enforcement officers in participating agencies, Document in MOAs the nature and extent of supervisory activities ICE officers are expected to carry out as part of their responsibilities in overseeing the implementation of the 287(g) program and communicate that information to both ICE officers and state and local participating agencies, Specify the program information or data that each agency is expected to collect regarding their implementation of the 287(g) program and how this information is to be reported, and Establish a plan, including a time frame, for the development of performance measures for the 287(g) program. We provided a draft of this report to DHS for review and comment. DHS provided written comments on January 28, 2009, which are presented in appendix V. In commenting on the draft report, DHS stated that it agreed with our recommendations and identified actions planned or underway to implement the recommendations. ICE also provided us with technical comments, which we considered and incorporated in the report where appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Homeland Security, the Secretary of State, the Attorney General, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-8777 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are acknowledged in appendix VI. 8 U.S.C. § 1357(g) (g) Performance of immigration officer functions by State officers and employees (1) Notwithstanding section 1342 of title 31, the Attorney General may enter into a written agreement with a State, or any political subdivision of a State, pursuant to which an officer or employee of the State or subdivision, who is determined by the Attorney General to be qualified to perform a function of an immigration officer in relation to the investigation, apprehension, or detention of aliens in the United States (including the transportation of such aliens across State lines to detention centers), may carry out such function at the expense of the State or political subdivision and to the extent consistent with State and local law. (2) An agreement under this subsection shall require that an officer or employee of a State or political subdivision of a State performing a function under the agreement shall have knowledge of, and adhere to, Federal law relating to the function, and shall contain a written certification that the officers or employees performing the function under the agreement have received adequate training regarding the enforcement of relevant Federal immigration laws. (3) In performing a function under this subsection, an officer or employee of a State or political subdivision of a State shall be subject to the direction and supervision of the Attorney General. (4) In performing a function under this subsection, an officer or employee of a State or political subdivision of a State may use Federal property or facilities, as provided in a written agreement between the Attorney General and the State or subdivision. (5) With respect to each officer or employee of a State or political subdivision who is authorized to perform a function under this subsection, the specific powers and duties that may be, or are required to be, exercised or performed by the individual, the duration of the authority of the individual, and the position of the agency of the Attorney General who is required to supervise and direct the individual, shall be set forth in a written agreement between the Attorney General and the State or political subdivision. (6) The Attorney General may not accept a service under this subsection if the service will be used to displace any Federal employee. (7) Except as provided in paragraph (8), an officer or employee of a State or political subdivision of a State performing functions under this subsection shall not be treated as a Federal employee for any purpose other than for purposes of chapter 81 of title 5 (relating to compensation for injury) and sections 2671 through 2680 of title 28 (relating to tort claims). (8) An officer or employee of a State or political subdivision of a State acting under color of authority under this subsection, or any agreement entered into under this subsection, shall be considered to be acting under color of Federal authority for purposes of determining the liability, and immunity from suit, of the officer or employee in a civil action brought under Federal or State law. (9) Nothing in this subsection shall be construed to require any State or political subdivision of a State to enter into an agreement with the Attorney General under this subsection. (10) Nothing in this subsection shall be construed to require an agreement under this subsection in order for any officer or employee of a State or political subdivision of a State — (A) to communicate with the Attorney General regarding the immigration status of any individual, including reporting knowledge that a particular alien is not lawfully present in the United States; or (B) otherwise to cooperate with the Attorney General in the identification, apprehension, detention, or removal of aliens not lawfully present in the United States. This report addresses (1) the extent to which ICE has designed controls to govern 287(g) program implementation and (2) how program resources are being used and the program activities, benefits, and concerns reported by participating agencies. To address our objectives, we contacted and obtained information from key people and organizations associated with the arrest, detention, and removal of aliens, and U.S. Immigration and Customs Enforcement’s (ICE) 287(g) program, including the following: ICE headquarters officials from the following offices: Office of Investigations, Office of the Principal Legal Advisor, Office of Detention and Removal, Office of the Chief Financial Officer/Budget Office, Office of State and Local Coordination, and Office of Professional Responsibility. ICE officials from ICE Field Offices in Phoenix, Arizona, and in the California offices of Los Angeles, Santa Ana, Riverside, and San Bernardino in conjunction with our site visits to state and local law enforcement agencies in these areas. Officials from all 29 state and local law enforcement agencies that had entered into agreements with ICE as of September 1, 2007, listed below. Six of these agencies reported that they had not yet begun implementing the program. Our analysis includes information from these six agencies as appropriate. We conducted structured interviews with officials from these organizations from October 2007 through February 2008. By interviewing officials from all participating agencies, we were able to obtain information and perspectives from participating agencies that had been involved in the program for the longest period of time as well as from those agencies that had just started participating to learn how law enforcement agencies get their program implemented. State and local law enforcement agencies that had entered into agreements with ICE as of September 1, 2007: Alabama Department of Public Safety; Arizona Department of Corrections; Arizona Department of Public Safety; Maricopa County Sheriff’s Office (Arizona); Los Angeles County Sheriff’s Office (California) Orange County Sheriff’s Office (California); Riverside County Sheriff’s Office (California); San Bernardino County Sheriff’s Office (California); Colorado Department of Public Safety/State Patrol; El Paso County Sheriff’s Office (Colorado); Collier County Sheriff’s Office (Florida); Florida Department of Law Enforcement; Cobb County Sheriff’s Office (Georgia); Georgia Department of Public Safety; Barnstable County Sheriff’s Office (Massachusetts); Framingham Police Department (Massachusetts); Massachusetts Department of Corrections; Alamance County Sheriff’s Office (North Carolina); Cabarrus County Sheriff’s Office (North Carolina); Gaston County Sheriff’s Office (North Carolina); Mecklenburg County Sheriff’s Office (North Carolina); Hudson Police Department (New Hampshire) New Mexico Department of Corrections; Tulsa County Sheriff’s Office (Oklahoma); Davidson County Sheriff’s Office (Tennessee); Herndon Police Department (Virginia); Prince William-Manassas Adult Detention Center (Virginia); Rockingham County Sheriff’s Office (Virginia); and Shenandoah County Sheriff’s Office (Virginia). We also conducted site visits with nine state and local law enforcement agencies that entered into an agreement with ICE as of September 1, 2007, and had begun implementing the program. These sites were selected to represent variation in length of partnership with ICE, type of model (e.g., jail, task force, or joint), geographic location, size of jurisdiction, and proximity to ICE Special-Agent-in-Charge or regional office. The offices from which we interviewed officials about their participation in the 287(g) program, include Rockingham County Sheriff’s Office, Shenandoah County Sheriff’s Office, Los Angeles County Sheriff’s Office, Orange County Sheriff’s Office, San Bernardino County Sheriff’s Office, Riverside County Sheriff’s Office, Arizona Department of Corrections, Maricopa County Sheriff’s Office (including the Enforcement Support, Human Smuggling Unit), and Arizona Department of Public Safety (including the Gang Enforcement Bureau and the Criminal Investigations Division). Although we are not able to generalize the information gathered from these visits to all other participating law enforcement agencies, they provided us with a variety of examples related to program implementation. To determine what the 287(g) program’s objectives are and to what extent ICE has designed controls to govern implementation, we collected and analyzed information regarding the program’s objective and obtained information from both ICE and the participating law enforcement agencies we interviewed and visited to determine if ICE objectives for the program were clearly articulated to law enforcement agencies. We reviewed available program-related documents, including program case files for the initial 29 participating agencies, the 287(g) brochure, training materials provided to state and local officers to become certified in the program, and a “frequently asked questions” document on the program. In addition, we analyzed the MOAs of each state and local agency participating in the 287(g) program as of September 1, 2007. Specifically, we examined sections of the MOAs related to program authority, designation of enforcement functions, and ICE supervision responsibilities, among other areas of these written agreements. We completed a content analysis of responses to structured interviews that were conducted with key officials from each of the participating law enforcement agencies in this review and from information gathered from site visits. Our content analysis consisted of reviewing the responses to the structured interview questions and identifying and grouping responses by theme or characterization. These themes were then coded and tallied. For some questions, participating agencies gave multiple responses or characterizations, therefore responses are not always mutually exclusive. Selection of themes and coding of responses were conducted separately by two analysts; any discrepancies were resolved. We also compared controls ICE told us they designed to govern implementation of the 287(g) program, including conducting background checks, providing formal training with qualifying exams for the applicants’ officers, and agreeing with state and local agencies to MOAs, with criteria in GAO’s Standards for Internal Control in the Federal Government, the Government Performance and Results Act (GPRA) and standard practices for program management. To corroborate the information we received from the law enforcement agencies through both the structured interviews and site visits, we interviewed officials from ICE both at headquarters and in the field, and examined documentation on guidance given to both ICE and state and local participants about the implementation of the program, as well as reviewed all 29 case files created and maintained by ICE on program participants. We identified for what purposes ICE relies on data collected from law enforcement agencies, and how data reliability checks are performed for data collection associated with the 287(g) program. We interviewed ICE officials and participating law enforcement agencies to determine what guidance ICE has provided to law enforcement agencies on how data are collected, stored, and reported to ICE. We interviewed officials and examined documentation from ICE to determine the measures established to monitor performance and improvements made to the program. We reviewed reports that use data from ICE’s Enforcement Case Tracking System or the ENFORCE database, which automates the processes associated with the identification, apprehension, and deportation of removable aliens. During our review, we learned that some data regarding the 287(g) program may not have been included in ENFORCE, and therefore, we are unsure of the completeness of the information relevant to this program in this database. We used this data to a limited extent in our Objective II discussion related to activities, benefits, and concerns of the 287(g) program. The data used was for illustrative purposes only and not used to draw conclusions about the program. To determine what resources ICE and participating law enforcement agencies provide to the program including the equipment and training for program participants, and the assignment of ICE supervisory staff for this program, we examined ICE’s budget for the 287(g) program, including how ICE calculates the funding requirements for each additional agreement. We also interviewed officials from the participating law enforcement agencies, analyzed information collected from these agencies to determine what resources they reported using to implement the program and the activities, benefits, and concerns they reported associated with the program. In addition, we examined budget and appropriations documentation from the program’s inception to the fiscal year 2009 budget request for the 287(g) program. We collected and analyzed information on the activities reported by ICE stemming from the program. Through our structured interviews, we gathered and analyzed the participating state and local agencies views on the activities, benefits, and concerns related to the program. We did not conduct a fiscal examination of the cost of detention facilities, nor review the budgetary effect on law enforcement agencies implementing the 287(g) program. In addition to the contact named above, Bill Crocker, Assistant Director, and Lori Kmetz, Analyst-in-Charge, managed this assignment. Susanna Kuebler, Carolyn Garvey, and Orlando Copeland made significant contributions to the work. Michele Fejfar assisted with design, methodology, and data analysis. Katherine Davis, Linda Miller, Adam Vogt and Peter Anderson provided assistance in report preparation, and Frances Cook provided legal support.

Section 287(g) of the Immigration and Nationality Act, as amended, authorizes the federal government to enter into agreements with state and local law enforcement agencies to train officers to assist in identifying those individuals who are in the country illegally. U.S. Immigration and Customs Enforcement (ICE) is responsible for supervising state and local officers under this program. GAO was asked to review this program. This report reviews (1) the extent to which ICE has designed controls to govern 287(g) program implementation; and (2) how program resources are being used and the activities, benefits, and concerns reported by participating agencies. GAO reviewed memorandums of agreement (MOA) between ICE and the 29 program participants as of September 1, 2007. GAO compared controls ICE designed to govern the 287(g) program with criteria in GAO's Standards for Internal Control in the Federal Government. GAO interviewed officials from both ICE and participating agencies on program implementation, resources, and results. ICE has designed some management controls to govern 287(g) program implementation, such as MOAs and background checks of state and local officers, but the program lacks other controls, which makes it difficult for ICE to ensure that the program is operating as intended. First, the program lacks documented program objectives to help ensure that participants work toward a consistent purpose. ICE officials stated that the objective of the program is to address serious crime, such as narcotics smuggling committed by removable aliens; however, ICE has not documented this objective in program materials. As a result, of 29 program participants reviewed by GAO, 4 used 287(g) authority to process individuals for minor crimes, such as speeding, contrary to the objective of the program. Second, ICE has not described the nature and extent of its supervision over participating agencies' implementation of the program, which has led to wide variation in the perception of the nature and extent of supervisory responsibility among ICE field officials and officials from the participating agencies. ICE is statutorily required to supervise agencies participating in the 287(g) program, and internal control standards require an agency's organizational structure to clearly define key areas of authority and responsibility. Defining the nature and extent of the agency's supervision over this large and growing program would strengthen ICE's assurance that management's directives are being carried out. Finally, while ICE states in its MOAs that participating agencies are responsible for tracking and reporting data to ICE, in 20 of 29 MOAs GAO reviewed, ICE did not define what data should be tracked or how it should be collected and reported. Communicating to participating agencies what data is to be collected and how it should be gathered and reported would help ensure that ICE management has the information needed to determine whether the program is achieving its objective. ICE and program participants use resources for personnel, training, and equipment, and participants report activities, benefits, and concerns regarding the program. In fiscal years 2006-2008, ICE received about $60 million to train, supervise, and equip program participants. As of October 2008, ICE reported enrolling 67 agencies and training 951 state and local law enforcement officers. According to data provided by ICE for 25 of the 29 program participants reviewed by GAO, during fiscal year 2008, about 43,000 aliens had been arrested pursuant to the program, and of those, ICE detained about 34,000. About 41 percent of those detained were placed in removal proceedings, and an additional 44 percent agreed to be voluntarily removed. The remaining 15 percent of those detained by ICE were given a humanitarian release, sent to federal or state prison, or released due to the minor nature of their crime and federal detention space limitations. Program participants report a reduction in crime, the removal of repeat offenders, and other public safety benefits. However, over half of the 29 agencies GAO contacted reported concerns from community members that use of program authority would lead to racial profiling and intimidation by law enforcement officials.

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SEC oversees mutual funds primarily through its Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement. OCIE examines mutual funds to evaluate their compliance with the federal securities laws, to determine if they are operating in accordance with disclosures made to investors, and to assess the effectiveness of their compliance control systems. The Division of Investment Management administers the securities laws affecting funds and advisers. It reviews disclosure documents that mutual funds are required to file with SEC and engages in other regulatory activities, such as rulemaking, responding to requests for exemptions from federal securities laws, and providing interpretation of those laws. Finally, SEC’s Division of Enforcement investigates and prosecutes violations of securities laws related to mutual funds. SEC regulates mutual funds under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934. The Investment Company Act was passed specifically to regulate mutual funds and other types of investment companies. Under the act, mutual funds are required to register with SEC, subjecting their activities to SEC regulation. The act also imposes requirements on the operation and structure of mutual funds. Its core objectives are to ensure that investors receive adequate and accurate information about mutual funds, protect the integrity of fund assets, prohibit abusive forms of self-dealing, prevent the issuance of securities that have inequitable or ensure the fair valuation of investor purchases and redemptions. The Investment Advisers Act requires mutual fund advisers to register with SEC, imposes reporting requirements on them, and prohibits them from engaging in fraudulent, deceptive, or manipulative practices. The Securities Act requires fund shares offered to the public to be registered with SEC and regulates mutual fund advertising. Under the Securities Act and Investment Company Act, SEC has adopted rules to require mutual funds to make extensive disclosures in their prospectuses. The Securities Exchange Act, among other things, regulates how funds are sold and requires persons distributing funds or executing fund transactions to be registered with SEC as broker-dealers. SEC, NASD, and NYSE regulate broker-dealers, including their mutual fund sales practices, by examining their operations and reviewing customer complaints. Broker-dealers that are members of NYSE and do business with the public are typically also required to be members of NASD. Historically, NASD has conducted the mutual fund sales practice portions of examinations for firms that are dually registered with it and NYSE. As a result, NYSE generally plays a lesser role in examining broker-dealers for mutual fund sales practices. NASD has established specific rules of conduct for its members that provide, among other things, standards for advertising and sales literature, including filing requirements, review procedures, approval and recordkeeping obligations, and general standards. NASD also tests members to certify their qualifications as registered representatives. SEC evaluates the quality of NASD and NYSE oversight in enforcing their member compliance with federal securities laws through SRO oversight inspections and broker-dealer oversight examinations. SROs are private organizations with statutory responsibility to regulate their own members through the adoption and enforcement of rules of conduct for fair, ethical, and efficient practices. As part of this responsibility, they conduct examinations of the sales practices of their broker-dealer members. SEC’s SRO oversight inspections cover all aspects of an SRO’s compliance, examination, and enforcement programs. The inspections determine whether an SRO is (1) adequately assessing risks and targeting its examinations to address those risks, (2) following its examination procedures and documenting its work, and (3) referring cases to enforcement authorities when appropriate. Under its broker-dealer oversight examinations, SEC examines some of the broker-dealers that SROs recently examined. SEC conducts these examinations to assess the adequacy of the SRO examination programs. In addition to its oversight examinations, SEC conducts cause, special, and surveillance examinations of broker-dealers, but these examinations do not serve to assess the quality of SRO examinations. Since the detection of the mutual fund trading abuses in the summer of 2003, SEC has made significant changes to its traditional examination approach, which generally focused on conducting routine examinations of all funds on an established schedule. To better detect potential violations, SEC has reallocated or plans to reallocate its staff to conducting targeted examinations focusing on specific risks and monitoring larger funds on a continuous basis. SEC’s revised examination approach offers the potential for the agency to more quickly identify emerging risks and better understand the operations of large and complex funds, although it is too soon to reach definitive judgments. However, due to the limited number of SEC’s examination staff relative to the number of mutual funds and advisers for which the agency has oversight responsibility, the decision to focus examination resources on particular areas involved tradeoffs that raise regulatory challenges. In particular, SEC’s capacity to examine lower risk advisers and funds within a reasonable time period and develop industry risk ratings has been limited. Historically, routine examinations of mutual fund complexes—groups or families of funds sharing the same adviser or underwriter—have served as the cornerstone of SEC’s mutual fund oversight, accounting for 85 percent of the total fund examinations done from 1998 through 2003. During that period, SEC generally tried to examine each complex at least once every 5 years. Due to resource constraints, SEC examinations typically focused on discrete areas that staff viewed as representing the highest risks of presenting compliance problems that could harm investors. Major areas of review have included portfolio management, order execution, allocation of trades, and advertising returns. In late 2002, SEC implemented a revised approach to conducting routine examinations that included a systematic process for documenting and assessing risks and controls for managing those risks in a range of areas related to the asset management function. Besides routine examinations, SEC conducts sweep examinations to probe specific activities of a sample of funds identified through tips, complaints, the media, or other information. The agency also conducts cause examinations when it has reason to believe something is wrong at a particular fund. Sweep and cause examinations accounted for about 5 and 10 percent, respectively, of the total examinations done during 1998 through 2003. After the detection of the market timing and late trading abuses in the summer of 2003, SEC officials concluded that the agency’s traditional focus on routine examinations had limitations. In particular, SEC staff said that routine examinations were not the best tool for broadly identifying emerging compliance problems, since funds were selected for examination based largely on the passage of time, not based on their particular risk characteristics. In addition, SEC officials stated that they concluded the growth in the number of mutual fund companies and the breadth of their operations, combined with the need to perform more in-depth examinations of discrete areas, did not allow SEC to maintain its existing routine examination cycle. To focus its resources on issues and funds presenting the greatest risk of having compliance problems that may harm investors, SEC has made significant revisions to its examination priorities and oversight processes as described below: First, SEC is placing a higher priority on sweep and cause examinations and a lower priority on routine examinations. SEC has directed its 10 field offices that conduct fund examinations to give priority to initiating, as warranted, sweep examinations of funds or advisers, focusing particularly on operational or compliance issues. To address the market timing and late trading abuses surfacing in late 2003, SEC shifted resources away from routine examinations to support sweep and cause examinations, according to SEC officials. As a result, sweep and cause examinations accounted for 87 percent of the 690 fund examinations completed in fiscal year 2004. SEC officials said that about 17 percent of these examinations resulted in referrals to the agency’s Division of Enforcement for potential violations of securities laws and regulations. (We note that the large increase in the number of sweep and cause examinations in fiscal year 2004 as well as the number of referrals was likely due to SEC’s focusing a substantial amount of resources on detecting market timing and late trading abuses.) Second, SEC no longer will routinely examine all funds and advisers on a regular basis, but it will conduct routine examinations of funds and advisers perceived to be high risk, once every 2 to 3 years. In addition, SEC will randomly select a sample of advisers and their affiliated funds perceived to be low risk for routine examination each year. Because these firms will be selected randomly, each firm will have an equal chance of being examined each year. According to SEC officials, the random selection process will enable agency staff to project the examination findings to the population of firms deemed low risk and assess the possible existence of problems within the population. Third, SEC plans to provide more continuous and in-depth oversight of the largest mutual funds. Specifically, SEC is creating teams of examiners dedicated to regularly interacting with and closely monitoring and examining the activities of firms in the largest and most complex groups of affiliated advisers and mutual funds. SEC initially plans to form teams under a pilot program to monitor 10 large advisory groups. Any decision to form additional monitoring teams will depend on how the pilot program develops, according to an SEC official. SEC officials said that the monitoring teams are loosely modeled on the federal bank regulators’ use of on-site teams to continuously monitor operations of large banks. However, unlike the bank regulator approach, SEC staff said the monitoring teams would not be located on-site at large mutual fund companies. Fourth, an SEC task force is considering the development of a surveillance program to support the agency’s oversight of all funds and advisers. The purpose of this program is to obtain from firms information that would enable examiners to identify aberrant patterns in fund and adviser activities and the possible existence of fraud or abusive schemes that require follow-up through examinations. In its fiscal 2006 budget request, SEC reported that the agency expects the surveillance system to begin operations during the second half of 2006. Fifth, SEC has promulgated rules that require investment advisers and investment companies to appoint independent chief compliance officers (CCO) who are responsible for ensuring that their companies adopt policies and procedures designed to prevent violations of federal securities laws and regulations. Fund CCOs are also responsible for preparing annual reports that must, among other things, identify any material compliance matter at the company since the date of the last report. SEC staff said that they plan to review such annual compliance reports while conducting examinations to assist in identifying problems at mutual funds and determine whether the funds have taken corrective actions. (As described later in this report, SEC is missing opportunities to take full advantage of CCO compliance reports to detect potential violations in the mutual fund industry.) Finally, SEC has established the Office of Risk Assessment (ORA) to assist the agency in carrying out its overall oversight responsibilities, including mutual fund oversight. ORA’s director reports directly to the SEC Chairman. According to SEC staff, ORA will enable the agency to analyze risk across divisional boundaries, focusing on new or resurgent forms of fraudulent, illegal, or questionable behavior or products. ORA’s duties include (1) gathering and maintaining data on new trends and risks from external experts, domestic and foreign agencies, surveys, focus groups, and other market data; (2) analyzing data to identify and assess new areas of concern across professions, industries, and markets; and (3) preparing assessments of the agency’s risk environment. ORA is to work in coordination with internal risk teams established in each of the agency’s major program areas—including OCIE—and a Risk Management Committee responsible for reviewing implications of identified risks and recommending appropriate courses of action. As we recently reported, the market timing and late trading abuses that surfaced in 2003 revealed weaknesses in SEC’s mutual fund oversight approach. We noted in the report that lessons can be learned from SEC not having detected market timing arrangements at an earlier stage. The key initiatives that SEC is taking to strengthen its mutual fund oversight program are largely intended to focus the agency’s resources on the largest and highest risk funds and activities. Although it is too soon to assess the effectiveness of the initiatives in light of their recent or planned implementation, the initiatives are consistent with some of the lessons learned concerning the importance of (1) conducting independent assessments of the adequacy of controls over areas such as market timing, (2) developing the institutional capability to identify and analyze evidence of potential risks, and (3) ensuring the independence and effectiveness of company compliance staff and potentially using their work to benefit the agency’s oversight program. By placing greater priority on sweep examinations, SEC may be better positioned to independently assess, as needed, the adequacy of fund controls designed to prevent and detect abusive practices. As we reported, SEC staff did not examine mutual funds for market timing abuses before late 2003, because they viewed market timing as a relatively lower risk area since agency staff believed that funds had adequate financial incentives to establish effective controls for it. In that regard, we noted the importance for SEC to conduct independent assessments of controls at a sample of funds, at a minimum, to verify that areas viewed as low risk, such as market timing, are in fact low risk and effective controls are in place. SEC’s revised examination priorities, particularly their emphasis on initiating sweep examinations that focus on operational or compliance issues, may provide the agency with greater opportunity to conduct independent assessments of controls for emerging risks, in part to validate critical assumptions about such risks and confirm the adequacy of controls in place to address those risks. By forming examiner teams dedicated to monitoring the largest and most complex groups of affiliated advisers and funds, SEC may have the opportunity to more efficiently or effectively use its resources and help ensure the independence and effectiveness of the monitored firms’ compliance staff. SEC estimates that the 100 largest advisory groups of affiliate advisers and funds accounted for about $7.1 trillion, or 85 percent, of the fund assets under management as of the end of September 2004. Thus, focusing on the largest advisory groups may enable SEC to attain the greatest dollar coverage with its limited examination resources. Focusing on the largest advisory groups may also be appropriate due to the control deficiencies that have been found at such companies. For example, SEC determined that nearly 50 percent of the 80 largest mutual funds had entered into undisclosed arrangements permitting certain shareholders to engage in market timing that appeared to be inconsistent with the funds’ policies, prospectus disclosures, or fiduciary obligations. In our earlier mutual fund work, we also found that compliance staff at some funds identified market timing but lacked the independence or authority necessary to control it. This finding suggested that routine communications with fund compliance staff could enhance SEC’s capacity to detect potential violations at an earlier stage, if compliance staff are effective and forthcoming about the problems they detect. SEC’s monitoring teams will provide agency staff with the opportunity to be in routine communication with fund compliance staff, including CCOs. Furthermore, such communications, combined with examinations, could help SEC ensure that fund CCOs, as required under SEC’s compliance rules, are in a position of authority to compel others to adhere to applicable compliance policies and procedures. By creating ORA, SEC is laying an important part of the foundation for developing the institutional capability to identify and analyze evidence of potential risks. SEC staff said that ORA will seek to ensure that SEC will have the information necessary to make better, more informed decisions on regulation. Working with other SEC offices, ORA staff expect to identify new technologies, such as data mining systems, that can help agency staff detect and track risks. SEC’s compliance rules create opportunities for ORA to leverage the knowledge of fund CCOs, including their annual compliance reports. Although ORA may help SEC be more proactive and better identify emerging risks, it is too soon to assess its effectiveness. In this regard, we note that as of February 2005, ORA had established an executive team of 5 individuals but still planned to hire an additional 10 staff to assist in carrying out its responsibilities. Finally, SEC’s fund and adviser surveillance system is in the exploratory stage but, if properly designed and implemented, may help the agency to leverage its limited resources to augment its examinations and oversee funds and advisers. Federal bank and other regulators use off-site surveillance programs to complement their on-site examinations. Each federal bank regulator has an off-site surveillance program to monitor the financial condition of banks between examinations. Information from off- site monitoring is used in setting bank examination schedules and determining the allocation of examiner resources for higher risk banks. Similarly, a recently deployed NASD surveillance program is used to analyze trends in broker-dealer activities and identify unusual patterns that indicate potential problems. NASD uses surveillance analyses to initiate cause examinations and to help its examiners focus on high-risk areas during their routine broker-dealers examinations. SEC’s planned changes to its mutual fund examination program offer potential advantages, but they also involve significant tradeoffs that raise important regulatory challenges for the agency. In comparison to federal bank regulators, SEC has significantly less examiners relative to the number of entities it regulates (see fig. 1), although bank and mutual fund regulatory regimes, including their examinations, differ from each other. As reflected in SEC’s revised oversight approach, any decision by SEC to focus additional examination resources on one or more fund areas involves tradeoffs that could result in less oversight of, or create a regulatory gap in, other areas. We are particularly concerned about SEC’s capacity going forward to review the operations of firms considered to be lower risk, conduct risk assessments of the industry, and potentially oversee the hedge fund industry. By shifting examination resources to targeted sweep and cause examinations as well as monitoring teams for larger funds, SEC may be limiting its capacity to examine the operations of funds perceived to pose lower risk (generally smaller funds) within a reasonable period. As stated previously, between 1998 and 2003, SEC generally sought to conduct routine examinations of all funds once every 5 years and shortened the cycle to 2 or 4 years in fiscal year 2004 following an increase in resources. However, under SEC’s revised examination program, some mutual funds may not be examined within a 10-year period. This is because SEC plans to annually review the operations of 10 percent of the funds deemed lower risk on a random basis. While reviewing funds on a random basis means each firm will have an equal chance of being reviewed annually, it is not clear that this approach will have more of an effect in deterring abuses than if each fund was assured of being examined every 5 years or less. Moreover, if SEC lacks sufficient resources to annually examine 10 percent of the funds deemed lower risk, its approach would have less of a deterrent effect. We recognize that through sweep examinations, SEC may review particular facets of funds deemed lower risk much more frequently than every 10 years or more. At the same time, sweep examinations are much more narrowly scoped than routine examinations and may exclude other potential areas of noncompliance at individual firms. Similarly, SEC’s inability to conduct examinations of all mutual funds within a reasonable period may limit its capacity to accurately distinguish relatively higher risk funds from lower risk funds and effectively conduct routine examinations of higher risk funds. Between late 2002 and October 2004, SEC routinely examined 297, or 30 percent, of the existing fund complexes and used its revised examination guidelines to assess the effectiveness of the funds’ compliance controls in deterring and preventing abuses and to assign the funds risk ratings of low, medium, or high. Had SEC not decided in late 2003 and 2004 to shift examination resources to sweep and cause examinations, it might have been able to assign risk ratings to all 982 fund complexes within the following 3 years in accordance with its routine examination cycle. Completing risk ratings for all fund complexes would have provided SEC with an additional basis for allocating resources to the highest risk firms. Over time, SEC’s risk ratings can become outdated, or stale, raising the possibility for funds deemed lower risk to become higher risk. For example, changes in a fund’s management, such as CCO, could lead to changes that weaken the fund’s compliance culture and controls. However, because SEC may not examine all fund complexes within a 10-year period under its revised examination program, its ability to assign risk ratings to all fund complexes and routinely examine all higher risk funds may be limited. In a previous report, we found that SEC may be missing opportunities to obtain useful information about the compliance controls of mutual funds, including those perceived to represent lower risks and may not be examined within a reasonable period of time. While SEC plans to review investment company CCO annual compliance reports during examinations, the agency has not developed a plan to receive and review the reports on an ongoing basis. Obtaining access to such annual reports and reviewing them on an annual basis could provide SEC examiners with insights into the operations of all mutual funds, including those perceived to represent lower risks, and could serve as a basis for initiating examinations to correct potential deficiencies or violations. SEC noted that it is considering how best to utilize the annual reports but noted any required filing of the reports with SEC would require rulemaking by SEC. A final oversight challenge facing SEC’s mutual fund examination program involves a new rule requiring hedge fund advisers to register with the agency. Issued in December 2004, the new rule requires hedge fund advisers to register with SEC as investment advisers by February 2006. The rule is designed, in part, to enhance SEC’s ability to deter or detect fraud by unregistered hedge fund advisers, some of which were involved in the recent mutual fund abuses. Once hedge fund advisers register, SEC will have the authority to examine their activities. The rule is expected to increase SEC’s examination workload, but because of data limitations the precise extent will not be known until hedge fund advisers actually register. Currently, comprehensive information on the number of hedge funds and advisers is not available, but SEC estimates that from 690 to 1,260 additional hedge fund advisers may be required to register under the new rule, increasing the pool of registered advisers by 8 to 15 percent. SEC officials estimate that at least 1,000 hedge fund advisers have previously registered as investment advisers with SEC to meet client needs or requirements. Under its examination program, SEC has examined these hedge fund advisers in the same way it has examined all other registered advisers. According to SEC officials, it is anticipated that the additional hedge fund advisers that register with SEC will be treated the same as all other registered advisers under SEC’s examination program. SEC has recognized that providing oversight of the additional registered hedge fund advisers will pose a resource challenge and has identified options for addressing the challenge. It could require fewer hedge fund advisers to register with SEC by raising the threshold level of assets under management required for adviser registration. It also has the option of seeking additional resources from Congress for the increased workload resulting from an increased number of registered advisers. Whatever approach is ultimately taken, SEC will have to consider the potential resource implications of the new rule for its oversight of mutual funds. SEC has integrated quality controls into its routine examinations but could benefit from additional controls to ensure that policies and procedures are being implemented effectively and consistently throughout SEC field offices. Under its new initiatives, SEC’s routine examinations will continue to be the primary regulatory tool for determining whether all funds and advisers are complying with the federal securities laws. Examination quality controls provide, among other things, assurances that important documents are provided supervisory review, and examinations are conducted according to agency policies, procedures, and individual examination plans. SEC could improve its quality control measures in three areas: supervisory review of risk scorecards, preparation of written examination plans, and review of completed examinations and work papers. Bank and other financial regulators have quality control measures that provide assurances above and beyond those measures used by SEC. The risk scorecards prepared by SEC during each mutual fund examination are critical work papers, providing the basis for determining areas to review in depth and an overall risk rating for a fund. A set of individual scorecards has been developed to assist examiners in assessing and documenting a fund’s compliance controls in 13 strategic areas and to determine the amount of additional testing examiners will do. (See table 1.) If controls in an area are strong, examiners may do limited or no additional testing to detect potential abuses, but if weak, additional testing is expected to be performed. Collectively, the 13 areas reviewed with the set of individual scorecards provides the basis for determining a mutual fund’s overall risk rating, which OCIE uses to determine how frequently the fund will be examined. While the risk scorecards currently cover 13 areas, SEC officials stated that each scorecard serves, in concept, as a model for assessing controls in a particular area of a firm’s activities. As such, SEC staff could create additional scorecards to assist them in their review of areas not covered by existing scorecards or modify existing scorecards not suitable for reviewing the controls used by a firm in a critical area. OCIE and field office officials told us that all applicable risk scorecards generally should be completed during routine examinations, but if there are time constraints due to extenuating factors, all scorecards may not be completed. Even though risk scorecards are important work papers for documenting and assessing fund compliance controls, SEC standards do not expressly require that they receive supervisory review. Current OCIE standards for preparing examination work papers, including scorecards, specify that they should be prepared in an organized manner facilitating supervisory review and examination reporting. The standards do not provide further supervisory review requirements such as who should do the review, how, or when. While the review of scorecards is not expressly required, OCIE headquarters and SEC field office officials stated that supervisors do review scorecards and other examination work papers but typically do not sign or initial them to document that they have been reviewed. In addition, we were told that lead examiners and branch chiefs review work papers throughout the examination process. These officials also review risk scorecards and other work papers when reviewing final examination reports, making sure that all findings are adequately supported and summaries of the scorecard findings included in the examination reports are accurate. After completing their review of examination reports, branch chiefs sign a form to document their review. In contrast to OCIE, federal bank and other regulators have standards requiring supervisors to document that they have reviewed examination work papers. Examples of the work paper standards include: Federal Reserve guidance requires examiners-in-charge or other experienced examiners to review all work papers as soon as practicable and to sign or initial the applicable documents to evidence their review. OCC guidance requires examiners-in-charge or other experienced examiners to sign or initial work paper cover sheets to evidence their review. The guidance allows reviewers to tailor the thoroughness of their review based on the experience of the examiner preparing the work paper. According to NYSE and NFA officials, the organizations require senior staff to review and sign work papers. NFA officials said that their work papers are electronic, so staff mark a checkbox to evidence their work paper review. While SEC officials stated that the review of the scorecards is documented indirectly by the supervisor’s signature on the examination report, without the supervisor’s signature or initials on the scorecards themselves, there is no way to readily verify that the scorecards were reviewed. Our review of 546 scorecards from 66 routine examinations of funds completed in fiscal year 2004 by SEC’s Midwest Regional Office (MRO), Northeast Regional Office (NERO), and Philadelphia District Office (PDO) disclosed a number of deficiencies potentially stemming from quality control weaknesses. Most of the scorecards did not contain evidence of supervisory review as expected, based on statements by SEC officials, but 34 scorecards, or about 6 percent, were signed or initialed as evidence of review. Regardless of whether the completed scorecards were signed or initialed, we found deficiencies in four areas that raise questions about the adequacy or completeness of supervisory review. First, each scorecard should be marked as to whether examiners rated the compliance controls in the area as highly effective, effective, or ineffective. We found 32, or about 6 percent, of the total scorecards where the control rating was not marked. Second, copies of scorecards should be included with the work papers to facilitate supervisory review, but we found 11, or about 17 percent, of the 66 examinations lacked any scorecards and 15, or about 23 percent, were missing one or more scorecards. Third, documentary evidence should be cited on scorecards to support effective and highly effective ratings, but we found 25, or about 5 percent, of the total scorecards did not cite documentary evidence supporting such ratings. Fourth, scorecard ratings are included in examination reports, but we found the ratings marked on 21, or about 4 percent, of the total scorecards had ratings that differed from the ones in the examination reports. SEC supervisors document their review of examination reports, which include a summary of the risk scorecard findings. Nonetheless, without documenting that the scorecards themselves were reviewed, SEC does not know if deficiencies resulted from a lack of or inadequate supervisory review. The systematic supervisory review of work papers, particularly risk scorecards, is essential for ensuring examination quality. Such reviews help to ensure that the work is adequate and complete to support the assessment of fund compliance controls as well as report findings and conclusions. Likewise, documentation of the review is important to ensure that all critical areas are reviewed. The reviewer’s initials or signature are written verification that a specific employee checked the work. Written examination plans that document the scope and objectives of routine examinations are not required by OCIE. Instead, OCIE officials stated that written examination plans are optional. OCIE allows branch chiefs and lead examiners to decide whether to prepare written plans, with branch chiefs typically meeting with examination teams to discuss the preliminary scope of examinations. Each routine examination is somewhat different because of the risk-based approach used by OCIE. Under this approach, all areas of compliance or fund business activities are not reviewed and instead review areas are judgmentally selected based on their degree of risk to shareholders. As a result, each examination is customized to the activities of the particular fund under examination, with the success of routine examinations depending, in part, on proper planning. The documentation of this planning is important for tracking agreements reached on examination scope and objectives and can be used as a guide for the examination team. Furthermore, the plan can be used to determine whether the examination was completed in accordance with the planned scope. According to OCIE officials, written plans may be helpful in planning examinations of large fund complexes, but many of the examinations conducted are of small firms that have five or fewer employees. For these small firms, the officials said that it may not be necessary to prepare a written examination plan, especially if the examination team conducting the work consists of one or two persons. While OCIE does not require the preparation of written examination plans, we found that SEC’s NERO requires examiners to prepare a planning memorandum to document examination scope and objectives, including firms to be examined within a fund complex, areas considered high risk, and areas to be reviewed. NERO branch chiefs approve the memorandums before the on-site work begins, and the memorandums effectively serve as examination plans. In contrast, SEC’s MRO and PDO do not require planning memorandums or examination plans. Instead, branch chiefs in these two offices meet with the examination teams to discuss the scope of examinations and then let the staff decide whether to prepare a written plan, according to MRO and PDO officials. MRO officials said that some branch chiefs will recommend that for large funds, teams prepare written examination plans since it helps coordinate the work. For 66 routine examinations we reviewed at these three offices, about half, or 53 percent, had written planning memorandums or examination plans. Examinations of the larger fund complexes that were managing more than $1 billion in assets also had examination plans for about half, or 54 percent. In contrast to OCIE, federal bank and other regulators require their staff to prepare written examination plans before conducting examinations. Examples of examination plan requirements include: FDIC guidance requires the examiner-in-charge to prepare a scope memorandum to document, among other things, the preliminary examination scope; areas to be reviewed, including the reasons why; and areas not to be included in the examination scope, including the reasons why. Federal Reserve guidance requires that a comprehensive risk-focused supervisory plan be prepared annually for each banking organization. The guidance also requires the examiner-in-charge, before going on-site, to prepare a scope memorandum to document, among other things, the objectives of the examination and activities and risks to be evaluated; level of reliance on internal risk management systems and internal and external audit findings; and the procedures that are to be performed. To ensure consistency, the guidance requires the scope memorandum to be reviewed and approved by Reserve Bank management. OCC guidance requires the examiner-in-charge or portfolio manager to develop and document a supervisory strategy for the bank that integrates all examination areas and is tailored to the bank’s complexity and risk profile. The strategy includes an estimate of resources that will be needed to effectively supervise the bank and outlines the specific strategy and examination activities that are planned for that supervisory cycle. The strategies are reviewed and approved by the examiner-in- charge’s or portfolio manager’s supervisor. NYSE and NFA officials told us that staff are required to prepare written examination or audit plans. NYSE officials said that staff meet with examination directors to reach agreement on the scope of their examination plans. NFA officials said that staff complete a planning module that includes a series of questions that staff answer to determine the scope of the audit, and the completed planning module serves as the audit plan. Examination planning meetings between SEC branch chiefs and examination teams are important for providing the opportunity to discuss and reach decisions about critical areas of examination scope and objectives. These discussions by themselves, however, do not provide a record of the agreements reached and may not result in a clear and complete understanding for examiners about the scope and objectives of a particular examination. A written examination plan would provide such a record—potentially enabling branch chiefs to better supervise examinations and assisting lead examiners to better communicate the examination strategy to the examination team. Such quality control is especially important given that staff must exercise considerable judgment for examination scope under SEC’s risk-based approach. SEC uses several methods to ensure the quality of its examinations but does not review completed examinations and work papers as done by other regulators to determine whether the examinations were conducted according to procedures or done consistently across field offices. OCIE has issued various policies and procedures to promote examination quality and consistency across the 10 SEC field offices that conduct the majority of its examinations. To help ensure that these policies and procedures are followed, SEC relies on experienced supervisors in its field offices to oversee all stages of routine examinations. Specifically, branch chiefs meet with examination staff to discuss the preliminary scope of examinations, advise staff during the fieldwork, and review all examination reports. Assistant directors in SEC field offices also assist in overseeing examinations and review all examination reports. Also, associate directors and regional or district administrators in SEC field offices may review examination reports. In addition, SEC field offices send each report and deficiency letter, if any, to an OCIE liaison, who reviews them. Finally, OCIE annually evaluates each field office examination program based on factors such as the overall quality of the office’s examination selection and findings; new initiatives and special projects; use of novel or effective risk assessment approaches; and overall productivity, including achievement of numerical examination goals. In contrast to OCIE, we were told that federal bank and other regulators have quality assurance programs that include reviews of completed examinations or other activities. Examples of such reviews include: FDIC guidance states that the agency reviews each regional office’s compliance examination program every 2 years, in part, to evaluate the consistency of supervision across the regions and compliance with policies and procedures. According to the guidance, evaluations include a review of examination reports and work papers. Federal Reserve officials said that the agency conducts on-site operations reviews of the banking supervision function of individual Reserve Banks at least every 3 years. The review targets each Reserve Bank’s risk-focused supervision program and includes a review of a sample of examination reports, work papers, and other supporting documentation. It also encompasses the bank’s ongoing quality management function, or the processes, procedures, and activities the bank uses to ensure that examination reports and related documents are of high quality and comply with established policy. OCC officials told us that the agency reviews its large bank examination program, including specific examination procedures. It conducts reviews to determine whether lead examiners are supervising banks according to plans. It also assesses specific examination procedures across samples of banks. Agency officials said that teams periodically review how examiners are conducting certain procedures to ensure that they are being implemented consistently throughout all field offices. NASD conducts quality and peer reviews to improve the quality, consistency, and effectiveness of its examination program. Under quality reviews, each NASD district office annually evaluates its performance in two or three areas. Under peer reviews, staff go on-site to district offices to evaluate particular program areas. NFA officials told us that the organization randomly selects completed audits for review on a quarterly basis and, as part of the review, supervisory teams review work papers to determine whether the audits complied with established policies and procedures. While OCIE staff evaluate all completed examinations by reviewing the final examination report, they do not review a sample of completed examinations and work papers to periodically assess examination quality and consistency across SEC’s field offices. SEC officials stated that after- the-fact reviews of underlying work papers may not be a cost-effective use of resources, given that key findings and evidentiary materials should be discussed and described in the examination report itself, which is reviewed by OCIE staff. Further, it would be difficult to second-guess decisions made by examiners when on-site, since reviewers would not have access to the same information. Finally, agency officials said that OCIE resources are limited, and time spent reviewing completed examination work papers would result in less time spent on conducting examinations. While reviewing completed examination work papers involves resource tradeoffs, it may yield important benefits. OCIE may be able to better determine whether its examiners are complying with established policies and procedures and whether its built-in quality controls are working. A review of underlying work papers also may allow OCIE to better assess the consistency of examination quality within and across SEC’s field offices as well as the extent to which existing quality controls are helping to ensure that quality is maintained. According to SEC officials, the agency is implementing a computer-based document management system. Under this system, it is anticipated that most, if not all, of the work papers created during examinations will be converted into electronic files, and these files will be maintained in a consistent manner online for a number of years. SEC officials said that when the system is fully operational, estimated to be some time in 2006, all work papers created during an examination will be available electronically to OCIE staff. At that point, OCIE liaisons could review electronic examination work papers on a sample basis in conjunction with their review of examination reports. In addition, electronic work papers would eliminate the need to be on-site to review underlying examination documentation and work papers across SEC’s examination program. Importantly, deficiencies we found during our review of risk scorecards highlight the need for OCIE to periodically assess the consistency of examination staff’s use of scorecards and other steps being taken during examinations. While the requirement to complete risk scorecards became effective in October 2002, SEC has not yet evaluated, for instance, whether the risk scorecards are being completed according to the guidance provided, whether changes to the design of the scorecards are needed, and whether additional guidance or training is needed. In March 2003, OCIE provided one training course on the scorecards, which was attended by 98 examiners, or about 20 percent of the SEC examiners devoted to fund and adviser examinations. According to SEC officials, two senior OCIE staff visited each field office during the spring and summer of 2003 and provided a full day of training on the scorecards to all examination staff. Nevertheless, the scorecard deficiencies we found during our review may indicate that additional training is needed. In addition, the scorecards may have design weaknesses that result in inconsistencies across SEC field offices. For example, field office officials stated that scorecards are designed for investment companies organized as mutual funds and do not readily apply to investment companies organized as unit investment trusts. NERO examiners did not complete scorecards for unit investment trusts, but MRO examiners did by modifying the scorecards as needed. Similarly, SEC field office officials stated that while the scorecards are designed to cover a broad range of fund compliance controls, fund controls for detecting and preventing market timing do not fall squarely under any of the 13 areas covered by the scorecards. As a result, staff have used work papers other than the risk scorecards to document their assessment of market timing controls. SEC officials said that the scorecards are models created to assist examiners in assessing fund controls. As such, scorecards are not intended to exist necessarily for every conceivable control and examiners have the flexibility to modify the scorecards as necessary. Moreover, the officials said that some inconsistencies in the preparation of risk scorecards are expected because not all funds and advisers are the same. In that regard, SEC officials told us that the approach taken by MRO staff in modifying a scorecard to fit the circumstances of an examination appears to be consistent with the approach to scorecard use expected by OCIE. To assess SRO oversight of broker-dealers, including their mutual fund sales practices, SEC conducts examinations of broker-dealers shortly after they have been examined by SROs. However, these SEC broker-dealer examinations, which involve a significant commitment of agency examination resources, provide limited information on the adequacy of SRO oversight and impose duplicative regulatory costs on the securities industry. SEC and SROs’ broker-dealer examinations often cover different time periods, and generally employ different sampling methodologies and use different examination guidelines. Consequently, SEC cannot reliably determine whether its examination findings are due to weaknesses in SRO examination procedures or some other factor. Another deficiency we found regarding SEC’s SRO oversight of broker-dealer mutual fund sales practices is that the agency does not have automated information on the full scope of areas reviewed during its broker-dealer oversight examinations and, therefore, cannot readily and reliably track useful examination information. SEC performs two types of activities to review the quality of SRO oversight of broker-dealers, including their sales of mutual funds. First, SEC conducts inspections of NASD and NYSE on a 3-year cycle that cover various aspects of their compliance, examination, and enforcement programs. These SRO oversight inspections are designed to determine whether an SRO is (1) adequately assessing risks and targeting its examinations to address those risks, (2) following its examination procedures and documenting its work, and (3) referring cases to enforcement authorities when appropriate. When conducting these inspections, SEC reviews a sample of the SRO’s examination reports and work papers to identify problems in examination scope or methods. As a result of these inspections, SEC has identified deficiencies in SRO examinations, including ones related to the SROs’ examinations of mutual fund sales practices, and communicated those to the SRO to remedy the problem. Second, SEC conducts broker-dealer oversight examinations, during which it examines some broker-dealers from 6 to 12 months after an SRO examines the firms. The purpose of broker-dealer oversight examinations is to help the SROs improve their examination programs by identifying violations that the SROs did not find and also by assisting them in evaluating improvements in how SRO examiners perform their work. SEC officials told us that a secondary goal of these examinations is to supplement the SROs’ enforcement of broker-dealer compliance with federal securities laws and regulations. SEC’s broker-dealer oversight examinations involve a significant commitment of agency resources and expose firms to duplicative examinations and costs. In addition to conducting broker-dealer examinations for the purposes of assessing SRO oversight (including for mutual fund sales practices), SEC conducts cause, special, and surveillance examinations of broker-dealers to directly assess broker-dealer compliance with federal securities laws and regulations, including those related to mutual fund sales. SEC currently has an internal goal of having oversight examinations account for 40 percent of all broker-dealer examinations each year. In 2004, 250, or 34 percent, of its 736 broker-dealer examinations were oversight examinations. Broker-dealers that are subject to similar SEC and SRO examinations that may take place within a 6 to 12 month period incur the costs associated with assigning staff to respond to examiner inquiries and to make available relevant records as requested. Although SEC broker-dealer oversight examinations involve a significant commitment of agency examination resources and impose costs on securities firms, our past work questioned their cost-effectiveness. In a 1991 report, we found that the way SEC conducted oversight examinations of broker-dealers provided limited information to help SROs improve the quality of their broker-dealer examination programs. Specifically, during its oversight examinations of broker-dealers, SEC often found violations not identified by SROs and frequently could not attribute the violations it found to weaknesses in SRO examination programs. Because SEC and SROs used different examination procedures or covered different time periods of broker-dealer activity, SEC examiners often could not determine whether the violations they found resulted from the improper implementation of procedures by SRO examiners or differences between the procedures used or the activity period covered. We previously recommended that SEC directly test SRO examination methods and results. However, based on its efforts to replicate some examinations conducted by SROs, the agency concluded that this was unproductive because it only confirmed findings identified by SROs during their examinations. Our current review has shown that despite our 1991 findings, SEC continues to conduct oversight examinations in a similar manner—by using different examination guidelines and time periods. First, SEC continues to review firm activities during the time between the completion of the SRO examination and its own examination. Next, when SEC is reviewing a firm’s transactions or customer accounts to identify potential abuses, it generally does not duplicate the sampling technique used by the SRO, but instead selects its own sample of transactions or customer accounts based on its own procedures. Finally, SEC examiners ask different questions to identify potential abuses. For example, although SEC and NASD both direct their examiners to ask questions to assess potential weaknesses in a firm’s internal controls to prevent market timing and late trading, their procedures call for examiners to ask about different potential internal control weaknesses. According to SEC officials, its examiners do not use the same procedures as SROs because using different procedures allows them to find violations that would not otherwise be found if they just duplicated the SRO procedures. Also, SEC officials stated that SEC has an obligation to review the broker-dealer’s activities at the time of the SEC examination to ensure compliance with securities laws at that time. However, as a result, SEC often cannot determine the specific reason why the SRO did not find the violations, limiting its ability to suggest improvements to SRO programs. SEC routinely provides SROs copies of deficiency letters it sends to broker- dealers as a result of oversight examinations. These deficiency letters sometimes include oversight comments that include steps the SRO can take to enhance its program. SRO officials stated they can often identify the reasons why SEC found the violations, but in many cases the reason is due to SEC’s use of different procedures, such as different review periods or samples. Consequently, SEC often cannot attribute a violation it finds to a problem with the SRO’s examination program. SEC officials said in some cases when SEC identifies a violation, it is able to determine whether the violation was occurring at the time of the original examination and should have been detected by the SRO. For example, in some cases when SEC finds an error in a broker-dealer’s net capital calculation, it is able to trace the error to previous calculations and determine whether it existed during the SRO examination. Even in cases when SEC can attribute a violation it found to a weakness in the SRO examination, it does not track this information in its automated examination tracking system and, as a result, cannot use it to identify trends in SRO problems it discovered during oversight examinations. SEC officials stated that they have a staff committee conducting a comprehensive review of oversight examination procedures and plan to add a feature to SEC’s examination tracking system to allow it to more systematically track identified weaknesses in SROs’ examination programs. Although SEC’s oversight examinations continue to find violations at broker-dealers and, thus, provide investor protection benefits, the violations provide limited information for assessing the quality of the SRO program. This information is particularly important given that the number of violations that SEC has found during its oversight examinations and determined as not found by NASD has increased in recent years. As shown in figure 2, the number of these violations that SEC found but has categorized as not found by NASD more than doubled between fiscal years 2002 and 2004. Despite this significant increase, SEC officials could not explain why the number of these violations increased but stated that the increase did not necessarily represent a decrease in the quality of NASD’s examination program. They said some of the increase is due to a significant increase in the number of rules applicable to broker-dealers. SEC officials told us that SRO officials have noted, and they agree, that the number of these violations, alone, is not always an appropriate measure of the quality of SRO examination programs. Accordingly, SEC officials told us that the agency recently began tracking findings deemed to be significant to allow it to better assess the materiality of an increase in the number of missed violations. If SEC had tested NASD’s examination methods or better tracked the reasons why NASD did not find a violation, SEC would have more information to assess the quality of NASD’s examination program. Another deficiency we found regarding SEC’s SRO oversight is that the agency cannot readily and reliably track key examination information. In assessing the quality of SEC’s oversight of broker-dealer sales of mutual funds, we asked SEC to provide data on which of its broker-dealer oversight examinations in recent years included reviews of mutual fund sales practices. The data would help determine the extent that SEC has reviewed mutual fund sales practices. SEC was not able to provide this information because it does not have automated information on the full scope of areas reviewed during its broker-dealer oversight examinations. SEC maintains a broad range of automated information about its examinations in its Super Tracking and Reporting System (STARS), including basic information about the firm, SEC staff assigned to conduct the examination, and the deficiencies and violations found during the examination. STARS identifies examinations that reviewed specific areas of special interest to SEC, called “focus areas,” as identified by senior SEC staff in headquarters, and new areas are added in part based on the emergence of new abuses. For example, SEC added breakpoints as a focus area in January 2003 and market timing and late trading in 2004. Although focus area designations provide useful information about how often SEC reviews some areas, focus areas do not cover all areas potentially reviewed by SEC during its examinations. Without methodically tracking the full scope of work performed during oversight examinations, SEC lacks information for determining how effective its oversight is in two important areas. First, because SEC does not know how often it has reviewed particular areas such as mutual fund sales practices during its oversight examinations, it cannot ensure that it has adequately reviewed all areas it considers important. When SEC reviews particular areas, its examiners generally refer to a set of written procedures, known as examination modules that provide information to guide examiners’ work. STARS does not include data fields to track whether staff use the module on mutual funds during an examination. Therefore, the extent of coverage of mutual funds is unknown. As a result, SEC officials could not determine how many of the approximately 1,400 broker-dealer oversight examinations conducted between 2000 and 2004 included a review of mutual fund sales practices. SEC officials stated that they have a separate database containing examination reports that can be electronically searched to identify relevant examinations containing a search term such as “mutual fund,” which would yield an estimate of the number of examinations that reviewed broker-dealer mutual fund sales practices. However, according to an official, not all examinations covering mutual fund sales practices would be captured because some examination reports that included reviews of mutual fund sales practices would not necessarily include any mention of mutual funds, especially if SEC identified no deficiencies or violations in that area. In contrast to SEC, both NASD and NYSE have systems with capability to track the full scope of examinations including the use of mutual fund and other examination modules. For NASD, some of its offices are able to track which of its broker-dealer examinations were followed by an SEC oversight examination. At 8 of its 15 district offices, which account for 55 percent of its examinations, NASD tracked this information and SEC conducted oversight examinations of approximately 5 percent of the 2,602 NASD examinations conducted between January 1999 and August 2004 that reviewed mutual fund sales practices. The remaining seven offices were not able to track this information because, according to an NASD official, the SEC field office conducting oversight examinations did not always provide a letter informing them that an oversight examination was conducted. With mutual fund sales practices being a regulatory priority, the percentage of SEC examinations reviewing these practices would be a useful measure for ensuring that the agency is addressing this priority. Second, because SEC does not track the full scope of work performed during its oversight examinations, it is limited in its ability to assess the significance of deficiencies and violations it finds. Because SEC does not know how often it has reviewed a particular area, the data it tracks on the number of deficiencies and violations it finds in a particular area are less meaningful. For example, it would be less significant if SEC found violations in a particular area during 5 out of 100 examinations as opposed to finding violations during 5 out of 5 examinations during which it reviewed the area. Without knowing the full scope of each oversight examination and therefore the number of times a particular area was reviewed, data tracked by SEC on the number of deficiencies and violations it finds are less meaningful. In addition to conducting broker-dealer oversight examinations to evaluate the adequacy of SRO activities, SEC conducts other types of examinations, including cause and sweep examinations, which are designed to directly assess broker-dealer compliance with the law. SEC tracks the number of firms it targets during its examination sweeps along with the number of violations and deficiencies it finds. SEC officials told us that the agency tracks the number of findings from these examinations as a percentage of the number of firms examined, and that tracking such information helps SEC assess the prevalence of the findings relative to the number of firms. However, without tracking the scope of work performed during its oversight examinations, SEC is unable to make similar assessments about the prevalence of violations and deficiencies identified during those reviews. Appendix II provides information you requested about (1) how SEC, NASD, and NYSE share information, including written examination guidance, related to their review of mutual fund sales practices and other examination priorities; (2) how SEC distributes and stores examination guidance for use by its broker-dealer examiners; and (3) what training SEC has provided to broker-dealer examiners on mutual funds and other topics and how it tracks and assesses such training. In the wake of the market timing and late trading abuses, SEC staff implemented significant changes to the agency’s mutual fund examination program in the view that doing so would help ensure the earlier detection and correction of violations. These changes—including conducting additional sweep examinations and continuously monitoring large companies—reflect a practical approach designed to focus SEC’s limited resources on higher risk funds and activities and have the potential to strengthen SEC’s oversight practices in certain regards. Nonetheless, the changes also involve tradeoffs, such as limiting the agency’s capacity to review funds perceived to be lower risk and conduct risk assessments of all funds in a timely manner. Moreover, SEC’s capacity to effectively monitor the hedge fund industry is open to question, given the tradeoffs that the agency has had to make in overseeing the mutual fund industry. While we recognize that SEC at some point may need to request additional resources from Congress to carryout its mutual fund and other oversight responsibilities, such requests should only occur after the agency has explored and achieved all available efficiencies within its existing resource limitations. Whether SEC’s utilization of resources under its revised examination program will provide effective oversight remains to be seen. Future adjustments by SEC to resources devoted to various oversight activities, such as sweep examinations and randomly selected lower risk fund examinations, are likely to occur as the agency gains experience through conducting these oversight activities and changing conditions in the mutual fund industry. However, SEC has had extensive experience with its broker-dealer oversight examinations, and the effectiveness of these examinations for improving the quality of SRO oversight remains unclear. This situation raises concern, particularly in light of the significant level of resources devoted to oversight examinations and the resource challenges faced by SEC’s fund and adviser examination program. We also identified basic weaknesses in SEC’s approaches to conducting mutual fund and broker-dealer examinations. For mutual fund examinations, SEC does not require staff to document their examination plans to facilitate supervisory review. Second, SEC has issued work paper standards but lacks guidance on their supervisory review. Moreover, despite the importance of risk scorecards in determining the depth of work done during examinations, SEC has not yet assessed whether they are prepared according to standards since implementing the scorecards in 2002. For broker-dealer examinations, SEC has not developed an automated system to track the full scope of work completed during examinations and therefore lacks useful information about SRO oversight. Without addressing these deficiencies, SEC’s capacity to effectively oversee the mutual fund industry and SROs is reduced. To improve SEC’s oversight of mutual funds and SRO oversight of broker- dealers that sell mutual funds, we are making four recommendations to the SEC Chairman. First, we recommend that SEC periodically assess the level of resources allocated to the various types of examinations in light of their regulatory benefits to help ensure that the agency is using its resources efficiently and effectively to oversee the mutual fund industry, including broker-dealers that offer mutual funds. As part of this assessment, SEC should seek to ensure that it allocates sufficient resources to mitigate any regulatory gaps that may currently exist concerning the timely examination of mutual funds perceived to represent lower risk, complete mutual fund risk assessments within a more reasonable period, and fulfill its new oversight responsibilities for the hedge fund industry. Second, in so doing, we recommend that the agency assess its methodology for conducting broker-dealer oversight examinations and whether some portion of the resources currently devoted to these examinations could be better utilized to perform mutual fund examinations. Third, to strengthen SEC’s approach to mutual fund examinations, we recommend that SEC establish a policy or procedure for supervisory review of work papers prepared during routine examinations and for documenting such reviews; establish a policy or procedure for preparing a written plan for each routine examination, documenting at a minimum the preliminary objectives and scope of the examination; and consider reviewing on a sample basis completed routine examinations and work papers to assess the quality and consistency of work within and across the field offices conducting examinations. Fourth, to assess and improve the effectiveness of SEC’s oversight of SRO broker-dealer examination programs, we recommend that the Chairman, SEC, electronically track information about the full scope of work performed during broker-dealer oversight examinations, including all major areas reviewed, to determine whether areas are receiving adequate review and to more fully assess the significance of deficiencies and violations found. SEC provided written comments on a draft of this report, which are reprinted in appendix III. SEC also provided technical comments that we incorporated into the final report, as appropriate. SEC focused most of its comments on providing further elaboration on the potential benefits of its examination strategy for overseeing mutual funds and investment advisers and on the benefits obtained from its broker-dealer oversight examinations. In addition, SEC briefly commented that it will consider our recommendation directed at improving its quality controls for routine fund examinations and that it has formed a working group to explore ways to enhance the value of its broker-dealer oversight examinations, including their ability to identify the reasons that violations may have been missed by SRO examinations. First, SEC stated that it is not possible for the agency to conduct timely, comprehensive routine examinations of every mutual fund and adviser, given the size of the industry and agency resources. Further, it expects its risk-targeted examinations to provide an effective means of addressing risks in the securities industry. Specifically, it believes that looking at the same type of risk at a number of different firms is a better approach than examining a single firm in depth. According to SEC, this approach will provide benefits by promptly identifying emerging trends and compliance problems, and individual firms can be compared to their industry peers. The agency believes this approach has already yielded benefits in identifying and addressing significant compliance problems before becoming major crises. In addition, SEC stated that the program it is developing to randomly select a sample of lower risk firms for routine examination will address our concern that such firms may not be given sufficient attention under its revised oversight strategy. According to SEC, this approach will provide a deterrent effect, enable the agency to test assumptions and techniques used throughout its examination program, and allow the agency to draw inferences about compliance in the adviser community, based on statistically valid sampling techniques. We recognize that SEC’s revised examination strategy for mutual funds and advisers offers potential benefits, including focusing its limited resources on firms and activities that are perceived to pose higher risks. Nonetheless, we continue to be concerned about SEC’s ability to examine all mutual funds within a reasonable period and accurately assess the relative risk of each fund on a timely basis. Unlike broker-dealers, mutual funds are regulated and examined solely by SEC. Under SEC’s current plans to randomly sample 10 percent of the firms perceived to be lower risk for routine examination each year, it is possible that up to a third of the total number of firms would not be selected for examination within a 10-year period. We believe that this is a lengthy time period for firms to conduct business without being examined. Similarly, SEC’s inability to conduct examinations of all mutual funds within a reasonable period will limit its capacity to accurately distinguish relatively higher risk funds from lower risk funds and effectively target its limited examination resources on those funds posing the highest risks. Therefore, we continue to believe that, as recommended, SEC should periodically assess the level of resources allocated to its various types of examinations and in so doing ensure that it allocates sufficient resources to mitigate any regulatory gaps that currently exist in the timely examination of funds perceived to represent lower risks and to ensure that it completes mutual fund risk assessments within a more reasonable time period. Second, SEC stated that its broker-dealer oversight examinations provide quality control over SRO examinations and serve other important goals. For example, SEC stated that oversight examinations allow it to detect violations that otherwise might not be detected, conduct routine examinations of new products or services, and test and validate assumptions and techniques used throughout the broker-dealer examination program. In addition, SEC expressed concern about our suggestion that it should reproduce SRO examinations if its oversight examinations are to provide accurate quality control information. SEC stated that this suggested approach would result in redundancies for broker-dealers being examined and limit the agency’s ability to reach conclusions about SRO examination programs. By conducting its examinations as independent compliance reviews, SEC stated that it can assess whether SRO procedures were followed and whether SRO procedures need to be modified or enhanced. The agency stated that through its oversight program it has identified SRO procedures that need to be modified or enhanced and its examiners meet regularly with SRO examiners to review the results of oversight examinations. Finally, SEC commented that it has formed a working group to explore ways to gain additional value from its broker-dealer oversight examinations, such as by better identifying the reasons that a violation may not have been detected by an SRO examination, aiding the SRO in improving its program, and minimizing burden on the firm examined. We recognize that SEC’s oversight examinations serve more than one goal and provide investor protection benefits. While such examinations serve a variety of purposes, one of their primary purposes is to assess the quality of SRO examinations. In fulfilling this purpose, we remain concerned that SEC’s approach provides limited ability to identify the reasons why an SRO did not find violations that SEC found and, in turn, provide suggestions for improving SRO examinations. SEC is responsible for overseeing SROs that examine broker-dealers on a regular basis, and it conducts oversight examinations of only a small percentage of the total number of broker- dealers. Thus, it is critical for SEC to ensure that SROs conduct effective examinations. As discussed, SEC has formed a working group to evaluate its oversight examinations. We believe this is a step in the right direction and also provides the agency with the opportunity to evaluate its approach and level of resources devoted to broker-dealer oversight examinations. Finally, regarding our recommendation that SEC strengthen three aspects of its quality control framework for routine fund examinations, the agency stated it will fully consider the recommendation. Specifically, in 2006, the agency plans to deploy an electronic system for work papers. In preparation for this effort, it plans to review how new technology can be used to improve the quality of examinations and it will consider our recommendation in its review. While SEC did not directly comment on our recommendation that it electronically track information about the full scope of work performed during its broker-dealer oversight examinations, we believe that this would provide SEC important information to determine whether areas are receiving adequate review and the relative significance of violations found in each area. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will provide copies of this report to the Chairman of the House Committee on Financial Services; the Chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, House Committee on Financial Services; and the Chairman and Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs. We also will provide copies of the report to SEC, FDIC, the Federal Reserve Board of Governors, NASD, NYSE, and OCC and will make copies available to others upon request. In addition, the report will be available at no cost on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To identify and assess the changes SEC has made to or is planning for its mutual fund examination program, we reviewed SEC testimony, speeches, reports, and other documents related to the agency’s mutual fund examination program. We also reviewed federal securities laws and regulations applicable to mutual funds and analyzed SEC data on the number, types, and results of its fund and adviser examinations. We also interviewed officials from SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Office of Risk Assessment and representatives from the Investment Company Institute to obtain information on the significance of planned changes. In addition, we interviewed federal bank regulatory officials from the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System, and Office of the Comptroller of the Currency (OCC) and self-regulatory organization (SRO) officials from NASD, the New York Stock Exchange (NYSE), and the National Futures Association (NFA) to discuss their examination programs and supervisory tools. To assess key aspects of the quality control framework of SEC’s routine mutual fund examinations, we reviewed policies, procedures, and other guidance applicable to those examinations. We also reviewed routine fund examinations completed in fiscal year 2004 by SEC’s Midwest Regional Office (MRO), Northeast Regional Office (NERO), and Philadelphia District Office (PDO). We selected these field offices because they were the three largest in the number of completed routine fund examinations in fiscal year 2004. The three offices completed 66 routine fund examinations, accounting for about 72 percent of all routine fund examinations completed in fiscal year 2004. Where appropriate, we also reviewed examinations of advisers to the funds we reviewed. We used a standardized data collection instrument to document the methods examiners used to conduct examinations and areas examiners reviewed during examinations. In addition, we interviewed officials from OCIE and three SEC field offices—MRO, NERO, and PDO—about their examination policies and procedures and representatives from a mutual fund company and consulting firm about fund examinations. To gather information and compare SEC examinations with those of other regulators, we interviewed officials from FDIC, the Board of Governors of the Federal Reserve System, OCC, NYSE, and NFA about their quality controls and reviewed some of their quality control policies and procedures. To determine the adequacy of SEC’s oversight of NASD and NYSE in protecting shareholders from mutual fund sales practice abuses, we reviewed SEC policies, procedures, and other guidance related to its broker-dealer oversight examinations and inspections and interviewed officials from SEC’s OCIE and Boston District Office, NASD, and NYSE. We also reviewed judgmentally selected SEC broker-dealer oversight examinations conducted by SEC’s Boston District Office in 2003 and 2004, and reviewed all reports of SRO inspections conducted of NASD and NYSE between 2001 and 2003. To gather information on SEC’s automated tracking system, Super Tracking and Reporting System, we interviewed SEC staff responsible for the system in headquarters and received an overview of the system and its capabilities at the Boston District Office. In addition, we reviewed reports generated from the system and training documents for the system. To help assess the extent to which SEC, NASD, and NYSE have shared written guidance, we compared and contrasted the examination modules they used to examine for certain mutual fund sales practice abuses. As part of our assessment of the training received by broker-dealer examiners, we obtained and analyzed SEC’s training attendance rosters and list of examiners employed by SEC since 1999. To ensure that data provided about the number, nature, and results of examinations conducted by SEC, NASD, and NYSE were reliable, we reviewed written materials describing these systems and reviewed the data provided to check for missing or inaccurate entries. We also interviewed agency staff responsible for maintaining the information systems that track such data. We determined that the data were sufficiently reliable for use in this report. We performed our work in Boston, Massachusetts; Chicago, Illinois; New York, New York; Philadelphia, Pennsylvania; and Washington, D.C. We conducted our work between February 2004 and July 2005 in accordance with generally accepted government auditing standards. You asked us to provide information about aspects of SEC’s oversight of the broker-dealer industry, including (1) how SEC, NASD, and the New York Stock Exchange (NYSE) share information, including written examination guidance, related to their review of mutual fund sales practices and other examination priorities; (2) how SEC distributes and stores examination guidance for use by its broker-dealer examiners; and (3) what training SEC has provided to its broker-dealer examiners on mutual funds and other topics, and how it tracks and assesses such training. SEC, NASD, and NYSE have developed guidance for examiners to use in assessing compliance by broker-dealers with mutual fund sales practice rules. Each regulator has developed its own examination module, or set of procedures, covering various topics related to mutual fund sales. Moreover, all three regulators recently revised their modules to include procedures to detect market timing and late trading abuses. In addition, the regulators periodically have provided their staff with other written guidance related to mutual fund sales. For example, SEC issued internal memorandums in 1997 and 2001 to inform staff about abuses related to breakpoints and other mutual fund sales practices and provide them with procedures for detecting such abuses. Through its oversight role, SEC reviews aspects of the self-regulatory organization (SRO) examination modules, including the mutual fund sales practice module. First, SEC officials told us that NYSE and NASD e-mail SEC copies of their examination modules when they make material changes to them. Second, during SEC’s on-site inspections of SRO examination programs, staff generally review SRO examination modules in connection with their review of completed SRO broker-dealer examinations and work papers. Third, as part of their broker-dealer oversight examinations, SEC staff generally review the SRO broker-dealer examinations and applicable examination modules before going on-site to conduct examinations of such broker-dealers. SEC and the SRO officials meet at least semiannually to discuss significant examination findings, customer complaints, trends in the industry, enforcement cases, and examination guidance. SEC officials told us that agency staff have met with NASD and NYSE officials semiannually and quarterly, respectively, to discuss, among other things, examination findings and guidance. The officials also said that they hold frequent telephone conversations to coordinate their examination efforts. For example, SEC, NASD, and NYSE staff talked with each other immediately following NASD’s discovery of breakpoint abuses in 2002, and established a joint task force to determine the extent of the abuses by conducting examinations of firms designed to identify failures to provide breakpoint discounts. Similarly, SEC, NASD, and NYSE staff talked with each other in their efforts to respond to the late trading and market timing abuses uncovered in 2003. In addition, SEC and SRO staff jointly attended conferences and training that included examination guidance as a topic of discussion. Finally, SEC, NASD, and NYSE have jointly developed a number of examination modules to enforce recent changes in laws and rules applicable to broker-dealers. Although SEC, NASD, and NYSE coordinate in these ways to oversee broker-dealers, they generally do not provide copies of their written examination materials to each other. That is, SEC typically does not provide copies of its modules or other internal written guidance to the SROs, nor do NASD and NYSE generally provide copies of such guidance to each other. Officials at these agencies shared benefits and drawbacks of providing written copies of examination materials to each other. The regulators agreed that sharing information about their examination approaches and outcomes is overall a positive way to more effectively oversee the broker-dealer industry. They cautioned, however, that certain drawbacks should be considered regarding the sharing of written examination materials. SEC officials said that sharing SEC examination modules could compromise its supervision of the SROs. According to the officials, if SEC shared its modules, the SROs may be less innovative and motivated to improve their methods. They said, for example, that the SROs may view SEC’s procedures as the most that they would need to do. NASD officials strongly disagreed with SEC’s assertions about the sharing of examination modules, saying they always seek the most effective examination procedures, regardless of those used by SEC; and an NYSE official said that while NYSE understands the SEC’s position in this regard, the sharing of SEC’s examination module would only enhance NYSE’s pre- existing examination procedures related to mutual funds. NASD and NYSE officials said it would be helpful if SEC shared copies of its modules and other guidance it shares with its own examiners. However, SEC and NASD officials said that NASD and NYSE may not want to share their examination modules with each other because of competitive reasons. For example, if one SRO shared its modules with another SRO, it would run the risk that its competitor could be able to adopt similar procedures without the cost of developing them. Finally, NASD officials told us that differences exist between NASD’s and NYSE’s membership, culture, priorities, and strategies that can lead to differences in examination procedures, and the same is true for financial institutions overseen by the banking regulators. SEC’s Office of Compliance Inspections and Examinations (OCIE) oversees and directs SEC’s broker-dealer examination program, but SEC’s 11 field offices conduct the vast majority of the broker-dealer examinations. Among other things, OCIE creates and updates broker- dealer examination modules, or policies and procedures; issues other examination guidance; and reviews broker-dealer examination reports. Currently, when OCIE develops and issues policy changes and examination guidance, it typically distributes such guidance to the field offices by e-mail. In turn, each field office separately stores the guidance on one of its shared computer drives or in some other way to provide its examiners access to the information. Field office examiners generally are responsible for keeping abreast of changes in guidance and reviewing it as needed in performing examinations. To better ensure that SEC examiners across all field offices have access to current and complete broker-dealer examination guidance, OCIE is developing an internal Web site to serve as a central repository for all broker-dealer examination guidance. According to agency officials, OCIE launched its internal Web site in April 2005 on a pilot basis to select broker- dealer examiners nationwide to obtain their comments about its organization and comprehensiveness. Subsequently, SEC made the Web site available to all examiners in July 2005. According to SEC officials, the Web site will allow broker-dealer examiners to access not only all guidance at one location but also links to databases and numerous other examiner tools. SEC’s OCIE has a training branch that provides routine and specialized training to its broker-dealer examiners, with some of the training related to mutual funds. More specifically, OCIE’s training branch provides a two- phased training program for broker-dealer examiners that is designed to teach examiners how to handle increasingly complex examination issues. According to an SEC official, the phase-one course is designed for new examiners and includes some training on mutual fund operations and mutual fund sales practices of broker-dealers. OCIE’s training branch also offers a range of specialized training delivered in a variety of formats. For example, it offers classroom training sessions and videoconferences taught by senior examiners or vendors, such as NASD, as well as training videos that examiners can view when convenient. An SEC official told us that since 1999 the training branch has offered over 25 training sessions that have included mutual fund topics, such as breakpoints. In addition, SEC periodically has coordinated its training efforts with SROs, including NASD and NYSE. For example, examiners representing SEC, NASD, NYSE, and other SROs, as well as state regulators have met annually for a 3-day joint regulatory seminar to receive training about emerging and recurring regulatory issues. In 2003 and 2004, the seminars provided training on mutual fund sales practice abuses, including late trading, market timing, and failure to provide breakpoint discounts. Finally, SEC examiners attend or participate in external training, such as industry conferences. Separate from OCIE’s training branch, SEC has a central training center called SEC University that oversees the agency’s training programs. SEC University uses an electronic database to track training received by SEC staff. According to SEC officials, the database has a number of weaknesses that limits its usefulness in helping SEC to track and assess the training received by examiners. For example, the database cannot be used to generate reports on which examiners have taken or not taken a particular course. Also, the database is not directly accessible to examiners or their supervisors and, thus, does not allow them to review their training records or enter external training they may have taken. Because of these weaknesses, OCIE’s training branch uses training rosters as needed to manually track which examiners have taken particular courses. SEC training staff said that they are requesting that the agency purchase a learning management system that would better enable it, including OCIE, to track and assess all training and other developmental opportunities. According to one of the officials, the initiative is currently tabled and may or may not receive funding this year. Despite challenges in its ability to track training in an automated way, OCIE takes some steps to evaluate the training needs of its examiners. It gathers and evaluates training participants’ reactions to and satisfaction with training programs and uses that information to decide on what training to offer in the future. Training branch staff told us that at the end of each course, they hand out course evaluation forms to participants. These forms include closed-ended questions about the extent to which participants found the course helpful and open-ended questions about what additional training needs they have. The training branch uses the information to improve individual classes and the program as a whole. In addition, training staff attend monthly meetings with management and staff from all field offices, in part, to identify training needs and opportunities, and they also attend yearly meetings with examination program managers to discuss the examiners’ training needs. In addition to the contact named above, John Wanska, Randall Fasnacht, Joel Grossman, Christine Houle, Marc Molino, Wesley Phillips, David Pittman, Paul Thompson, Richard Tsuhara, and Mijo Vodopic made key contributions to this report.

As the frontline regulator of mutual funds, the Securities and Exchange Commission (SEC) plays a key role in protecting the nearly half of all U.S. households owning mutual funds, valued around $8 trillion in 2005. Mutual fund abuses raised questions about the integrity of the industry and quality of oversight provided by SEC and self-regulatory organizations (SRO) that regulate broker-dealers selling funds. This report assesses (1) changes SEC has made to, or is planning for, its mutual fund exam program; (2) key aspects of SEC's quality control framework for routine fund exams; and (3) the adequacy of SEC's oversight of NASD and the New York Stock Exchange in protecting shareholders from mutual fund sales abuses. SEC is initiating several changes intended to strengthen its mutual fund exam program but faces challenges overseeing the fund industry. In the wake of the fund abuses, SEC has revised its past approach of primarily conducting routine exams of all funds on a regular schedule. It concluded these exams were not the best tool for identifying emerging problems, since funds were not selected for examination based on risk. To quickly identify problems, SEC is shifting resources away from routine exams to targeted exams that focus on specific risks. It will conduct routine exams on a regular schedule but only of funds deemed high risk. SEC also is forming teams to monitor some of the largest groups of advisers and funds. Although SEC is seeking to focus its resources on higher risk funds and activities, the resource tradeoffs it made in revising its oversight approach raise significant challenges. The tradeoffs may limit SEC's capacity not only to examine funds considered lower risk within a 10-year period but also to accurately identify which funds pose higher risk and effectively target them for routine examination. Potentially taxing its resources further, SEC recently adopted a rule to require advisers to hedge funds (investment vehicles generally not widely available to the public) to register with it. This rule is expected to increase SEC's exam workload, but the precise extent is not yet known. SEC has integrated some quality controls into its routine exams, but certain aspects of its framework could be improved. It relies on experienced staff to oversee all exam stages but does not expressly require supervisors to review work papers or document their review. GAO found deficiencies in key SEC exam work papers, raising questions about the quality of supervisory review. SEC also does not require examiners to prepare written exam plans, though they use considerable judgment in customizing each exam. Written plans could serve as a guide for conducting exams and reviewing whether exams were completed as planned. As done by other regulators, SEC also could review a sample of work papers to test compliance with its standards. A primary tool that SEC uses to assess the adequacy of SRO oversight of broker-dealers offering mutual funds provides limited information for achieving its objective and imposes duplicative costs on firms. To assess SRO oversight, SEC reviews SRO exam programs and conducts oversight exams of broker-dealers, including their mutual fund sales practices. SEC's oversight exams take place 6 to 12 months after SROs conduct their exams and serve to assess the quality of SRO exams. However, GAO reported in 1991 that SEC's oversight exams provided limited information in helping SROs to improve their exam quality, because SEC and the SROs used different exam guidelines and their exams often covered different periods. GAO found that these problems remain, raising questions about the considerable resources SEC devotes to oversight exams. GAO also found that SEC has not developed an automated system to track the full scope of work done during its oversight exams. Thus, SEC cannot readily determine the extent to which these exams assess mutual fund sales practices.

govreport

This section describes TVA’s (1) legislation and governance, (2) operations and planning, (3) debt ceiling, and (4) retirement system. TVA is an independent federal corporation established by the TVA Act. The act established TVA to improve the quality of life in the Tennessee River Valley by improving navigation, promoting regional agricultural and economic development, and controlling the floodwaters of the Tennessee River. To those ends, TVA built dams and hydropower facilities on the Tennessee River and its tributaries. From its inception in 1933 through fiscal year 1959, TVA received annual appropriations to finance its cash and capital requirements. In 1959, however, Congress amended the TVA Act and provided TVA with the authority to finance its power program through revenue from electricity sales and borrowing and required it to repay a substantial portion of the annual appropriations it had received to pay for its power facilities. Under the TVA Act, TVA must design its rates to cover all costs but also keep rates as low as feasible. TVA must charge rates for power that will produce gross revenues sufficient to provide funds for its costs including operating, administrative and maintenance costs. TVA can borrow by issuing bonds and notes, an authority set by Congress that cannot exceed $30 billion outstanding at any given time. Legislation also limits competition between TVA and other utilities. When the TVA Act was amended in 1959, it prohibited TVA, with some exceptions, from entering into contracts to sell power outside the area where it or its distributors were the primary source of power supply on July 1, 1957. This is commonly referred to as the “fence,” because it limits TVA’s ability to expand substantially outside its service area. In addition, the Federal Power Act includes a provision that helps protect TVA’s ability to sell power within its service area. This provision, called the “anti- cherrypicking” provision, exempts TVA from being required to allow other utilities to use its transmission lines to deliver power to customers within its service area. The anti-cherrypicking provision reduces TVA’s exposure to loss of customers and competition from other utilities. A nine-member Board of Directors nominated by the President and confirmed by the U.S. Senate administers TVA. The board sets TVA’s goals and policies, appoints the CEO, develops long-range plans, seeks to ensure those plans are carried out, and approves TVA’s budget. The board also approves rate changes and has the sole authority to set wholesale electric power rates and approve the retail rates charged by TVA’s distributors. TVA’s board approves the agency’s strategic plan which outlines TVA’s broad goals, priorities, and performance measures. TVA’s most recent strategic plan covers fiscal years 2014 through 2018 and outlines its “strategic imperatives”—namely, to “maintain low rates, live within our means, manage our assets to meet reliability expectations and provide a balanced portfolio, and be responsible stewards of the region’s natural resources.” In August 2013, TVA’s board approved the goal to reduce TVA’s debt to about $22 billion by fiscal year 2023. TVA developed this goal during its fiscal year 2014 long-term financial planning process, but TVA updates its long range financial plan each year. The TVA board approves the budget each fiscal year, and the board is updated at least semi-annually on the long-range financial plan. TVA uses a 10-year long-range financial plan to determine the amount of funds that will be available for capital investment. Operating priorities are detailed in business unit plans, such as the power supply plan, the transmission assessment plan, and the coal and gas operations asset plan. In addition, TVA files publicly available quarterly and annual financial reports with the Securities and Exchange Commission. TVA also submits a budget proposal and management agenda (performance report) to Congress and a performance budget (performance plan) to OMB. To meet demand for electricity, utilities can construct new plants, upgrade existing plants, purchase power from others, and provide incentives to customers to reduce and shift their demand for electricity through energy efficiency or demand-response programs. Since its establishment, to meet the subsequent need for more electric power, TVA has expanded beyond hydropower to other types of power generation such as natural gas, coal, and nuclear plants. In fiscal year 2016, TVA provided nearly 159 billion kilowatt-hours to customers from its power generating facilities and purchased power, as shown in figure 1. To guide TVA decisions about the resources needed to meet future demand for electricity and determine the most cost-effective ways to prepare for the future power needs of its customers, TVA periodically develops an integrated resource plan (IRP). TVA’s 2015 IRP found no immediate needs for new baseload plants—plants that generally have been the most costly to build but have had the lowest hourly operating costs—beyond the completion of the Watts Bar Unit 2 nuclear plant in Tennessee and the expansion of capacity at the Browns Ferry nuclear plant in Alabama. In October 2016, TVA completed Watts Bar Unit 2— the first nuclear unit to enter commercial operation in 20 years. Beyond those projects, the 2015 IRP found that TVA could rely on additional natural gas generation, greater levels of cost-effective energy efficiency, and increased contributions from competitively priced renewable power. TVA develops forecasts of demand for electricity that help it make resource planning decisions, such as how much and what kind of capacity to build, how much power to buy from other sources, or how much to invest in energy efficiency. To forecast the demand for electricity in its service area for the next 20 or more years, TVA employs a set of models but forecasting beyond a few years into the future involves great uncertainty. Utilities deal with uncertainty partly by producing a range of forecasts based on demographic and economic factors, and by maintaining excess generating capacity, known as reserves. Models help utilities choose the least-cost combination of generating resources to meet demand. If demand forecasts are unreasonably high or low, a utility could end up with more or less generating capacity than it needs to serve its customers reliably, or it could end up with a mix of generating capacity that is not cost effective. These outcomes can affect electricity rates as well as the utility’s financial situation. TVA experienced less than anticipated electricity demand growth over the past 20 years and now forecasts little, if any, growth in demand for electricity in the upcoming years. Congress increased TVA’s debt ceiling four times from 1966 to 1979, from $750 million to $30 billion. In the years following these increases, TVA’s financial condition worsened, largely as the result of construction delays, cost overruns, and operational shutdowns in its nuclear program. In the late 1960s and 1970s, TVA started construction on 17 nuclear units but completed only 7 because of lower-than-anticipated demand for electricity, resulting in billions of dollars of debt. In February 2001, we reported that TVA had about $6.3 billion in unrecovered capital costs associated with uncompleted and nonproducing nuclear units. In fiscal year 2016, TVA had about $1.1 billion in unrecovered costs associated with uncompleted nuclear units. While the debt ceiling has not been changed since 1979, TVA’s business and operations have grown along with the power needs of the Tennessee Valley. TVA has continued to add generating capacity to the system, as its customer base has increased, and environmental spending requirements have increased. TVA generally uses debt financing for capital investments in new generation capacity and environmental controls and uses revenues for operation and maintenance of the power system. TVA can borrow funds at competitive interest rates as a result of its triple-A credit rating which is based, in part, on its ownership by the federal government. Appendix I includes historical data on TVA’s debt and other selected financial data. TVA’s board established TVARS in 1939. TVARS is a separate legal entity from TVA and is administered by a seven-member Board of Directors. The TVARS board manages the retirement system, including decision-making on investment portfolios, the interest rate or rates used in actuarial and other calculations, and benefits. The Rules and Regulations of the TVA Retirement System (TVARS Rules) establish how the retirement system is administered and what benefits are payable to participants. The TVARS Rules establish the minimum amount TVA must contribute to the system each year. The TVARS board can amend the TVARS Rules, but TVA has veto power and amendments proposed by the TVARS board become effective only if TVA does not exercise its veto within 30 days. As a governmental plan, TVA’s plan is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for pension plans in the private sector. As of September 30, 2016, the defined benefit pension plan (which we refer to as the pension plan in this report) had about 34,000 participants, of whom about 24,000 were retirees; it is a “mature” plan, in that there are more than twice as many retirees and beneficiaries as employees participating in the plan. To meet its goal to reduce its debt from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023, TVA plans to increase revenue through rate increases, limit the growth of operating expenses, and reduce capital expenditures. TVA’s plans assume the completion of capital projects will occur on time and within budget. TVA’s plans also include costs for investigating the development of new nuclear technology but do not include capital costs for construction. According to TVA officials, TVA aims to increase its overall financial flexibility over the long term to ensure sufficient room under the debt ceiling so it can access capital for future investments to meet its mission. TVA plans to gradually decrease debt through 2023 (see fig. 2). To meet its goal to reduce its debt to about $22 billion by fiscal year 2023, TVA’s plans include the following. Rate increases. TVA’s plans include annual rate increases not to exceed 1.5 percent of the retail rate as needed to maintain its debt reduction trajectory. According to TVA officials and documents, TVA’s plans included rate increases of 1.5 percent for about $200 million in annual revenue. TVA can use increased revenue to refinance existing debt or to fund certain expenditures rather than taking on new debt, but TVA’s board must approve rate increases. TVA increased rates each fiscal year from 2014 through 2017. According to TVA officials, annual rate increases through 2023 could result in the reduction of debt to about $19.8 billion by fiscal year 2023, which would exceed the agency’s debt reduction goal. Limits in the growth of operating expenses. TVA plans to continue evaluating its operations and to limit the growth of its operating expenses. Having fewer operating expenses frees up revenue from rates that TVA can use to repay outstanding debt or fund certain expenditures without taking on new debt. In fiscal year 2016, TVA’s O&M expenses totaled about $2.8 billion—a reduction of about 18 percent from $3.4 billion in fiscal year 2013. As part of its cost-reduction initiatives, TVA eliminated 2,200 positions through attrition and elimination of vacant positions. TVA plans to pursue additional workforce reductions to offset increases in retirement benefit and labor costs. According to TVA documents, reductions in expenses associated with coal plant closures will offset some of the increase in labor-related costs but other reductions will be required. TVA officials said that additional reductions could involve contract labor in its nuclear group. In July 2016, TVA offered a voluntary reduction-in-force program to all 3,500 employees in its nuclear group, providing an opportunity to retire or depart; as of January 2017, TVA officials had not provided information on the number of employees participating in this program. In fiscal year 2016, TVA’s workforce included 10,691 employees and 12,729 contractors. According to TVA documentation, as a major component of its O&M costs, TVA continuously evaluates its staffing levels, both employees and contractors. TVA plans are being finalized, over the next several years, to decrease the overall workforce through various mechanisms as TVA aligns its workforce with changes to its generating assets; these mechanisms may include reductions-in-force, attrition, and elimination of vacant positions. However, early retirements and severance associated with workforce reductions could also pose additional expenses. Reductions in capital expenditures. TVA plans to reduce its capital expenditures through fiscal year 2023. Over the past decade, TVA’s capital expenditures increased by over 180 percent—from about $1.2 billion in fiscal year 2006 to about $3.4 billion in fiscal year 2015. TVA aims to decrease capital expenditures to about $1.8 billion by fiscal year 2023 (see fig. 3). Based on its electricity demand forecast, TVA does not anticipate the need for additional baseload capacity until the 2030s beyond completion of Watts Bar Unit 2—which cost about $4.7 billion—and capacity expansion at three nuclear units. TVA’s capital expenditure plan from fiscal years 2016 through 2023 includes a total of about $17.4 billion; about $8.3 billion for base capital projects to maintain the current operational state, about $5.2 billion for capacity expansion projects, and about $3.9 billion for environmental and other projects. Under TVA’s financial guiding principles, TVA may issue debt for new assets, including capacity expansion and installation of environmental controls, but, according to TVA officials, TVA plans to primarily fund capital expenditures with revenue, as opposed to issuing new debt, to reach its debt goal. TVA increased construction expenditures from fiscal years 2006 through 2016 from about $1.4 billion ($1.6 billion in 2016 dollars) to about $2.7 billion while reducing the amount of new debt issued (see fig. 4). According to TVA officials, TVA’s plans assume that the completion of capital projects will occur on time and within budget. TVA’s plans included the assumption that it would complete construction of a new nuclear unit—Watts Bar Unit 2—in 2016. Watts Bar Unit 2 began commercial operation in October 2016. By completing construction of this unit in 2016, a key assumption underlying TVA’s debt reduction plans was met. However, TVA’s plans include other key capital projects such as the construction of two natural gas plants, modification of a coal plant to install clean air controls, and two smaller nuclear projects. Information about these two nuclear projects follow. Browns Ferry extended power uprate (EPU). TVA’s capital plans include a project that aims to increase generation capacity at the Browns Ferry nuclear plant’s three existing units. TVA began the project in 2001 and anticipated completion within 2 to 4 years but the project remains incomplete. As of September 30, 2016, TVA reported that it anticipates completion of the project by 2024 at a total estimated cost of about $475 million—an increase of 25 percent from an estimated $380 million in fiscal year 2014. According to TVA documentation, the agency spent about $191 million on the project through fiscal year 2016. The project involves engineering analyses and modification and replacement of certain existing plant components to enable the units to produce additional power. To allow operation at the higher power level, the license for each unit requires modification that would occur in parallel with the NRC license amendment review process. TVA originally submitted the licensing amendment requests to NRC in June 2004. However, TVA withdrew these requests in September 2014 and submitted a new request in September 2015. According to NRC, it is planning to complete its review by fall 2017. Watts Bar Unit 2 steam generator replacement. TVA’s capital plans include about $438 million to replace steam generators at the newly operational unit. The existing generators prematurely developed leaks and other problems occurred at nuclear plants, including Watts Bar Unit 1 which required replacement of the generators 9 years into operation. According to TVA officials, TVA has completed steam generator replacements at other nuclear units without significant cost overruns or schedule delays. Given historical trends in nuclear construction, TVA’s estimated capital costs may be optimistic and could increase. Any cost overruns or delays on its nuclear or other capital projects could require adjustments to its future financial plans. TVA’s history of cost overruns and schedule delays includes the construction of Watts Bar Unit 2 which began commercial operation in October 2016 after decades of construction (see table 1). TVA did not complete another nuclear project. TVA auctioned off the 1,400 acre site of the Bellefonte nuclear plant in Alabama, including two unfinished nuclear units, in November 2016 for $111 million—a fraction of the approximately $5 billion TVA had spent on the plant. TVA began building the plant in 1974, but several stops and starts in construction occurred primarily as a result of lower-than-anticipated growth in electricity demand. According to TVA officials, TVA decided again to complete unit 1 in 2011 but stopped work in 2013 because of reduced electricity demand, Watts Bar Unit 2 concerns, and anticipated increases in construction costs. In 2013, TVA estimated that the cost to complete the unit had grown from its prior approved cost of $4.9 billion to at least $7.5 billion or more. TVA stated that it wanted to complete Watts Bar Unit 2 and await the results of its IRP process. Based on the 2015 IRP, TVA decided not to complete construction of Bellefonte. According to TVA documentation, TVA spent about $10 million to $12 million annually maintaining the Bellefonte site. TVA’s plans do not anticipate any such events occurring with its current projects that would interfere with timely completion within budget. TVA’s plans include costs for investigating the development of new nuclear technology but do not include capital costs for construction of the technology. Specifically, TVA is assessing the potential of its Clinch River site in Tennessee for the construction of small modular reactors (SMR). According to TVA documentation, these efforts include research and development activities that support its technology innovation mission. In 2016, TVA submitted an early site permit application to NRC to assess the suitability of the site for construction and operation of SMRs at its 1,200-acre Clinch River site. An early site permit is valid for up to 20 years and would address site safety, environmental protection, and emergency preparedness associated with any of the light-water reactor SMR designs under development in the United States. According to TVA documentation, TVA has not selected a technology and has not entered into any contracts for design work. If TVA decides to construct SMRs, its costs are uncertain but could total about $3 billion after cost sharing through public-private partnerships but expenditures prior to a construction decision would be a very small portion of this cost, according to TVA documentation. The total estimated costs for TVA to develop, submit, and support the NRC application and review include about $72 million, according to an interagency agreement with DOE, and TVA is responsible for half of these costs. According to TVA documentation, the agency spent about $23 million on SMR activities through fiscal year 2015 and estimates spending about $5 million in fiscal year 2016. According to TVA, it spends about $10 million to $15 million on research and development activities each year as part of its technology innovation organization (not including spending on SMRs). TVA officials said that the agency will not decide whether or not to construct SMRs for at least 5 years. However, TVA is investigating SMRs even though its 2015 IRP found that TVA does not need additional baseload power plants beyond the projects currently under way and that SMRs are cost-prohibitive. TVA’s debt reduction plans and performance information are not reported in a manner consistent with GPRAMA requirements. GPRAMA requires agencies, including TVA, to report major management challenges that they face, and for each major management challenge that agencies develop and report performance information—including performance goals, measures, milestones, and planned actions to resolve the challenge. TVA identifies managing debt and its unfunded pension liabilities as major management challenges but TVA has not reported required performance information in its annual performance plan or report on these challenges. For managing debt, TVA’s CEO stated a goal for debt reduction by 2023 during a congressional hearing in April 2015 and the goal is reported in internal documents and Board presentation slides available on TVA’s website. In addition, according to TVA’s 2016 performance report, its strategic objectives include “effectively manage debt to ensure long-term financial health.” TVA’s 2016 performance report includes a goal related to total financing obligations for fiscal years 2016 and 2017, but the goal shows these obligations increasing, and the report does not include information on planned actions to resolve the challenge. Although TVA established a goal to reduce its debt, it has not documented in its annual performance plan or report strategies for how it will meet its goal, as required by GPRAMA, thereby reducing transparency and raising questions about how the agency will meet its goal. For TVA’s unfunded pension liabilities, TVA officials have stated a goal to eliminate the pension funding shortfall (about $6 billion at the end of fiscal year 2016) by 2036, but TVA has not identified such a goal or milestones in its performance plan or report. As of September 30, 2016, TVA’s pension plan was about 54 percent funded with a funding shortfall of about $6 billion (plan assets totaled $7.1 billion and liabilities $13.1 billion). While TVA’s debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years (see fig. 5). Unfunded pension liabilities are similar to other kinds of debt because they constitute a promise to make a future payment or provide a benefit. According to a joint American Academy of Actuaries and Society of Actuaries task force, a pension plan needs to be evaluated as part of a plan sponsor’s overall enterprise; an analysis that looks at the pension plan as a self-standing entity is incomplete and too narrow. However, TVA officials told us that because TVA uses revenue from the rates it charges customers to fund the pension, and not debt in the form of bonds, unfunded pension liabilities would not affect TVA’s debt reduction plan. In addition, TVA defers pension costs as “regulatory assets”— incurred costs deferred for recovery through rates in the future—in accordance with accounting standards and with TVA board approval. However, because TVA will need to recover these costs through rates in the future, this affects its financial health and operations. If TVA uses revenue from rate increases to close the pension shortfall, this could decrease its ability to fund other activities such as capital projects with revenue from rates. This could, in turn, require TVA to rely on debt to fund certain capital projects and interfere with efforts to meet overall debt reduction goals. Alternatively, further rate increases could interfere with TVA’s objective of keeping rates as low as feasible. Without the Board of Directors ensuring that TVA better document and communicate information about its goals to reduce debt and unfunded pension liabilities in its performance plan and report, including strategies for achieving its goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. Several factors could affect TVA’s ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. In addition, TVA aims to eliminate its $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but no mechanism is in place to ensure TVA fully funds the liabilities if, for example, plan assets do not achieve expected returns. Several factors could affect TVA’s ability to meet its debt reduction goals, including regulatory pressures that could require additional capital investment, changes in demand for electricity, technological innovations, or unforeseen events that could affect revenues or require additional investments. TVA’s fossil fuel and nuclear power plants are, or potentially will be, affected by existing and proposed environmental and other regulations, and the implementation of these regulations may require TVA to make additional capital investments. For example, TVA estimates it will spend about $2 billion on environmental expenditures and compliance with regulations from 2017 through 2023 but, according to a TVA document, this estimate could change as additional information becomes available and regulations change. TVA spent about $977 million to eliminate the wet storage of coal combustion residual, commonly called coal ash, to assist in meeting EPA and Tennessee Department of Environment and Conservation environmental requirements. As part of these efforts, TVA prepared a June 2016 environmental impact statement on the approach it planned to take for closing coal ash impoundments at its coal plants, which involved converting all its wet storage to dry storage. According to a TVA document, the agency anticipates spending about an additional $1.2 billion in related coal ash costs through 2022. While the status of the Clean Power Plan that EPA issued in 2015 is unclear, TVA continues to assess the plan and its status. According to TVA documentation, TVA is well positioned to meet carbon emission guidelines for existing fossil fuel plants under the plan. Specifically, in April 2011, TVA agreed to retire 18 of its 59 fossil fuel units by the end of 2017 for several reasons, including the cost of adding emission control equipment and other environmental improvements to the units. As of September 2016, TVA had retired 14 of the 18 units and reported that it would continue to evaluate the appropriate asset mix, given the costs of continuing to operate its coal plants, including adhering to environmental regulations. With regard to TVA’s nuclear power plants, TVA also faces potential costs related to proposed regulations. For example, in May 2014, NRC notified certain nuclear power plant licensees of the results of seismic hazard screening evaluations performed following the Fukushima nuclear accident. Based on the screening results, TVA must conduct additional seismic risk evaluations of all three of its nuclear plants—Browns Ferry, Sequoyah, and Watts Bar—by 2019. According to TVA, NRC is developing a rule anticipated in mid-2017 for nuclear plants to mitigate the effects of events, such as seismic events, that exceed plant design standards that could require TVA to modify one or more of its nuclear plants. According to TVA documents, plant modification costs will be unknown until the rule is finalized, but they could be substantial. Reductions in demand for electricity could affect TVA’s revenues; alternatively, increases in demand could generate additional revenue but require investment in additional capacity or purchased power. The expanded use of distributed generation and increased energy efficiency and conservation could reduce demand for electricity in TVA’s service area and affect its revenues. As the amount of distributed generation grows and renewable generation and energy efficiency technologies improve and become more cost-effective, TVA projects sales of electricity will see little, if any, growth in upcoming years. According to several representatives from industry and stakeholder groups, distributed generation could increase competition from end-use customers— consumers who typically buy power from the local power companies that obtain power from TVA—if they adopt on-site power generation. According to EIA’s Annual Energy Outlook 2016, annual electricity demand for the average household will decline by 11 percent from 2015 to 2040. EIA reported that factors contributing to a decline in household demand include efficient lighting technologies and increased distributed generation, particularly rooftop solar. According to TVA documents, the agency cannot predict the financial impact from future growth of distributed generation but TVA has taken steps to anticipate the changes in the electricity market that distributed generation could bring. For example, in 2016, TVA announced a new business unit focused on distributed energy resources and the energy delivery marketplace, and according to a TVA official, it also formed information exchanges to provide forums to discuss implementation issues related to distributed generation and energy efficiency. Other technological developments in the electric utility industry could change TVA’s operating costs or requirements. For example, several representatives we interviewed from industry and stakeholder groups said that energy storage technology could become more cost-effective and change the way utilities operate. While the added capacity provided by energy storage could delay or alleviate the need for TVA to build additional power plants, TVA officials said that there are still several unknowns about the technology though they do not believe integration of battery storage into the system would be problematic. Finally, unforeseen events could also affect TVA’s ability to meet debt reduction goals. For example, the 2008 Kingston coal ash spill cost about $1.2 billion to remediate—costs TVA is still recovering. TVA plans to make annual contributions of $300 million to the pension plan, or more if required by the TVARS Rules, for up to 20 years. According to TVA’s analysis, there is a 50 percent chance that annual contributions of $300 million could eliminate the $6 billion funding shortfall at the end of 20 years and a 50 percent chance that a funding shortfall would remain. TVA’s analysis assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. According to TVA officials, the pension plan asset performance is critical to TVA’s ability to close the pension funding shortfall. TVA officials have stated a goal to fully fund the pension plan within 20 years. However, if market conditions over the next 20 years are not favorable enough to fully fund the pension liabilities, which TVA’s analysis assigns a 50 percent chance, TVA would need to contribute more than $300 million per year to make up the difference if it aims to eliminate the funding shortfall. Other factors that could affect TVA’s pension liabilities include greater than expected increases in retiree lifespans and declining bond yields. In a 2010 report, the TVA OIG found that a combination of factors— including market conditions and TVA actions—resulted in a significant shortfall between pension plan assets and projected liabilities. These factors included: (1) TVA not making contributions to TVARS for 6 years, (2) the addition of significant retirement benefits to the plan when the funded status was better, (3) the establishment of TVARS Rules that had the effect of enticing employees to retire, and (4) the economic downturn in 2008 and 2009. The TVARS pension plan’s funded status decreased from about 92 percent in 2007 to about 55 percent in 2016 (see fig. 6). In December 2015, TVA proposed changes to the TVARS Rules to reduce the obligations of the pension plan and commit to making consistent contributions. The TVARS board approved amendments that reduced TVA’s pension liabilities by about $960 million, reduced future benefit accruals, and added a minimum contribution requirement of $300 million to the existing requirement for a period of 20 years. However, the amended TVARS Rules do not adjust TVA’s annual contribution requirement to ensure TVA will fully fund its pension liabilities. The TVARS Rules require that for a period of 20 years, or until the plan is deemed fully funded, TVA’s annual contribution equal the greater of (1) a formula-based contribution or (2) $300 million. To the extent that a $300 million contribution proves inadequate because of plan experience, the formula-based contribution would determine the amount TVA must contribute each year. The formula uses a 30-year “open amortization method,” meaning that the amortization period is reset to 30 years each fiscal year, so the end of the amortization period (i.e., paying off the unfunded liability) may never be achieved. A Blue Ribbon Panel commissioned by the Society of Actuaries believes that plans’ risk management practices and their ability to respond to changing economic and market conditions would be enhanced through the use of amortization periods shorter than the 30-year period commonly used today. The panel recommended amortization periods of no more than 15 to 20 years for gains and losses. According to the panel’s 2014 report, the panel believes that fully funding pension benefits of public employees over their average future service reasonably aligns the cost of today’s public services with the taxpayers who benefit from those services. In addition, according to the American Academy of Actuaries, funding rules should include targets based on accumulating the present value of benefits for employees by the time they retire, and a plan to make up for any variations in actual assets from the funding target within a defined and reasonable time period. In the private sector, ERISA generally requires a 7-year amortization of shortfalls for private sector single- employer pension plans. Unlike an open amortization period, a closed, or fixed, amortization period is generally maintained until the original unfunded liability amount is fully repaid. Thus, a closed amortization period would be a better practice if the goal is to fully fund pension liabilities. Table 2 compares the amortization of $6 billion in unfunded liabilities using open and closed amortization methods, assuming assets return 7 percent, as TVA expects. The closed amortization method would extinguish the unfunded liability in 30 years, whereas more than $4 billion in unfunded liability would remain under the open amortization method (see table 2). As we mentioned earlier, TVA assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. If the return on investment was lower than expected, the unfunded liabilities would be greater, and TVA would need to contribute more than $300 million per year to make up the difference. The open amortization period utilized by the TVARS formula-based contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and does not ensure full funding of the pension liabilities. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. TVA officials told us that the agency does not plan to contribute more than the TVARS Rules require and that it plans to continue to treat its unfunded pension liabilities as regulatory assets, deferring pension costs for recovery through rates in the future. However, the TVARS Rules do not provide for fully funding pension benefits over the service of TVA employees covered by the plan, which would align the cost of services provided by covered employees with the rates paid by customers who benefit from the services of covered employees. The deferral of contributions necessary to close the funding shortfall reduces future financial flexibility and may result in the need for rate increases during a period of declining demand for electricity. If TVA needs to use revenue originally targeted for debt reduction to pay for greater than estimated pension expenses, this could interfere with TVA’s debt reduction goal and additional rate increases may be required which could interfere with TVA’s ability to keep rates low. Alternatively, less flexibility could lead to pressure to reduce the pay or benefits of future TVA employees. Since fiscal year 2013, TVA reduced its O&M costs by about 18 percent while completing construction of the first nuclear unit to enter commercial operation in 20 years. However, since the late 1970s, TVA’s financial condition worsened largely as a result of delays, cost overruns, and operational shutdowns in its nuclear program, and the agency continues to invest in nuclear projects while deferring full recognition and funding of pension liabilities. TVA generally aims to reduce its debt to increase its financial flexibility over the long term to ensure sufficient room under its debt ceiling so it can access capital for future investments to meet its mission. However, retirement benefit and labor costs and cost overruns or delays on nuclear capital projects could put pressure on TVA’s plan, along with other factors including future demand for electricity or unforeseen events. GPRAMA requires agencies to report major management challenges that they face and report performance information—including performance goals, measures, milestones, and planned actions needed to resolve them. However, TVA is not fully meeting this requirement, thereby reducing transparency and raising questions about how it will meet its goals of managing debt and reducing its unfunded pension liabilities. TVA’s unfunded pension liabilities affect TVA’s financial health and operations especially if TVA will need to fund them through rate increases in the future. Without better documentation and communication of TVA’s goals to reduce debt and unfunded pension liabilities in its performance plan and report, including the strategies for achieving these goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. TVA aims to eliminate $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but factors such as market conditions could affect TVA’s progress and no mechanism is in place to ensure the pension plan is fully funded. The TVARS Rules do not adjust TVA’s required contributions to ensure pension liabilities will be fully funded and TVA plans to contribute no more than the rules require and to defer the remaining pension liability. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. We recommend that the Board of Directors ensure that TVA take the following two actions: better document and communicate its goals to reduce its debt and unfunded pension liabilities in its performance plans and reports, including detailed strategies for achieving these goals. propose, and work with the TVARS board to adopt, funding rules designed to ensure the plan’s full funding. We provided a draft of this product to TVA for comment. In its comments, reproduced in appendix II, TVA agreed with our first recommendation and stated that it will incorporate additional details in the next iteration of its performance plan and report to enhance transparency. TVA neither agreed nor disagreed with our second recommendation. However, TVA said that it is committed to working with the TVARS Board to ensure a fully funded system. It did not specifically state whether it would consider proposing, and working with the TVARS Board to adopt, funding rules designed to ensure the pension plan’s full funding. As TVA states in its comments, it worked with the TVARS Board to implement plan amendments that were effective October 1, 2016. TVA states that those amendments have placed the retirement system on a path toward achieving full funding in 20 years. We continue to believe that the action we recommended is needed and, as discussed in the report, that the open amortization period used in the TVARS Rules to determine TVA’s minimum contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and, therefore, does not ensure full funding of the pension liabilities. In addition, we received technical comments, which we have incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, TVA’s board of directors, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix III. The Tennessee Valley Authority (TVA) reports on debt using a measure of total financing obligations that includes bonds and notes, which TVA considers “statutory debt,” and other financing obligations which include lease-leaseback obligations, energy prepayment obligations, debt related to variable interest entities, and membership interests issued in connection with a lease financing transaction. As table 3 shows, in fiscal year 2016, TVA’s $26 billion in debt included about $24 billion in bonds and notes and $2 billion in other financing obligations. Table 4 shows selected data from TVA’s financial statements including revenues, expenses, and other data. Table 5 shows TVA’s pension liabilities, assets and funded status. Table 6 shows TVA’s regulatory assets—incurred costs deferred for recovery through rates in the future—by major category. Frank Rusco, (202) 512-3841 or [email protected]. In addition to the contact named above, Michael Hix (Assistant Director), Janice Ceperich, Philip Farah, Kirk Menard, and Joseph Silvestri made key contributions to this report. Also contributing to this report were Antoinette Capaccio, Cindy Gilbert, Steve Lowrey, Alison O’Neill, Karissa Robie, Dan C. Royer, Barbara Timmerman, and Jacqueline Wade.

TVA, the nation's largest public power provider, is a federal electric utility with revenues of about $10.6 billion in fiscal year 2016. TVA's mission is to provide affordable electricity, manage river systems, and promote economic development. TVA provides electricity to more than 9 million customers in the southeastern United States. TVA must finance its assets with debt and operating revenues. TVA primarily finances large capital investments by issuing bonds but is subject to a statutorily imposed $30 billion debt limit. In fiscal year 2014, TVA established a debt reduction goal. GAO was asked to review TVA's plans for debt reduction. This report examines (1) TVA's debt reduction goal, plans for meeting its goal, and key assumptions; (2) the extent to which TVA reports required performance information; and (3) factors that have been reported that could affect TVA's ability to meet its goal. GAO analyzed TVA financial data and documents and interviewed TVA and federal officials and representatives of stakeholder and industry groups. To meet its goal to reduce debt by about $4 billion—from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023—the Tennessee Valley Authority (TVA) plans to increase rates, limit the growth of operating expenses, and reduce capital expenditures. For example, TVA increased rates each fiscal year from 2014 through 2017 and was able to reduce operating and maintenance costs by about 18 percent from fiscal year 2013 to 2016. TVA's plans depend on assumptions that future capital projects will be completed on time and within budget, but TVA's estimated capital costs may be optimistic and could increase. TVA's debt reduction plans and performance information are not reported in a manner consistent with the GPRA Modernization Act of 2010. Specifically, TVA identifies managing its debt and its unfunded pension liabilities as major management challenges but has not reported required performance information in its performance plans or reports on these challenges, thereby reducing transparency and raising questions about how it will meet its goal. As of September 30, 2016, TVA‘s pension plan was about 54 percent funded (plan assets totaled about $7.1 billion and liabilities $13.1 billion). While TVA's debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years, as shown below. Tennessee Valley Authority's Debt and Unfunded Pension Liabilities, Fiscal Years 2006 through 2016 Several factors could affect TVA's ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. Also, TVA aims to eliminate its unfunded pension liabilities within 20 years, according to TVA officials. However, factors such as market conditions could affect TVA's progress, and no mechanism is in place to ensure it fully funds the pension liabilities if, for example, plan assets do not achieve expected returns. The TVA retirement system rules that determine TVA's required annual pension contributions do not adjust TVA's contributions to ensure full funding and TVA does not plan to contribute more than the rules require. Without a mechanism that ensures TVA's contributions will adequately adjust for actual plan experience, unfunded liabilities could remain and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. GAO recommends that TVA (1) better communicate its plans and goals for debt reduction and reducing unfunded pension liabilities in its annual performance plan and report and (2) take steps to have its retirement system adopt funding rules designed to ensure the pension plan's full funding. TVA agreed with the first recommendation and neither agreed nor disagreed with the second. GAO believes that action is needed as discussed in the report.

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By the late 1970s, the First City Bancorporation of Texas, Inc., through its subsidiary banks, had a high concentration of loans to the energy industry in the Southwest United States and was regarded as a principal lender in that industry. In the early and mid-1980s, when the energy industry experienced financial difficulties, so did First City. By 1986, First City was reporting operating losses. First City, its regulators, and FDIC recognized that many of the subsidiary banks could not survive without major infusions of capital. These parties agreed that the capital needed for long-term viability could not come wholly from the private sector due to the financially strained condition of the Southwest’s economy and banking industry. A chronology of events leading to FDIC’s open bank assistance in 1988 and the final resolution of the First City banks in 1993 appears below. A description of changes in various legal authorities over the same period, 1987 to 1993, is contained in appendix II. After considering available alternatives, FDIC and First City entered into a recapitalization agreement—commonly referred to as open bank assistance—that called for First City to reduce its subsidiary banks from nearly 60 to about 20. The agreement also required the creation of a “collecting bank” to dispose of certain troubled assets held by the subsidiary banks. The open bank assistance included a $970 million capital infusion from FDIC along with $500 million of private capital raised by the new bank management to restore First City’s financial health. As part of the agreement, FDIC received $970 million in preferred stock of the collecting bank. FDIC also received a guarantee, from both First City Bancorporation and the subsidiary banks, for $100 million payable in 1998 toward the retirement of the collecting bank preferred stock. The recapitalized First City banks embarked on a short-lived aggressive growth policy that resulted in First City banks’ assets increasing from about $10.9 billion as of April 19, 1988, to about $13.9 billion as of September 30, 1990. First City banks’ loan portfolios included high-risk loans, such as loans to finance highly leveraged transactions, international loans, and out-of-territory lending. During this period, First City reported $183 million in profits and paid $122 million in cash dividends. In part, the earnings used to justify the cash dividends were profits that depended on income from nontraditional and onetime sources, such as the sale of its credit card operations. By September 1990, problems with the quality of its loan portfolios not only caused operating losses but also started to erode First City’s capital. A 1990 OCC examination report strongly criticized the lending practices of First City’s lead bank, First City-Houston. Some of its loan losses resulted from continued deterioration in loans made before April 1988. However, other losses were attributed to new loans associated with an aggressive risk-taking posture by new management combined with poor underwriting practices. During and immediately after OCC’s 1990 examination, First City made changes in the lead bank’s senior executive management, and OCC entered into formal supervisory agreements with First City’s Houston, Austin, and San Antonio banks. The agreements required each of the banks to achieve and maintain adequate levels of capital. They also required improvements in (1) underwriting standards, (2) bank management and board oversight, (3) strategic planning, (4) budgeting, (5) capital and dividend policies, (6) management of troubled assets, (7) internal loan review, (8) allowance for loan and lease losses (ALLL), (9) lending activities, and (10) loan administration and appraisals. According to OCC, First City bank management complied with substantially all of the provisions of the formal agreements, except the capital maintenance provisions. While First City significantly strengthened its underwriting criteria, reduced its aggressive high-risk lending practices, and initiated actions to recapitalize, these efforts did not prevent the First City banks from failing. Between September 30, 1990, and October 30, 1992, problems in the loan portfolios continued to mount. First City bank assets decreased from about $13.9 billion to about $8 billion, and First City incurred total losses of about $625 million. Most of the post-recapitalization losses were from loans at First City’s lead bank in Houston and its second-largest bank in Dallas. Among the primary reasons for the banks’ financial difficulties were the continued decline in the Texas economy, weaker-than-anticipated loan portfolios in the recapitalized banks, questionable lending activity by First City management within the first 2 years of the recapitalization, and high bank operating expenses. OCC, as primary federal bank regulator for the lead bank, projected in early 1991 that operating losses would deplete the capital of this bank by year-end 1992. Later, on the basis of First City’s operating results, OCC projected that by the end of 1992 bank losses would either (1) deplete the capital at the Houston bank and cause its insolvency or (2) erode the bank’s capital to less than 2 percent of its assets, in which case OCC had the authority to close the bank effective December 19, 1992, in accordance with the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The Federal Reserve System (FRS)—the primary federal bank regulator for the Dallas bank—also projected its likely insolvency by the end of 1992. Under the cross-guarantee provisions of the Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA), FDIC could require the 18 otherwise solvent First City banks to reimburse FDIC for any anticipated losses resulting from the failures of the Houston and Dallas banks. FDIC staff advised the FDIC Board that the capital of the 18 banks would not be sufficient to cover the projected losses from the 2 insolvent banks, and the application of the cross-guarantee provision could result in the insolvency of all 20 First City banks. OCC, FDIC, and the Texas Banking Commissioner closely monitored the First City banks following the recapitalization, and along with FRS, shared information concerning the Houston and Dallas banks’ deteriorating financial conditions. Following its September 1991 and January 1992 examinations of First City-Houston, OCC advised First City that its future viability could not be ensured without a significant capital infusion. Similarly, FRS examination of the holding company in 1991 found that First City lacked adequate capital to support its network of subsidiary banks. Beginning in June 1991, representatives of OCC began working with their counterparts at FDIC on a plan for early intervention and resolution of First City-Houston. These efforts were intense and ongoing throughout 1991 and into 1992. During 1991 and 1992, First City, OCC, and FDIC considered a number of alternative resolution plans. The resolution plans considered by First City involved three types of transactions: (1) Type A—Acquisition of First City banks by a stronger, well-capitalized banking company. (2) Type B—Major capital infusion by an outside investor or investor groups. (3) Type C—A self-rescue by the banking organization through some combination of consolidation or sale of subsidiary banks, new capital, and FDIC concessions and financial support. Initially, First City favored a Type B transaction and indentified a number of potential investors as possible sources of significant new capital. However, in anticipation that raising new capital would be extremely difficult given the banking organization’s precarious financial position and continuing OCC concerns with bank management, First City did not actively pursue a Type B transaction. Thereafter, it pursued a Type A transaction almost exclusively. In October 1991, OCC, FDIC, and First City developed a proposal (Type A transaction) that called for the banks’ acquisition by a stronger institution, with the possible need for FDIC financial assistance. In late 1991, FDIC’s Division of Resolutions (DOR) staff contacted a number of banking organizations to assess their interest in acquiring the First City banks. While a number of institutions expressed considerable interest in the First City banks and conducted in-depth reviews of bank operations, only one institution ultimately submitted a bid. DOR staff recommended that the bid be rejected for a number of reasons, including its estimated $240 million cost to FDIC, which was higher than FDIC’s estimate of $179 million to liquidate the banks at that time. DOR staff also asserted that the proposal was not in the best interest of FDIC because it contained several items that were difficult to quantify and would require costly negotiations with the acquirer. DOR staff asserted that these negotiations could significantly delay completion of any open bank assistance until after December 1992, when FDIC projected the banks would become insolvent. After the Type A transaction for open bank assistance was rejected by FDIC, First City developed two new self-rescue proposals (Type C) to recapitalize the troubled banks. In July 1992, First City submitted its first self-rescue plan, which called for the closure and immediate reopening of four of the largest First City banks under the control of an acquiring bank. Under this proposal, the acquiring bank would purchase about $7.5 billion of First City banks’ performing and fixed assets, and FDIC would enter into a loss-sharing agreement with the acquiring bank for the remaining $1.2 billion of troubled assets. DOR staff recommended this alternative be pursued because they estimated no losses to BIF. According to the staff’s projections, a combination of the financial commitments made by the acquiring bank and the ALLL previously established by First City banks could absorb additional deterioration that might occur in the quality of the loan portfolios. However, the FDIC Board was concerned about the ability of First City bank management to execute the proposal. In August 1992, the FDIC Board rejected the proposal mainly because of a condition in the plan that required FDIC to guarantee payment in full for all deposits, including uninsured deposits. In August 1992, First City management submitted another self-rescue proposal to OCC to recapitalize the banks. This proposal called for First City to merge its four largest banks—Houston, Dallas, Austin, and San Antonio. This plan also called for 13 of the remaining 16 First City banks to be sold for an estimated $200 million. An additional $100 million in new equity capital would be raised through a stock offering to new investors and current shareholders. Approximately $96 million would be raised through cost savings from proposed renegotiation of long-term leases. Finally, the proposal would have required FDIC to make concessions totaling over $100 million—stemming largely from the 1988 open bank assistance. The plan projected that the reconstituted and recapitalized First City banks would work their way back to profitability. According to First City documents, it had received commitments from potential investors and landlords needed to raise more than $300 million in capital. OCC’s analysis of First City’s August self-rescue proposal concluded that the plan lacked viability due to an estimated $200 million capital shortfall at the reconstituted banks. OCC concluded that the plan did not provide sufficient incoming capital to cover asset quality problems and to provide the capital base required to reestablish the banks for long-term viability. OCC documents also showed that the planned lease renegotiations would not result in the projected savings. Finally, OCC also believed that First City would not be able to raise sufficient capital through stock issuances. Shortly after receipt of First City’s August 1992 self-rescue plan, OCC determined that an up-to-date examination was necessary to evaluate the likelihood that the plan would result in long-term viability for First City. The examination of the Houston bank, which began in late August 1992, focused on problem loans. OCC noted significant deterioration in several large loans since its last examination. On the basis of the results of its August examination, OCC determined that the bank had underestimated its ALLL by about $67 million. This amount exceeded the Houston bank’s existing equity capital of about $28 million, thus making the Houston bank insolvent and requiring OCC to close it. The Examiner-In-Charge (EIC) and other OCC officials told us that their adjustment of ALLL was based on both objective and subjective considerations. They said they gave consideration to First City-Houston’s history relating to its management’s inadequate recognition of loan quality problems and provision for ALLL. The OCC officials said they were also concerned about deteriorating financial conditions at the bank as reflected in dangerous classification trends within its loan portfolio, whereby a higher percentage of loans were recognized as troubled loans and the bank had not experienced the same recovery pattern as experienced by most banks. Further, OCC officials said they were concerned about the bank’s financial condition relative to other comparable institutions. In comparing First City’s ALLL to that of peer institutions, OCC said that it found that First City had maintained an ALLL level far below that of its peers. OCC said that given First City’s asset problems, it believed that First City’s ALLL should have been far higher than the peer average. OCC officials said they were also concerned about the weakening economic conditions in Texas and First City’s ability to overcome its problems in this environment. Finally, OCC officials said that, by this time, they had lost confidence in First City’s management and its processes for establishing proper reserve levels. On October 16, 1992, OCC advised FDIC of its latest examination findings and its plans to close First City-Houston as soon as practicable so that FDIC could resolve it in an orderly manner. FDIC advised OCC that FDIC could accelerate its projected December 1992 resolution to October 30, 1992, in light of the OCC examination findings. Accordingly, on October 30, 1992, OCC declared the First City-Houston bank insolvent and appointed FDIC receiver. On that same day, the Texas Banking Commissioner closed First City-Dallas on the grounds of imminent insolvency, and FDIC exercised its statutory authority to issue immediately payable cross-guarantee demands on the remaining 18 First City banks. This resulted in the closure of the entire First City banking organization on October 30, 1992. After being advised of OCC’s examination findings, FDIC considered two basic alternatives to provide for the orderly resolution of the First City banks: (1) liquidate them immediately or (2) place them under FDIC control and operate them as bridge banks until a sale could be arranged. FDIC chose the latter alternative, which would provide time for FDIC to compare the cost of liquidation to the cost of selling the banks based on bids it planned to solicit after the banks failed. FDIC assumed potential acquirers would be interested in purchasing the banks only if FDIC removed certain risks associated with asset quality problems, potential litigation liabilities, and costly contractual obligations. The January 1993 sale attracted bids from 30 potential acquirers and resulted in the sale of all 20 of the bridge banks. At the time of sale, FDIC estimated the sale would result in a gain, or surplus, of about $60 million—substantially different from the $500 million loss that FDIC had estimated 3 months earlier. FDIC officials said they were astonished by the proceeds. After resolution and liquidation expenses are paid, FDIC is to return any surplus to First City creditors and shareholders. Shortly after the First City banks were closed, the holding company filed lawsuits on behalf of the shareholders. The lawsuits asserted, among other things, that federal and state banking regulators acted without regard to due process and illegally and unnecessarily closed a solvent banking organization. More specifically, the lawsuits allege that OCC wrongfully closed the lead national bank and that the Texas Banking Commissioner wrongfully closed First City-Dallas. The lawsuits also asserted that FDIC, as the insurer, was responsible for the inappropriate closure of the financially sound First City banks. According to the suit, FDIC used its cross-guarantee authorities to execute the agency’s preconceived plan to gain control of the First City banking organization. The holding company asserted that FDIC’s use of its cross-guarantee provisions was both inappropriate and unnecessary, and violated the Fifth Amendment of the Constitution. The suit also noted that on numerous occasions during the summer of 1992, First City Bancorporation offered to merge all the First City banks and restore the capital at the troubled banks. The holding company asserted that if the regulators had approved such an action, their plans to close the First City banks could not have been carried out. In 1988, FDIC could have waited until the First City banks were insolvent and either liquidated them or sold them to interested potential acquirers. However, FDIC determined that providing $970 million in assistance to the First City banks was the best alternative available. When FDIC approved First City’s open bank assistance, FDIC’s resolution alternatives were limited by both regulatory requirements and economic conditions. In April 1988, OCC could not have closed First City banks for insolvency because, at that time, OCC could close a bank for insolvency only when a bank’s primary capital was negative. At the time, a bank’s primary capital was defined by OCC as the sum of the bank’s retained earnings and the bank’s ALLL. Although First City had negative retained earnings of $625 million, it also had $730 million in ALLL; hence, it had positive primary capital of $105 million. Additionally, in the mid-1980s, the Texas banking industry was experiencing its worst economic performance since the Great Depression, which limited FDIC’s resolution alternatives. According to FDIC, the economic conditions increased the cost to liquidate troubled banks and reduced the number of potential acquirers. Consequently, FDIC considered two resolution alternatives in August 1987. One was to allow First City losses to continue to mount until the banks’ primary capital was depleted, then either liquidate or operate First City banks as bridge banks until potential acquirers could be found. Under the other alternative, FDIC could have provided open bank assistance to willing acquirers of the First City banks—as long as the estimated cost of assistance was less than the estimated cost of liquidation to the insurance fund. FDIC decided against the first alternative for three reasons. First, FDIC believed that allowing First City banks to continue to deteriorate could jeopardize the stability of the regional banking industry. FDIC also was unsure about operating First City as a bridge bank because bridge banks were new to FDIC (the agency had received bridge bank authority in August 1987). Second, the First City banks were far too large and complex to be the agency’s first bridge banks, in FDIC’s opinion. And third, FDIC rejected liquidation because estimated liquidation costs were determined to be higher than the estimated cost to the fund for open bank assistance. FDIC approved $970 million of open bank assistance as the best resolution alternative available. A total of eight parties expressed interest in acquiring the troubled banks, and three submitted bids. FDIC’s estimates of potential insurance fund commitments based on those bids ranged from the $970 million for open bank assistance to $1.8 billion for the bid most costly to the insurance fund. According to FDIC records, one of the bids led to estimated fund costs as low as $603 million, but FDIC found that the bidder had used overly optimistic assumptions in the offer. When adjusted, the insurance fund cost of that bid was nearly $1.3 billion. The Federal Reserve Board (FRB) approved the change of control of these recapitalized banks to the new First City bank management with reservations. FRB’s memo approving the change of control warned the new management that assumptions agreed upon by FDIC and First City and used to forecast the banks’ road to recovery were optimistic. It also warned that if regional economic conditions did not drastically improve, the recapitalization effort was not likely to succeed. We reviewed the First City banks’ performance following the recapitalization to identify the factors that contributed to the October 1992 failures. We found that the failures resulted from a combination of factors, including the payment of dividends to shareholders, deteriorating loan portfolios, and relatively high operating costs. These findings are described in appendix III. On October 28, 1992, the FDIC Board determined that placing the failed First City banks into interim bridge banks constituted the least costly and most orderly resolution to First City’s financial difficulties. On that date the FDIC Board considered three alternatives. Two involved bridge bank resolutions and the third called for a liquidation of First City banks’ assets. The difference between the two bridge bank alternatives was that one alternative contained a loss-sharing agreement on a selected pool of troubled assets. Under this agreement, the acquirer would manage and dispose of the asset pool, and FDIC would reimburse the acquirer for a portion of the losses incurred when selling those assets. The other bridge bank alternative did not provide for loss sharing. The purpose of the two bridge bank alternatives was to provide for an orderly resolution by continuing the business of the banks until acceptable acquirers could be found. FDIC’s belief was that the bridge banks would preserve the First City banks’ value as going concerns while FDIC marketed them. FDIC estimated that a bridge bank resolution would minimize BIF’sfinancial exposure. FDIC was aware of various parties’ interest in acquiring the banks. However, FDIC believed that the potential acquirers would be interested in the banks only after they were placed in receivership, since, after closure, new bank management could renegotiate contractual and deposit arrangements with bank servicers and customers. FDIC staff estimated resolution costs to BIF ranging from a low of about $700 million (bridge bank with loss sharing) to a high of over $1 billion (FDIC liquidation). FDIC estimated both bridge bank alternatives to be less costly than a liquidation primarily because of the likelihood that FDIC would be able to obtain a premium, or a cash payment, from potential acquirers who would be assuming the deposits of the bridge banks. In a liquidation, no such premium would be paid because FDIC pays the depositors directly instead of selling the right to assume the deposits to an acquirer. FDIC also estimated that it could minimize the losses to the insurance fund if it provided loss sharing. While the FDIC Board believed that a bridge bank with a loss-sharing arrangement was the most orderly and least costly alternative presented by DOR, the ultimate cost of resolving the First City banks was uncertain. DOR staff’s initial cost model, which was based on the estimated proceeds and costs of each resolution alternative, estimated that a bridge bank resolution with loss sharing would cost about $700 million. This estimate was based largely on an asset valuation review performed for DOR by an outside contractor. Representatives from FDIC’s Division of Liquidations (DOL), which was responsible for disposing of assets assumed by FDIC, said that liquidating the First City banks would likely cost more than $1 billion. Other FDIC officials—including senior level DOR officials—said that because of the considerable market interest in the banks on a closed-bank basis, the cost to resolve First City banks would likely be about $300 million. The Board determined that placing First City banks into interim bridge banks would cost the insurance fund about $500 million. The then DOR Director told us that the fact that the Board did not rely solely on the initial DOR cost model was not a deviation from the normal resolution process. He explained to us that the resolution process is dynamic and takes into account FDIC Board deliberations. He noted that it was his responsibility to advise the Board regarding the merits and shortfalls associated with the DOR asset valuation process. He pointed out that DOR’s asset valuations estimated the net realizable value for failed bank assets disposed of by FDIC through a liquidation. The methodology determining net realizable value of assets may not always reflect the market value of assets disposed of through such resolution alternatives as an interim bridge bank. Typically, a going concern (including a bridge bank) establishes asset values that attempt to maximize the return to the investor regardless of the period the assets may be held. Net realizable asset valuation in a liquidation, on the other hand, attempts to maximize the return to the investor given a limited holding period, often less than 2 years. According to FDIC documents used in its Board’s deliberations, the October 1992 decision to place the First City banks in bridge banks and commit about $500 million to resolve First City was the least costly of the three alternatives the FDIC Board formally considered when the banks were closed. During the year preceding the failure, FDIC and OCC considered and rejected a number of alternatives to resolve the First City banks because the alternatives were considered too costly, did not ensure the banks’ long-term viability, or included provisions that were unacceptable from a policy perspective. As previously discussed, OCC had projected that operating losses, caused by imbedded loan portfolio problems, would render First City banks insolvent by December 1992. However, OCC’s determination that the Houston bank was insolvent in October 1992 accelerated First City banks’ closure by about 2 months. FDIC officials believed the earlier than projected closure unintentionally but effectively precluded either previous or new potential acquirers from doing due diligence, i.e., determining the value of the bank assets, deposits, and other liabilities necessary to ascertain their interest in bidding on the First City banks at the time of closure. Although FDIC initially estimated the cost to BIF of the October 1992 resolution of First City banks to be $500 million, the agency has since projected that this resolution will result in no cost to BIF. When it announced the sale of the First City banks in January 1993, FDIC estimated the proceeds generated from the sale would amount to a surplus of about $60 million. In June 1994, FDIC estimated that the surplus may exceed $200 million. As mentioned earlier, any surplus remaining after payment of FDIC’s resolution expenses is to be returned to First City’s creditors and shareholders. According to FDIC’s analysis of the resolution, sales proceeds were higher than FDIC expected largely because acquirers paid a 17-percent premium for the banks—substantially more than the 1-percent premium on deposits that FDIC had estimated in arriving at the $500 million loss estimate. According to FDIC officials, a deposit premium of 1 percent was typical for failed bank resolutions contemporaneous with the 1992 First City bank resolution. Some FDIC officials, however, told us that at least part of the premium paid by the acquirers should be attributed to the value the acquirers placed on First City bank assets. Since acquirers do not specify in their bids how much they are willing to pay for assets or deposits, neither we nor FDIC can determine the exact basis for the premium. As of June 1994, FDIC projected that settlement of the lawsuits by First City Bancorporation would result in no cost to BIF. FDIC’s projection was based on the assumption that the estimated surplus from the bridge bank sale will exceed its costs to resolve and liquidate the bridge banks, with any excess ultimately to be paid to the holding company. On June 22, 1994, FDIC and the holding company signed a settlement agreement under which First City would immediately receive in excess of $200 million. The settlement would allow the First City Bancorporation to pay its creditors and permit a distribution to its shareholders sooner rather than later.Basic tenets of this proposed settlement are (1) BIF will incur no loss in connection with the 1992 resolution of the First City banks and (2) FDIC will not receive more than its out-of-pocket costs to resolve the banks. Consistent with these tenets, the proposed settlement provides for FDIC to receive the net present value of over $100 million, largely based on First City’s guarantee to pay in 1998 toward the retirement of the collecting-bank-preferred-stock FDIC received in return for the 1988 open bank assistance. Any settlement between the two parties cannot be consummated until it is approved by the bankruptcy court. FDIC officials anticipate a decision on the settlement in early 1995. Generally, the processes used in providing financial assistance, closing banks, and resolving troubled banks should always include adequate safeguards for BIF. The events surrounding the First City resolutions offer valuable lessons for FDIC as the insurer and for all of the primary bank regulators. These lessons relate to how to better assist, close, or otherwise resolve troubled institutions in the future. Consultation between regulatory agencies might have led FDIC to adopt more realistic assumptions concerning the likelihood of success of the $970 million open bank assistance provided First City in 1988. When FDIC and the new First City management forecasted the First City banks’ success in 1988, a key economic assumption was that the economies of Texas and the Southwest would reverse their recessionary trend and grow at about 3 percent per year to mirror the growth rate of the national economy during the mid-1980s. However, the Texas economy grew only an average of 2.2 percent per year between 1989 and 1991. Furthermore, by the late 1980s and early 1990s, the national economy, which had been growing at about 3 percent per year, started to weaken and experience its own recessionary conditions. While approving the change of control to the new First City bank management, FRB raised a concern about these economic assumptions being too optimistic and, if not realized, possibly jeopardizing the success of the recapitalized banks. If FDIC had consulted with its regulatory counterparts in FRS and OCC on economic and financial assumptions for the economy and market in which the assisted bank would operate, it would have had a broader base for, and greater confidence in, the economic assumptions used as a basis to approve the open bank assistance. Such consultation might have produced more realistic assumptions and a better understanding of the likelihood that the financial assistance that FDIC provided could be successful. The financial assistance agreement could have included safeguards to better ensure that First City undertook only those operations that were within its capabilities and capacities. At the time of the open bank assistance, the new management of the First City bank projected relatively modest growth, primarily in traditional consumer lending activities. However, under pressure to generate a return for its investors through earnings and dividends, the management pursued much riskier lending and investment activities than it had described in its reorganization prospectus. In addition to taking more risks, the new bank management did not have the expertise, policies, or procedures in place to adequately control these activities. Further, the new bank management entered into contractual arrangements based on projected growth that, when not realized, resulted in higher operating expenses than the bank could sustain. FDIC’s assistance agreement did not include sufficient safeguards to ensure that the new bank management actually pursued a business strategy comparable to the one agreed upon as being prudent, or that the bank’s activities were in line with management’s capabilities or the bank’s capacities. In retrospect, such safeguards could have been specified in the agreement. For example, according to the reorganization prospectus, First City projected that it would expand its overall loan portfolio an average of about 10 percent per year for the first 3 years after the recapitalization. The new bank management projected that consumer, credit card, and energy loans would grow at significantly higher rates than the overall loan portfolio. Management also projected little growth in the riskier areas of real estate and international lending. Contrary to those projections, overall lending activity grew by only about 3 percent in 1989 and actually declined by about 3 percent in 1990 and by over 31 percent in 1991. First City sold its credit card portfolio in early 1990. In addition, First City’s actual real estate and international loans accounted for far greater percentages of its total loan portfolio than projected in the 1988 prospectus. FDIC’s financial assistance agreement with First City did not contain provisions requiring First City’s management to develop specific business strategies reflecting safe and sound banking practices and internal control mechanisms safeguarding FDIC’s investment in the First City banks. Shortly after the recapitalization, OCC examiners criticized the management of First City’s Houston bank for not having established policies and procedures to manage the risk associated with the bank’s highly leveraged transaction loans. Consequently, OCC directed the bank to establish policies and procedures to minimize the risks of those transactions. OCC similarly directed the bank management to establish policies and procedures related to the Houston bank’s international lending activities. In the meantime, First City bank management paid dividends based on income derived from its lending activity as well as from extraordinary events, such as the sale of its credit card operations. While such payments were permissible under the law at the time, they did not help the bank retain needed capital. Consequently, First City banks lacked sufficient capital to absorb the losses stemming from their lending activities. Further, First City-Houston entered into long-term contractual arrangements for buildings and services, such as data processing, that were based on overly optimistic projections of future growth. When that growth was not realized, the overhead costs related to these arrangements proved to be a drain on earnings and contributed to the bank’s failure. FDIC would have been in a better position to avoid the risks associated with these banking practices if it had strengthened the open assistance agreement by including provisions to (1) require bank management to develop business strategies relative to its market, expertise, and operational capabilities; and (2) control the flow of funds out of the bank through dividends, contractual arrangements, and other activities, such as management fees paid to the holding company or affiliates. The provisions could have been structured so that the primary regulator held bank management accountable for compliance with them. Such a structure could have involved having bank management stipulate that it would comply with specific assistance agreement provisions. Such a stipulation would have allowed the primary regulator to monitor the bank’s adherence to the key provisions of the assistance agreement, including the development of specific business strategies and lending policies and procedures. The primary regulator would then have had the information and authority necessary to take the appropriate enforcement action to ensure compliance with the key provisions of the agreement. Banks are required to follow statutory limitations on dividend payments provided in 12 U.S.C. §§ 56 and 60. While the regulations implementing the statutes and governing the payment of dividends have been tightened since 1988, banks are still authorized to pay dividends, as long as they satisfy the FDICIA minimum capital requirements. FDIC could have better controlled the flow of funds from the assisted banks by either limiting dividend payments or requiring regulatory approval based on the source of dividends. Such controls are typically used by FDIC and other regulators in enforcement actions when they have reason to be concerned about the safety and soundness of a bank’s practices or condition, and they could have been used in a similar manner in the First City assistance agreement. OCC could have better documented the bases for its closure decision had its examination reports and workpapers been clear, complete, and self-explanatory. Congress authorized the Comptroller of the Currency, as the charterer of national banks, to close a national bank whenever one or more statutorily prescribed grounds are found to exist, including insolvency. It is generally agreed in the regulatory community that closure decisions should be supported by clear, well-documented evidence of the grounds for closure. Thus, OCC and other primary regulators’ bank examination reports and underlying workpapers supporting closure decisions need to be complete, current, and accurate and provide documentation of the bases for closure decisions that is self-explanatory. However, we were unable to determine the basis for the OCC examiners’ finding that First City-Houston’s ALLL was insufficient solely from our review of the examination report or workpapers. Specifically, the examination report that OCC conveyed to Houston bank management did not fully articulate the basis for OCC’s finding that the bank’s ALLL was inadequate. From our review of OCC’s workpapers, we were unable to reconstruct the analysis performed to arrive at the need to increase the Houston bank’s ALLL. We had to supplement the information in the working papers with additional information obtained through discussions with the EIC and senior level OCC officials in order to determine how OCC arrived at its decision to require First City-Houston to increase its ALLL by $67 million. OCC officials were able to provide additional clarifying information on the basis for this finding. Although some information regarding these concerns was included in the examination workpapers, it was not sufficient for us to independently follow how OCC’s examiners arrived at the basis for their conclusion that First City-Houston’s ALLL was insufficient. Thoroughly documented workpapers would also have provided OCC and FDIC with a clear trail of the examiners’ methodology, analytical bases of evidentiary support, and mathematical calculations. This would have precluded the need for resource expenditures to reconstruct or verify the basis for examiners’ conclusions. Workpapers are important as support for the information and conclusions contained in the related report of examination. As described in OCC’s examination guidance, the primary purposes of the workpapers include (1) organizing the material assembled during an examination to facilitate review and future reference, (2) documenting the results of testing and formalizing the examiner’s conclusions, and (3) substantiating the assertions of fact or opinions contained in the report of examination. When examination reports and workpapers are clear and concise, independent reviewers, including those affected by the results, should be able to understand the basis for the conclusions reached by the examiner. OCC officials agreed that the First City examination workpapers should have included a comprehensive summary of the factors considered in reaching the final examination conclusions, especially regarding such a critical issue as a determination of bank insolvency. FDIC’s DOR could have considered information from the primary regulator relative to asset quality in making its resolution decisions. In situations like First City, where the primary regulator had just extensively reviewed a high proportion of the loan portfolio as part of a comprehensive examination and found deficiencies in the bank’s loan classification and reserving processes, FDIC resolutions officials should have been able to utilize the examination findings, at least as a secondary source, to test their asset valuation assumptions. This would have been particularly useful because the failure came on short notice and some FDIC officials had reservations about some of the underlying assumptions. OCC examination officials were apparently communicating with their FDIC examination counterparts about the accelerated First City-Houston bank examination. Even so, FDIC’s DOR officials could have benefitted from earlier information on OCC’s preliminary findings that indicated that First City-Houston would be insolvent before December 1992, as had been anticipated by all affected parties. This information would have provided DOR more lead time to consider a wider range of resolution alternatives, including soliciting bids from parties it knew to be interested in acquiring the banks. FDIC officials, however, did not believe the interested parties would submit bids since neither they nor FDIC had an opportunity to perform due diligence on the First City bank assets on such short notice. DOR officials could have used the OCC examiners’ assessment of asset quality as a means of verifying the asset valuations estimated through its own techniques. This would have been similar to the way FDIC uses its research model on smaller resolutions, i.e., as an independent check against the valuations. Also, the FDIC Board could have used such information since it was not confident that the more traditional resolution estimating techniques provided reliable results for the circumstances relative to the failing bank. The going concern valuation used by OCC examiners may even have been more relevant than the net realizable valuation used by DOR because FDIC expected a bridge bank or open bank assistance resolution to be the most orderly and least costly resolution alternative. FDIC and OCC provided written comments on a draft of this report, which are described below and reprinted in appendixes IV and V. FRS also reviewed a draft, generally agreed with the information as presented, but provided no written comments. FDIC described the report as being well researched and an overall accurate recording of the events that led up to and through the 1988 and 1992 transactions. FDIC offered further information and explanation related to the two transactions, including reasons why some of the lessons to be learned could not have been used by FDIC in 1988 and 1992 or would not have altered the outcomes of these transactions. FDIC further stated, however, that it will consider the lessons enumerated in the report and, where appropriate, incorporate them into future resolution decisions. We believe FDIC’s elaborations about the 1988 and 1992 transactions provide meaningful insights about its assistance and resolutions processes. The Executive Director, in later discussions about FDIC’s written comments, assured us that FDIC is open and receptive to the lessons to be learned, and his elaborations were intended to explain the bases for FDIC’s decisions and why other positions were not considered or taken at the time of the transactions. OCC raised concerns that the report might create an inference that we were questioning OCC’s basis to close the First City banks and about our suggestion that OCC needs to improve the quality of its examination reporting and workpaper documentation. OCC believes its basic standards for examiner documentation are appropriate for supervisory oversight and examiner decisionmaking purposes. While OCC believes its basic approach to be sound, including its documentation practices, it will consider our views in reviewing current examination guidance for potential revision to provide clarity, ensure consistency, and reduce burden. Our study was basically intended to provide an accurate accounting of the events, involving both the banks and regulators, that led to the 1988 and 1992 transactions to resolve First City. In compiling this account, we identified lessons to be learned from the First City experience that could potentially improve the insurer’s and regulators’ open bank assistance, bank closure, and bank resolution processes. We did not question the bases used by the insurer or regulators in making decisions relative to First City, but instead we looked for opportunities to improve those processes to ensure the insurer’s and regulators’ interests are adequately protected in making future decisions. The insurer and regulators, including FRS, generally agreed to consider the lessons to be learned from the First City experience to improve their processes. We will provide copies of this report to the Chairman, Federal Deposit Insurance Corporation; the Comptroller of the Currency; the Chairman of the Federal Reserve Board; and the Acting Director of the Office of Thrift Supervision. We will also provide copies to other interested congressional committees and members, federal agencies, and the public. This review was done under the direction of Mark J. Gillen, Assistant Director, Financial Institutions and Markets Issues. Other major contributors to this review are listed in appendix VI. If you have any questions about the report, please call me on (202) 512-8678. Concerned with FDIC’s provision of $970 million financial assistance to First City banks in 1988 and their ultimate failure less than 5 years later, the former Chairman of the Senate Committee on Banking, Housing and Urban Affairs asked us to review the events surrounding First City Bancorporation of Texas’ 1988 and 1992 resolutions and to use our review to reflect on FDIC’s use of open bank assistance. As agreed with the Committee, we focused our review on First City’s largest bank in Houston and its second largest bank in Dallas, because the financial difficulties of these two banks resulted in the insolvency of First City’s 18 other banks. Our objectives were to review the events leading up to First City’s 1988 open bank assistance and its 1992 bank failures to determine why FDIC provided open bank assistance in 1988 rather than close the First why the 1992 resolution estimate differed so much from the estimate resulting from the 1993 sale of the banks; whether the First City banks’ failures in 1992 are expected to result in additional costs to BIF; and whether the First City experience provides lessons relevant to the assistance, closure, and/or resolution of failing banks. To achieve our objectives, we reviewed examination reports and related available examination documents and workpapers relative to First City’s Houston and Dallas banks and other subsidiary banks for 1983 through 1992. We began our review of examination reports with the 1983 examination because OCC officials told us that was when they first identified safety and soundness deficiencies in First City banks. The 1993 examination also precipitated the first supervisory agreement between First City management and the bank regulatory agencies. In reviewing the examination reports we sought to obtain information on the condition of the banks at the time of each examination and the significance of deficiencies as identified by the regulators. We reviewed examination workpapers, correspondence files, and management reports to gain a broader understanding of the problems identified, the approach and methodology used to assess the conditions of the First City banks, and the regulatory actions taken to promote or compel bank management to address deficient conditions found by regulators. We also used the examination workpapers to compile lists of loans that caused significant losses to the banks to try and compare the loan quality problems arising from loans made before the recapitalization to those made by new bank management. We interviewed the OCC examiners-in-charge of the 1989 examinations and all subsequent examinations to obtain their perspectives on the conditions found at the First City banks. We also interviewed OCC National Office officials to obtain their views on the adequacy of OCC’s oversight of the banks. We reviewed all relevant examination reports, workpapers, and supporting documentation to assess their adequacy in explaining the positions taken by OCC relative to First City-Houston and the Collecting Bank. When we were unable to gain adequate information from the examination records, we sought further explanations from OCC examination officials and assessed those explanations when received. We also reviewed FDIC and FRS records of examinations and supporting documents, particularly those related to First City-Dallas. We also discussed issues relating to First City banks with FDIC and FRS officials. Further, we reviewed First City Bancorporation financial records and supporting documents and discussed issues relating to OCC, FDIC, and FRS oversight with First City officials. Finally, we reviewed FDIC records relating to First City’s 1988 recapitalization and FDIC’s 1992 and 1993 bridge bank decisions. We discussed issues relating to these actions with FDIC, OCC, FRS, and First City officials to obtain their viewpoints on the actions taken. We also reviewed FDIC, OCC, and FRS records assessing the economy and the conditions of Texas financial institutions from the mid-1980s to the early 1990s. FDIC and OCC provided written comments on a draft of this report. FRS also reviewed a draft, generally agreed with the information as presented, but provided no written comments. The agencies’ written comments are presented and evaluated on page 21 of the letter and reprinted in appendixes IV and V. We did our work between January 1993 and June 1994 at FDIC, OCC, and FRS in Washington, D.C.; at FDIC, OCC, and FRS in Dallas; and at the First City banks in Houston and Dallas. We did our work in accordance with generally accepted government auditing standards. The 1980s and the early 1990s were tumultuous times for the banking industry, especially in the Southwest. During this time, the banking industry experienced record profits followed by record losses, and a number of legislative and regulatory changes altered both the way banks did business and the way banks were regulated. The responsibility for regulating federally insured banks is divided among three federal agencies. OCC is the primary regulator for nationally chartered banks. FRS regulates all bank holding companies and state-chartered banks that are members of FRS. FDIC regulates state-chartered banks that are not members of FRS. FDIC is also the insurer of all federally insured banks and thrifts, which gives it the dual role of being both the regulator and insurer for many banks. The primary role of federal regulators is to monitor the safety and soundness of the operations of both individual banks and the banking system as a whole. The regulators’ major means of monitoring the banks is through the examination process. Examinations are intended to evaluate the overall safety and soundness of a bank’s operations, compliance with banking laws and regulations, and the quality of a bank’s management and directors. Examinations are also to identify those areas where bank management needs to take corrective actions to strengthen performance. When a regulator identifies an area where the bank needs to improve, it can require the bank to initiate corrective action through either formal or informal measures. These measures can be as informal as a comment in the examination report or as severe as the regulator ordering the bank to cease and desist from a particular activity or actually ordering the closure of the bank. The role of the insurer is to protect insured depositors in the nation’s banks, help maintain confidence in the banking system, and promote safe and sound banking practices. As the insurer of bank deposits, FDIC may provide financial assistance for troubled banks. The assistance may be granted directly to the bank or to a company that controls or will control it. FDIC may also grant assistance to facilitate the merger of banks. When a chartering authority closes a bank, it typically appoints FDIC as receiver for the bank. FDIC then arranges for insured depositors to be paid directly by FDIC or the acquiring bank and liquidates the assets and liabilities not assumed by the acquiring bank. Many banks, including First City’s, are owned or controlled by a bank holding company and have one or more subsidiary banks. Typically, in a bank holding company arrangement, the largest subsidiary bank is referred to as the lead bank. The subsidiary banks may or may not have the same types of banking charters, i.e., either national or state charters. Consequently, different regulators may be responsible for overseeing the lead bank and the other subsidiary banks in the organization, with FRS responsible for overseeing all bank holding companies. First City Bancorporation of Texas typified this structure. It consisted of a holding company, a nationally chartered lead bank, 11 other nationally chartered subsidiary banks, 5 state-chartered banks that were members of FRS, and 3 state-chartered banks that were not members of FRS. Hence, the First City organization was supervised and examined by all three federal bank regulators. Between the time FDIC first announced open bank assistance for First City in 1987 and its closure in 1992, a number of regulatory and legislative initiatives gave the federal government greater authority to deal with troubled financial institutions. Passage of the Competitive Equality Banking Act of 1987 (CEBA), the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provided both regulators and the insurer greater authorities in dealing with troubled financial institutions. Their passage also provided the impetus for regulatory changes that granted regulators and the insurer greater authorities to close and resolve troubled financial institutions. The regulators’ expanded authority to close a bank is possibly one of the most significant changes that has occurred in the federal government’s oversight of banks. At the time of the 1988 First City reorganization, OCC had the authority to appoint FDIC as receiver for a national bank whenever OCC, through its examination of the bank, determined that the bank was insolvent. The National Bank Act did not define insolvency, and the courts afforded OCC considerable discretion in determining the standard for measuring insolvency. OCC used two standards to measure insolvency—a net worth standard and a liquidity standard. Basically, a bank becomes net worth or equity insolvent when its capital has been depleted. Similarly, a bank becomes liquidity insolvent when it does not have sufficient liquid assets—i.e., cash—to meet its obligations as they become due, regardless of its net worth. Following the 1988 First City reorganization, OCC promulgated a regulation that allowed it to find a national bank insolvent at an earlier stage than before. Under the new rule, OCC redefined primary capital to exclude a bank’s allowance for loan and lease losses. Prior to this change, OCC considered a national bank’s regulatory capital to include not only its retained earnings and paid-in capital but also the allowance a bank had set up for loan and lease losses; i.e., for uncollectible or partially collectible loans. According to OCC, the change brought OCC’s measurement of a bank’s equity more closely in line with generally accepted accounting principles’ measurement of equity. While this action was not specifically required by FIRREA, OCC stated the change was within the spirit of the 1989 amendments to the federal banking laws. The cross-guarantee provisions of FIRREA also granted FDIC authority to recoup from commonly controlled depository institutions any losses incurred or reasonably anticipated to be incurred by FDIC due to the failure of a commonly controlled insured depository institution. As in the case of the First City banks, the cross-guarantee assessment may result in the failure of an otherwise healthy affiliated institution if the institution is unable to pay the amount of the assessed liability. This provision imposes a liability on commonly controlled institutions for the losses of their affiliates at the time of failure, thereby reducing BIF losses. The law gives FDIC discretion in determining when to require reimbursement and to exempt any institution from the cross-guarantee provisions if FDIC determines that the exemption is in the best interest of the applicable insurance fund. The manner in which FDIC can resolve troubled banks involves another significant set of changes that has occurred since FDIC announced First City’s first resolution in 1987. More specifically, FDICIA now requires FDIC to evaluate all possible methods for resolving a troubled bank and resolve it in a manner that results in the least cost to the insurance fund. Prior to FDICIA’s least-cost test, FDIC was required to choose a resolution method that was no more costly than the cost of a liquidation. Currently, the only exception to the least-cost determination is when the Secretary of the Treasury determines that such a selection would have a serious adverse effect on the economic conditions of the community or the nation and that a more costly alternative would mitigate the adverse effects. To date, the systemic risk exception has not been used. FDIC’s ability to provide open bank assistance has also undergone significant changes since FDIC assisted First City in 1988. At that time, FDIC was authorized to provide assistance to prevent the closure of a federally insured bank. FDIC was permitted to provide the assistance either directly to the troubled bank or to an acquirer of the bank. Before providing the assistance, FDIC had to determine that the amount of assistance was less than the cost of liquidation, or that the continued operation of the bank was essential to provide adequate banking services in the community. To implement these provisions, FDIC adopted guidelines that open assistance had to meet. The key guidelines are summarized below: The assistance had to be less costly to FDIC than other available alternatives. The assistance agreement had to provide for adequate managerial and capital resources (from both FDIC and non-FDIC sources) to reasonably ensure the bank’s future viability. The agreement had to provide for the assistance to benefit the bank and FDIC and had to include safeguards to ensure that FDIC’s assistance was not used for other purposes. The financial effect on the debt and equity holders of the bank, including the impact on management, shareholders, and creditors of the holding company, had to approximate what would have happened if the bank had failed. If possible, the agreement had to provide for the repayment of FDIC’s assistance. FDICIA placed additional limits on FDIC’s use of open bank assistance. FDICIA added a new precondition to FDIC’s authority to provide open assistance under section 13(c), which is summarized below. Under FDICIA, FDIC may consider providing financial assistance to an operating financial institution only if the following criteria can be met: (a) Grounds for the appointment of a conservator or receiver exist or likely will exist in the future if the institution’s capital levels are not increased and it is unlikely that the institution will meet capital standards without assistance. (b) FDIC determines that the institution’s management has been competent and has complied with laws, directives, and orders and did not engage in any insider dealing, speculative practice, or other abusive activity. In addition to the previously discussed statutory changes, FDICIA contained a resolution by Congress that encourages banking agencies to pursue early resolution strategies provided they are consistent with the new least-cost provisions and contain specific guidelines for such early resolution strategies. Since FDICIA, a further statutory limitation has been placed on open assistance transactions. Section 11 of the Resolution Trust Corporation Completion Act of 1993 prohibits the use of BIF and Saving Association Insurance Fund (SAIF) funds in any manner that would benefit the shareholders of any failed or failing depository institution. In FDIC’s view, as set forth in its report to Congress on early resolutions of troubled insured depository institutions, this provision “largely eliminates the possibility of open assistance, except where a systemic risk finding” is made pursuant to the least-cost provisions. Another change to FDIC’s resolution alternatives occurred when CEBA provided FDIC the authority to organize a bridge bank in connection with the resolution of one or more insured banks. Essentially, a bridge bank is a nationally chartered bank that assumes the deposits and other liabilities of a failed bank. The bridge bank also purchases the assets of a failed institution and temporarily performs the daily functions of the failed bank until a decision regarding a suitable acquirer or other resolution alternative can be made. To better understand some of the factors that contributed to the ultimate failure of the 1988 recapitalized First City banks, we reviewed First City’s activities from 1988 to 1990 as reflected in examination reports and workpapers. The results of that review are summarized in this appendix. First City Bancorporation banks’ reported profits in 1988, 1989, and 1990 depended on nontraditional sources of income that were not sustainable. These profits were then used to justify the payment of cash dividends during 1989 and 1990 that significantly reduced the banks’ retained earnings. First City’s reliance on income from the Collecting Bank nearly equalled First City’s net income during 1988 and 1989, First City’s only profitable years. Furthermore, we found that if it were not for the $73 million in interest and fee income the Collecting Bank paid First City in 1988, the latter would have lost about $7 million that year. While First City’s 1989 net income did not completely depend upon the Collecting Bank’s interest and fees, we found that such income accounted for nearly $100 million of the $112 million in net income earned by First City during 1989. Another nontraditional source of First City income was generated in the first quarter of 1990 when First City sold its credit card portfolio for a $139 million profit. This sale enabled First City to turn an otherwise $49 million loss from operations into a $90 million net profit during the quarter that ended March 31, 1990. These nontraditional sources of income accounted for nearly all of First City’s net income during the first 2 years of operations after recapitalization and did not necessarily indicate a significant problem with First City’s operations. It is also not necessarily a basis for criticizing First City’s management. First City’s reliance on income from nontraditional sources could be explained as the result of initial start-up problems associated with taking over a large regional multibank holding company during a period of economic instability. What is noteworthy is that First City used the profits on income from nontraditional and onetime sources to pay $122 million in cash dividends, thereby decreasing the bank’s retained earnings. The assistance agreement’s only limitation on the payment of dividends was that common stock dividends could not exceed 50 percent of the period’s earnings. The anticipated success of the recapitalized First City was at least partially based upon the assumption that First City Bancorporation, including the Collecting Bank, would not experience further loan portfolio deterioration. This assumption proved to be incorrect. Problems with both pre- and post-recapitalization loan portfolios resulted in significant loan charge-offs and the depletion of bank equity. For example, we found that about $270 million in assets that originated prior to the recapitalization at First City’s Houston and Dallas banks resulted in nearly $75 million in losses. Furthermore, problems with pre-recapitalization assets also plagued the Collecting Bank. These problems forced First City to charge-off nearly $200 million of Collecting Bank notes by the time the banks were closed in October 1992. First City also experienced significant problems with loans originated after the 1988 reorganization. We found that First City suffered about $300 million in losses on such loans. Some of these losses occurred as a result of First City’s aggressive loan growth policy that increased its portfolio of loans to finance inherently risky, highly leveraged transactions. First City’s highly leveraged transaction lending peaked in 1989 at more than $700 million. Other significant losses resulted from First City’s international and other nonregional lending practices. Still other losses resulted from poor underwriting practices or adverse economic conditions. First City’s recapitalization prospectus predicted that the banks would realize savings of more than $100 million per year by reducing operating expenses to a level commensurate with industry standards. While First City realized at least some of the anticipated savings during its first 2 years of operations, it was unable to sustain these cost-cutting efforts. According to both OCC and FDIC, high operating expenses contributed to First City’s 1992 failure. As shown in table III.1, First City’s operating expenses did not decrease as First City’s net income, gross profits, and total assets decreased. Rather, First City’s operating expenses were the lowest during 1988 and 1989, when it reported year-end profits, and highest during 1990 and 1991, when it lost more than $380 million. Our review of First City’s escalating operating expenses showed that during 1990 and 1991—a period when the banks’ revenues and assets were decreasing—its data processing and professional services expenses increased because of the way in which payments for these services were structured in related long-term contracts. Furthermore, First City’s operating expenses were already high due to above-market long-term building leases negotiated before the recapitalization. (158) (225) The following are GAO’s comments on the Federal Deposit Insurance Corporation’s letter dated October 24, 1994. 1. We agree with FDIC that it received bridge bank authority in 1987, prior to the 1988 First City resolution, but did not receive cross-guarantee authority until later, in 1989. We do not dispute the FDIC scenario regarding what may have happened had it exercised its bridge bank authority on the two troubled First City banks in 1988 without having the authority to recover the losses from the other affiliated First City banks. Under the circumstances, FDIC alternatives for resolving the First City banks in 1988 were to either provide open bank assistance for the two troubled banks, or wait until they failed and consider the other resolution methods, including bridge banks. 2. We do not dispute the FDIC position that regulatory agencies were invited to all important meetings or that its Board of Directors was aware of the regulators’ opinions prior to making the 1988 open bank assistance decision. Our suggestion, however, is for FDIC to actively consult with its regulatory counterparts about key assumptions used in resolution alternatives recommended to the Board. We believe FDIC could take better advantage through greater consultation in making economic projections. The Federal Reserve, for example, has developed considerable expertise. In later discussions with the Executive Director, he agreed with us that such consultation with regulatory counterparts would be of value, although he noted that the accountability for the resolution decision, along with its assumptions, resides with FDIC. 3. In later discussions with the Executive Director, he told us that he does not disagree with our suggestion that FDIC include safeguards in open bank assistance agreements. His only concern would be if the safeguards were so stringent as to discourage potential private investors, thereby potentially costing FDIC more to resolve a troubled bank. He agrees with us that FDIC’s responsibility is to protect the Bank Insurance Fund and FDIC should include safeguards in its assistance agreements. 4. We agree that FDIC could realistically enforce the assistance agreement conditions only if FDIC determined that the bank breached the contractual conditions. The Executive Director told us that he is receptive to including provisions in future FDIC assistance agreements that authorize primary regulators to take enforcement actions if they find noncompliance with safeguards contained in future FDIC assistance agreements. His primary concern involves the potential of discouraging private investors, although he also believes there may be some practical problems in agreeing on conditions that serve the interests of the acquirer, the insurer, and the primary regulator. The Executive Director understands that such provisions would enable the primary regulator to gather the necessary information and have the requisite authority to take the appropriate enforcement action to ensure compliance with the relevant provisions of the assistance agreement. 5. We agree that in 1992, earlier FDIC notification of OCC’s finding that First City-Houston was insolvent may not have provided FDIC with a broader range of resolution alternatives because First City management was still convinced that it could raise sufficient capital to make the bank financially viable. Consequently, while some potential investors or acquirers had performed due diligence relative to earlier First City self-rescue proposals, FDIC did not believe sufficient due diligence had been performed by potential acquirers or that First City management would permit those interested to perform due diligence. Therefore, FDIC believed bridge banks would provide for the most orderly resolution, which FDIC also determined to be the least costly resolution alternative available at that time. While earlier notification may not have affected the First City resolution, the Executive Director agreed with us that early notification of insolvency is critically important for FDIC to consider the full range of resolution alternatives. He also said that FDIC is in regular contact with primary regulators to ensure early warning of potential insolvencies to maximize its resolution options. 6. We agree that examiners typically value assets on a going concern basis, and resolvers value the assets on a net realizable value presuming that they will be liquidated. The Executive Director, however, agreed with us that in unique situations like First City—where a high percentage of the assets were just assessed by examiners and market interest in the troubled banks suggests the assets will be acquired by a healthy bank—FDIC could use the examiners’ assessments as a secondary source to check on the validity of its asset valuation review results. Such a use would be comparable to how FDIC generally uses its research model, the results of which the FDIC Board of Directors may consider in its deliberations in making its resolution decisions. The following are GAO’s comments on the Comptroller of the Currency’s letter dated January 5, 1995. 1. Our objectives in the First City study included a review of the processes used by regulators to assist, close, or otherwise resolve failing financial institutions. We reviewed the adequacy of those processes, including the bases for the related decisions made by federal regulators for First City. While we found some deficiencies in the processes as applied in the First City decisions and suggested opportunities to improve those processes from the First City experience, it was not our objective nor did we take a position on the regulators’ decisions. 2. We agree with OCC that its basic standards for examination reporting and workpaper documentation are adequate based on this study and on other GAO studies of OCC’s examination process. In our report entitled Bank and Thrift Regulation: Improvements Needed in Examination Quality and Regulatory Structure (GAO/AFMD-93-15), dated February 16, 1993, we found that OCC generally adequately documented its examination results. Although we did not find in our study of First City adequate documentation for the examination results, OCC officials assured us that our concerns are being considered in their efforts to improve OCC examination processes, including the documentation of examination results. Rosemary Healy, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed the Federal Deposit Insurance Corporation's (FDIC) resolution of the First City Bancorporation of Texas, focusing on: (1) why FDIC decided to resolve the corporation by providing financial assistance instead of using other available resolution alternatives; and (2) the additional cost to the Bank Insurance Fund (BIF) as a result of the resolution. GAO found that: (1) in 1988, FDIC provided $970 million in financial assistance to recapitalize and restructure the banking organization; (2) FDIC chose this method of resolution because it was less costly than liquidating the banks in the event of insolvency; (3) FDIC estimated BIF costs to liquidate the banks to be about $1.74 billion, as opposed to the $970 million estimated for open bank assistance; (4) FDIC did not opt to sell the banks because it did not believe that it would be able to find acceptable buyers with sufficient capital to restore the banks to long-term viability; (5) FDIC placed the banks under its control for about 3 months and operated them as bridge banks to facilitate the orderly resolution of the banks; (6) FDIC relied on its best business judgment in estimating BIF costs at the time of the banks' failures; (7) FDIC considered loss estimates that ranged from $300 million to over $1 billion in making its least-cost resolution determination; (8) the Office of the Comptroller of the Currency could have better supported its decision to close the largest bank by ensuring that its examination reports and underlying workpapers were clear, well documented, and self-explanatory; and (9) FDIC resolution officials could have used OCC examination findings as a means of verifying its valuation of the banks' assets.

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In the early 1980s, Congress had concerns about a lack of adequate oversight and accountability for federal assistance provided to state and local governments. Before passage of the Single Audit Act in 1984 (the act), the federal government relied on audits of individual grants to help gain assurance that state and local governments were properly spending federal assistance. Those audits focused on whether the transactions of specific grants complied with program requirements. The audits usually did not address financial controls and were, therefore, unlikely to find systemic problems with an entity’s fund management. Further, individual grant audits were conducted on a haphazard schedule, which resulted in large portions of federal funds being unaudited each year. In addition, the auditors conducting the individual grant audits did not coordinate their work with the auditors of other programs. As a result, some entities were subject to numerous grant audits each year, while others were not audited for long periods. In response to concerns that large amounts of federal financial assistance were not subject to audit and that agencies sometimes overlapped on oversight activities, Congress passed the Single Audit Act of 1984. The act stipulated that state and local governments that received at least $100,000 in federal financial assistance in a fiscal year have a single audit conducted for that year. The concept of a single audit was created to replace multiple grant audits with one audit of an entity as a whole. State and local governments which received between $25,000 and $100,000 in federal financial assistance had the option of complying with audit requirements of the act or the audit requirements of the federal program(s) that provided the assistance. The objectives of the Single Audit Act, as amended, are to promote sound financial management, including effective internal control, with respect to federal awards administered by nonfederal entities; establish uniform requirements for audits of federal awards administered promote the efficient and effective use of audit resources; reduce burdens on state and local governments, Indian tribes, and nonprofit organizations; and ensure that federal departments and agencies, to the maximum extent practicable, rely upon and use audit work done pursuant to the act. The Single Audit Act adopted the single audit concept to help meet the needs of federal agencies for grantee oversight as well as grantees’ needs for single, uniformly structured audits. Rather than being a detailed review of individual grants or programs, the single audit is an organizationwide financial statement audit that includes the audit of the Schedule of Expenditures of Federal Awards (SEFA) and also focuses on internal control and the recipient’s compliance with laws and regulations governing the federal financial assistance received. The act also required that grantees address material noncompliance and internal control weaknesses in a corrective action plan, which is to be submitted to appropriate federal officials. The act further required that single audits be performed in accordance with GAGAS issued by GAO. These standards provide a framework for conducting high-quality financial audits with competence, integrity, objectivity, and independence. The Single Audit Act Amendments of 1996 refined the Single Audit Act of 1984 and established uniform requirements for all federal grant recipients. The refinements cover a range of fundamental areas affecting the single audit process and single audit reporting, including provisions to extend the law to cover all recipients of federal financial assistance, including, in particular, nonprofit organizations, hospitals, and universities; ensure a more cost-beneficial threshold for requiring single audits; more broadly focus audit work on the programs that present the greatest financial risk to the federal government; provide for timely reporting of audit results; provide for summary reporting of audit results; promote better analyses of audit results through establishment of a federal clearinghouse and an automated database; and authorize pilot projects to further streamline the audit process and make it more useful. The 1996 amendments required the Director of OMB to designate a Federal Audit Clearinghouse (FAC) as the single audit repository, required the recipient entity to submit financial reports and related audit reports to the clearinghouse no later than 9 months after the recipient’s year-end, and increased the audit threshold to $300,000. The criteria for determining which entities are required to have a single audit are based on the total amount of federal awards expended by the entity. The initial dollar thresholds were designed to provide adequate audit coverage of federal funds without placing an undue administrative burden on entities receiving smaller amounts of federal assistance. When the act was passed, the dollar threshold criteria for the audit requirement were targeted toward achieving audit coverage for 95 percent of direct federal assistance to local governments. As part of OMB’s biennial threshold review required by the 1996 amendments, OMB increased the dollar threshold for requirement of a single audit to $500,000 in 2003 for fiscal years ending after December 31, 2003. Federal oversight responsibility for implementation of the Single Audit Act is currently shared among various entities—OMB, federal agencies, and their respective Offices of Inspector General (OIG). The Single Audit Act assigned OMB the responsibility of prescribing policies, procedures, and guidelines to implement the uniform audit requirements and required each federal agency to amend its regulations to conform to the requirements of the act and OMB’s policies, procedures, and guidelines. OMB issued Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations, which sets implementing guidelines for the audit requirements and defines roles and responsibilities related to the implementation of the Single Audit Act. The federal agency that awards a grant to a recipient is responsible for ensuring recipient compliance with federal laws, regulations, and the provisions of the grant agreements. The awarding agency is also responsible for overseeing whether the single audits are completed in a timely manner in accordance with OMB Circular No. A-133 and for providing annual updates of the Compliance Supplement to OMB. Some federal agencies rely on the OIG to perform quality control reviews (QCR) to assess whether single audit work performed complies with OMB Circular No. A-133 and auditing standards. The grant recipient (auditee) is responsible for ensuring that a single audit is performed and submitted when due, and for following up and taking corrective action on any audit findings. The auditor of the grant recipient is required to perform the audit in accordance with GAGAS. A single audit consists of (1) an audit and opinions on the fair presentation of the financial statements and the SEFA; (2) gaining an understanding of internal control over federal programs and testing internal control over major programs; and (3) an audit and an opinion on compliance with legal, regulatory, and contractual requirements for major programs. The audit also includes the auditor’s schedule of findings and questioned costs, and the auditee’s corrective action plans and a summary of prior audit findings that includes planned and completed corrective actions. Under GAGAS, auditors are required to report on significant deficiencies in internal control and on compliance associated with the audit of the financial statements. Recipients expending more than $50 million in federal funding ($25 million prior to December 31, 2003) are required to have a cognizant federal agency for audit in accordance with OMB Circular No. A-133. The cognizant agency for audit is the federal awarding agency that provides the predominant amount of direct funding to a recipient unless OMB otherwise makes a specific cognizant agency assignment. The cognizant agency for audit provides technical audit advice, considers requests for extensions to the submission due date for the recipient’s reports, obtains or conducts QCRs, coordinates management decisions for audit findings, and conducts other activities required by OMB Circular No. A-133. According to OMB officials, the FAC single audit database generates a listing of those agencies that should be designated cognizant agencies for audit based on information on recipients expending more than $50 million. The officials also stated that OMB is responsible for notifying both the recipient and cognizant agency for audit of the assignment. Federal award recipients that do not have a cognizant agency for audit are assigned an oversight agency for audit, which provides technical advice and may assume some or all of the responsibilities normally performed by a cognizant agency for audit. Federal grant awards to state and local governments have increased significantly since the Single Audit Act was passed in 1984. Because single audits represent the federal government’s primary accountability tool over billions of dollars each year in federal funds provided to state and local governments and nonprofit organizations, it is important that these audits are carried out efficiently and effectively. As shown in figure 1, the federal government’s use of grants to state and local governments has risen substantially, from $7 billion in 1960 to almost $450 billion budgeted in 2007. GAO supported the passage of the Single Audit Act, and we continue to support the single audit concept and principles behind the act as a key accountability mechanism over federal grant awards. However, the quality of single audits conducted under this legislation has been a longstanding area of concern since the passage of the Single Audit Act in 1984. During the 1980s, GAO issued reports that identified concerns with single audit quality, including issues with insufficient evidence related to audit planning, internal control and compliance testing, and the auditors’ adherence to GAGAS. The federal Inspectors General as well have found similar problems with single audit quality. The deficiencies we cited during the 1980s were similar in nature to those identified in the recent PCIE report. In June 2002, GAO and OMB testified at a House of Representatives hearing about the importance of single audits and their quality. In its testimony, OMB identified reviews of single audit quality performed by several federal agencies that disclosed deficiencies. However, OMB emphasized that an accurate statistically based measure of audit quality was needed, and should include both a baseline of the current status and the means to monitor quality in the future. We also recognized in our testimony the need for a solution or approach to evaluate the overall quality of single audits. To gain a better understanding of the extent of single audit quality deficiencies, OMB and several federal OIGs decided to work together to develop a statistically based measure of audit quality, known as the National Single Audit Sampling Project. The work was conducted by a committee of representatives from the PCIE, the Executive Council on Integrity and Efficiency (ECIE), and three State Auditors, with the work effort coordinated by the U.S. Department of Education OIG. The Project had two primary objectives: to determine the quality of single audits by performing QCRs of a statistical sample of single audits, and to make recommendations to address any audit quality issues noted. The project conducted QCRs of a statistical sample of 208 audits randomly selected from a universe of over 38,000 audits submitted and accepted for the period April 1, 2003, through March 31, 2004. The sample was split into two strata: Stratum 1: entities with $50 million or more in federal award expenditures, Stratum 2: entities with less than $50 million in federal award expenditures (with at least $500,000). The above split in the sample strata corresponds with the current threshold for designating a cognizant agency, which is for entities that expend more than $50 million in a year in federal awards. Table 1 shows the universe and strata used in the analysis and the reviews completed in the National Single Audit Sampling Project. The project covered portions of the single audit relating to the planning, conducting, and reporting of audit work related to (1) the review and testing of internal control and (2) compliance testing pertaining to compliance requirements for selected major federal programs. The scope of the project included review of audit work related to the SEFA and the content of all of the auditors’ reports on the federal programs. The project did not review the audit work and reporting related to the general purpose financial statements. The PCIE project team categorized the audits based on the results of the QCRs into the following three groups: Acceptable—No deficiencies were noted or one or two insignificant deficiencies were noted. This group also includes the subgroup, Accepted with Deficiencies, which is defined as one or more deficiencies with applicable auditing criteria noted that do not require corrective action for the engagement, but should be corrected on future engagements. Audits categorized into this subgroup have limited effect on reported results and do not call into question the auditor’s report. Examples of deficiencies that fall into this subgroup are (1) not including all required information in the audit findings; (2) not documenting the auditor’s understanding of internal control, but testing was documented for most applicable compliance requirements; and (3) not documenting internal control or compliance testing for a few applicable compliance requirements. Limited Reliability—Contains significant deficiencies related to applicable auditing criteria and requires corrective action to afford reliance upon the audit. Deficiencies for audits categorized into this group have a substantial effect on some of the reported results and raise questions about whether the auditors’ reports are correct. Examples of deficiencies that fall into this category are (1) documentation did not contain adequate evidence of the auditors’ understanding of internal control or testing of internal control for many or all compliance requirements; however, there was evidence that most compliance testing was performed; (2) lack of evidence that work related to the SEFA was adequately performed; and (3) lack of evidence that audit programs were used for auditing internal control, compliance, and/or the SEFA. Unacceptable—Substandard audits with deficiencies so serious that the auditors’ opinion on at least one major program cannot be relied upon. Examples of deficiencies that fall into this group are (1) no evidence of internal control testing and compliance testing for all or most compliance requirements for one or more major programs, (2) unreported audit findings, and (3) at least one incorrectly identified major program. As shown in table 2, the PCIE study estimated that, overall, approximately 49 percent of the universe of single audits fell into the acceptable group. This percentage also includes “accepted with deficiencies.” The remaining 51 percent had deficiencies that were severe enough to cause the audits to be classified as having limited reliability or being unacceptable. Specifically, for the 208 audits drawn from the universe, the statistical sample showed the following about the single audits reviewed in the PCIE study: 115 were acceptable and thus could be relied upon. This includes the category of “accepted with deficiencies.” Based on this result, the PCIE study estimated that 48.6 percent of the entire universe of single audits were acceptable. 30 had significant deficiencies and thus were of limited reliability. Based on this result, the PCIE study estimated that 16.0 percent of the entire universe of single audits was of limited reliability. 63 were unacceptable and could not be relied upon. Based on this result, the PCIE study estimated that 35.5 percent of the entire universe of single audits was unacceptable. It is important to note the significant difference in results in the two strata. Specifically, 63.5 percent of the audits of entities in stratum 1 (those expending $50 million or more in federals awards) were deemed acceptable, while 48.2 percent of audits in stratum 2 (those expending at least $500,000 but less than $50 million) were deemed acceptable. Because of these differences, it is also important to analyze the results in terms of federal dollars. For the 208 audits drawn from the entire universe, the statistical sample showed the following about the single audits reviewed in the PCIE study: The 115 acceptable audits represented 92.9 percent of the value of federal award amounts reported in all 208 audits the PCIE study reviewed. The 30 audits of limited reliability represented 2.3 percent of the value of federal award amounts reported in all 208 audits the PCIE study reviewed. The 63 unacceptable audits represented 4.8 percent of the value of federal award amounts reported in all 208 audits the PCIE study reviewed. The dollar distributions for the 208 audits reviewed in the study are shown in table 3. The most prevalent deficiencies related to the auditors’ lack of documenting an understanding of internal control over compliance requirements, testing of internal control of at least some compliance requirements, and compliance testing of at least some compliance requirements. The PCIE report states that for those audits not in the acceptable group, the project team believes that lack of due professional care was a factor for most deficiencies to some degree. The term due professional care refers to the responsibility of independent auditors to observe professional standards of auditing. GAGAS further elaborate on this concept in the standard on Professional Judgment. Under this standard, auditors must use professional judgment in planning and performing audits and in reporting the results, which includes exercising reasonable care and professional skepticism. Reasonable care concerns acting diligently in accordance with applicable professional standards and ethical principles. Using professional judgment in all aspects of carrying out their professional responsibilities—including following the independence standards, maintaining objectivity and credibility, assigning competent audit staff to the assignment, defining the scope of work, evaluating and reporting the results of the work, and maintaining appropriate quality control over the assignment process—is essential to performing a high quality audit. We previously noted similar audit quality problems in prior reports. In December 1985, we reported that problems found by OIGs in the course of QCRs mostly related to lack of documentation showing whether and to what extent auditors performed testing of compliance with laws and regulations. In March 1986, we reported that our own review of single audits showed that auditors performing single audits frequently did not satisfactorily comply with professional auditing standards. The predominant issues that we found in our previous reviews were insufficient audit work in testing compliance with governmental laws and regulations and evaluating internal controls. We also observed, through discussions with the auditors and reviews of their work, that many did not understand the nature and importance of testing and reporting on compliance with laws and regulations, or the importance of reporting on internal control and the relationship between reporting and the extent to which auditors evaluated controls. As a result, in 1986, we reported that the public accounting profession needed to (1) improve its education efforts to ensure that auditors performing single audits better understand the auditing procedures required, and (2) strengthen its enforcement efforts in the area of governmental auditing to help ensure that auditors perform those audits in a quality manner. Similar to our prior work, the PCIE report presents compelling evidence that a serious problem with single audit quality continues to exist. The PCIE study also reveals that the rate of acceptable audits for organizations with $50 million or more in federal expenditures was significantly higher than for audits for organizations with smaller amounts of federal expenditures. The results also showed that overall, a significant number of audits fell into the groups of limited reliability with significant deficiencies and unacceptable. In our view, the current status of single audit quality is unacceptable. We are concerned that audits are not being conducted in accordance with professional standards and requirements. These audits may provide a false sense of assurance and could mislead users of audit reports regarding issues of compliance and internal control over federal programs. The PCIE report recommended a three-pronged approach to reduce the types of deficiencies noted and improve the quality of single audits: 1. revise and improve single audit standards, criteria, and guidance; 2. establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to conduct and continue to perform single audits; and 3. review and enhance the disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements. More specifically, to improve standards, criteria, and guidance, the PCIE report recommended revisions to (1) OMB Circular No. A-133, (2) the AICPA Statement on Auditing Standards (SAS) No. 74, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance, and (3) the AICPA Audit Guide, Current AICPA Audit Guide, collectively to emphasize correctly identifying major programs for which opinions are make it clear when audit findings should be reported; include more detailed requirements and guidance for compliance testing; emphasize the minimal amount of documentation needed to document the auditor’s understanding of, and testing of, internal control related to compliance; provide specific examples of the kind of documentation needed for risk assessment of individual federal programs; present illustrative examples of properly presented findings; specify content and examples of SEFA and any effect on financial emphasize requirements for management representations related to federal awards, similar to those for financial statement audits; provide additional guidance about documenting materiality; and require compliance testing to be performed using sampling in a manner prescribed by the AICPA SAS No. 39, Audit Sampling, as amended, to provide for some consistency in sample sizes. The PCIE report recommendation called on OMB to amend its Circular No. A-133 to require that (1) as a prerequisite to performing a single audit, staff performing and supervising the single audit must have completed a comprehensive training program of a minimum specified duration (e.g., at least 16–24 hours); (2) every 2 years after completing the comprehensive training, auditors performing single audits complete a minimum specified amount of CPE; and (3) single audits may only be procured from auditors who meet the above training requirements. The PCIE report also recommends that OMB develop, or arrange for the development of, minimum content requirements for the required training, in consultation with the National State Auditors Association (NSAA), the AICPA and its Governmental Audit Quality Center (GAQC), and the cognizant and oversight agencies for audit. The report states that the minimum content should cover the essential components of single audits and emphasize aspects of single audits for which deficiencies were noted in this project. In addition, the report recommends that OMB develop, or arrange for the development of, minimum content requirements for the ongoing CPE and develop a process for modifying future content. The report further recommends that OMB encourage professional organizations, including the AICPA, the NSAA, and qualified training providers, to offer training that covers the required content. It also recommends that OMB encourage these groups to deliver the training in ways that enable auditors throughout the United States to take the training at locations near or at their places of business, including via technologies such as Webcasts, and that the training should be available at an affordable cost. The PCIE project report emphasizes that the training should be “hands on” and should cover areas where the project team specifically found weaknesses in the work or documentation in its statistical study of single audits. The report specifically stated that the training should cover requirements for properly documenting audit work in accordance with GAGAS and other topics related to the many deficiencies disclosed by the project, including critical and unique parts of a single audit, such as the auditors’ determination of major programs for testing, review and testing of internal controls over compliance, compliance testing, auditing procedures applicable to the SEFA, how to use the OMB Compliance Supplement, and how to audit major programs not included in the Compliance Supplement. The PCIE report concludes that such training would require a minimum of 16 to 24 hours, and that a few hours or an “overview” session will not suffice. We believe that the proposed training requirements would likely satisfy the criteria for meeting a portion of the CPE hours already required by GAGAS. This recommendation focuses on developing processes to address unacceptable audits and auditors not meeting the required training requirements. OMB Circular No. A-133 currently has sanctions that apply to an auditee (i.e., the entity being audited) for not having a properly conducted audit and requires cognizant agencies to refer auditors to licensing agencies and professional bodies in the case of major inadequacies and repetitive substandard work. The report noted that other federal laws and regulations do currently provide for suspension and debarment processes that can be applied to auditors of single audits. Some cognizant and oversight agency participants in the project team indicated that these processes are rarely initiated due to the perception that it is a large and costly effort. As a result, the report specifically recommends that OMB, with federal cognizant and oversight agencies, should (1) review the process of suspension and debarment to identify whether (and if so, how) it can be more efficiently and effectively applied to address unacceptable audits, and based on that review, pursue appropriate changes to the process; and (2) enter into a dialogue with the AICPA and State Boards of Accountancy to identify ways the AICPA and State Boards can further the quality of single audits and address the due professional care issues noted in the PCIE report. The report further recommends that OMB, with federal cognizant agencies, should also identify, review, and evaluate the potential effectiveness of other ways (both existing and new) to address unacceptable audits, including (but not limited to) (1) revising Circular No. A-133 to include sanctions to be applied to auditors for unacceptable work or for not meeting training and CPE requirements, and (2) considering potential legislation that would provide to federal cognizant and oversight agencies the authority to issue a fine as an option to address unacceptable audit work. While we support the recommendations made in the PCIE report, it will be important to resolve a number of issues regarding the proposed training requirement. Some of the unresolved questions involve the following: What are the efficiency and cost-benefit considerations for providing the required training to the universe of auditors performing the approximately 38,500 single audits? How can current mechanisms already in place, such as the AICPA’s Government Audit Quality Center (GAQC), be leveraged for efficiency and effectiveness purposes in implementing new training? Which levels of staff from each firm would be required to take training? What mechanisms will be put in place to ensure compliance with the training requirement? How will the training requirement impact the availability of sufficient, qualified audit firms to perform single audits? The effective implementation of the third prong, developing processes to address unacceptable audits and for auditors who do not meet professional requirements, is essential as the quality issues have been long-standing. We support the PCIE recommended actions to make the process more effective and efficient and to help ensure a consistent approach among federal agencies and their respective OIGs overseeing the single audit process. In addition to the findings and recommendations of the PCIE report, we believe there are two other critical factors that need to be considered in determining actions that should be taken to improving audit quality: (1) the distribution of unacceptable audits and audits of limited reliability across the different dollar amounts of federal expenditures by grantee, as found in the PCIE study; and (2) the distribution of single audits by size in the universe of single audits. These factors are critical in effectively evaluating the potential dollar implications and efficiency and effectiveness of proposed actions. The PCIE study found that rates of unacceptable audits and audits of limited reliability were much higher for audits of entities in stratum 2 (those expending less than $50 million in federal awards) than those in stratum 1 (those expending $50 million or more). Table 1 presented earlier in this testimony shows the data from the sample universe of single audits used by the PCIE. Analysis of the data shows that 97.8 percent of the total number of audits (37,671 of the 38,523 total) covered approximately 16 percent ($143.1 billion of the $880.2 billion) of the total reported value of federal award expenditures, indicating significant differences in distributions of audits by dollar amount of federal expenditures. At the same time, the rates of unacceptable audits and audits of limited reliability were relatively higher in these smaller audits. We believe that there may be opportunities for considering size characteristics when implementing future actions to improve the effectiveness and quality of single audits. For instance, there may be merit to conducting a more refined analysis of the distribution of audits to determine whether less-complex approaches could be used for achieving accountability through the single audit process for a category of the smallest single audits. Such an approach may provide sufficient accountability for these smaller programs. An example of a less-complex approach consists of requirements for a financial audit in accordance with GAGAS, that includes the higher level reports on internal control and compliance along with an opinion on the SEFA and additional, limited or specified testing of compliance. Currently, the compliance testing in a single audit is driven by compliance requirements under OMB Circular No. A-133 as well as program-specific requirements detailed in the compliance supplement. A less-complicated approach could be used for a category of the smallest audits to replace the current approach to compliance testing, while still providing a level of assurance on the total amount of federal grant awards provided to the recipient. Another consideration for future actions is strengthening the oversight of the cognizant agency for audit with respect to auditees expending $50 million or more in federal awards. As shown in the data from the sample universe of single audits used by the PCIE, 852 audits (or 2.2 percent) of the total 38,523 audits covered $737.2 billion (or 84 percent) of the reported federal award expenditures. This distribution suggests that targeted and effective efforts on the part of cognizant agencies aimed at improving audit quality for those auditees that expend greater than $50 million could achieve a significant effect in terms of dollars of federal expenditures. We continue to support the single audit concept and principles behind the act as a key accountability mechanism over federal awards. It is essential that the audits are done properly in accordance with GAGAS and OMB requirements. The PCIE report presents compelling evidence that a serious shortfall in the quality of single audits continues to exist. Many of these quality issues are similar in nature to those reported by GAO and the Inspectors General since the 1980s. We believe that actions must be taken to improve audit quality and the overall accountability provided through single audits for federal awards. Without such action, we believe that substandard audits may provide a false sense of assurance and could mislead users of audit reports. While we support the recommendations made in the PCIE report, we believe that a number of issues regarding the proposed training requirements need to be resolved. The PCIE report results also showed a higher rate of acceptable audits for organizations with larger amounts of federal expenditures and showed that the vast majority of federal dollars are being covered by a small percentage of total audits. We believe that there may be opportunities for considering size characteristics when implementing future actions to improve the effectiveness and quality of single audits as an accountability mechanism. Considering the recommendations of the PCIE within this larger context will also be important to achieve the proper balance between risk and cost-effective accountability. In addition to the considerations surrounding the specific recommendations for improving audit quality, a separate effort taking into account the overall framework for single audits may be warranted. This effort could include answering questions such as the following: What types of simplified alternatives exist for meeting the accountability objectives of the Single Audit Act for the smallest audits and what would the appropriate cutoff be for a less-complex audit requirement? Is the current federal oversight structure for single audits adequate and consistent across federal agencies? What alternative federal oversight structures could improve overall accountability and oversight in the single audit process? Are federal oversight processes adequate and are sufficient resources being dedicated to oversight of single audits? What role can the auditing profession play in increasing single audit quality? Do the specific requirements in OMB Circular No. A-133 and the Single Audit Act need updating? Mr. Chairman, we would be pleased to work with the subcommittee as it considers additional steps to improve the single audit process and federal oversight and accountability over federal grant funds. Mr. Chairman and members of this subcommittee, this concludes my statement. I would be happy to answer any questions that you or members may have at this time. For information about this statement, please contact Jeanette Franzel, Director, Financial Management and Assurance, at (202) 512-9471 or [email protected]. Individuals who made key contributions to this testimony include Marcia Buchanan (Assistant Director), Robert Dacey, Abe Dymond, Heather Keister, Jason Kirwan, David Merrill, and Sabrina Springfield (Assistant Director). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Federal government grants to state and local governments have risen substantially, from $7 billion in 1960 to almost $450 billion budgeted in 2007. The single audit is an important mechanism of accountability for the use of federal grants by nonprofit organizations as well as state and local governments. However, the quality of single audits conducted under the Single Audit Act, as amended, has been a longstanding area of concern since the passage of the act in 1984. The President's Council on Integrity and Efficiency (PCIE) recently issued its Report on National Single Audit Sampling Project, which raises concerns about the quality of single audits and makes recommendations aimed at improving the effectiveness and efficiency of those audits. This testimony provides (1) GAO's perspective on the history and importance of the Single Audit Act and the principles behind the act, (2) a preliminary analysis of the recommendations made by the PCIE for improving audit quality, and (3) additional considerations for improving the quality of single audits. In the early 1980s, Congress had concerns about a lack of adequate oversight and accountability for federal assistance provided to state and local governments. In response to concerns that large amounts of federal financial assistance were not subject to audit and that agencies sometimes overlapped on oversight activities, Congress passed the Single Audit Act of 1984. The act adopted the single audit concept to help meet the needs of federal agencies for grantee oversight as well as grantees' needs for single, uniformly structured audits. GAO supported the passage of the Single Audit Act, and continues to support the single audit concept and principles behind the act as a key accountability mechanism for federal grant awards. However, the quality of single audits has been a longstanding area of concern since the passage of the act in 1984. In its June 2007 Report on National Single Audit Sampling Project, the PCIE found that, overall, approximately 49 percent of single audits fell into the acceptable group, with the remaining 51 percent having deficiencies severe enough to classify the audits as limited in reliability or unacceptable. PCIE found a significant difference in results by audit size. Specifically, 63.5 percent of the large audits (with $50 million or more in federal award expenditures) were deemed acceptable compared with only 48.2 percent of the smaller audits (with at least $500,000 but less than $50 million in federal award expenditures). The PCIE report presents compelling evidence that a serious problem with single audit quality continues to exist. GAO is concerned that audits are not being conducted in accordance with professional standards and requirements. These audits may provide a false sense of assurance and could mislead users of the single audit reports. The PCIE report recommended a three-pronged approach to reduce the types of deficiencies found and to improve the quality of single audits: (1) revise and improve single audit standards, criteria, and guidance; (2) establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to be able to conduct and continue to perform single audits; and (3) review and enhance the disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements. In this testimony, GAO supports PCIE's recommendations and points out issues that need to be resolved regarding the proposed training and other factors that merit consideration when determining actions to improve audit quality. GAO believes that there may be opportunities for considering size when implementing future actions to improve the effectiveness and quality of single audits. In addition, a separate effort considering the overall framework for single audits could answer such questions as whether simplified alternatives can achieve cost-effective accountability in the smallest audits; whether current federal oversight processes for single audits are adequate; and what role the auditing profession can play in increasing single audit quality.

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Medicare is a federal health insurance program designed to assist elderly and disabled beneficiaries. Hospital insurance, or part A, covers inpatient hospital, skilled nursing facility, hospice care, and certain home health services. Supplemental medical insurance, or part B, covers physician and outpatient hospital services, laboratory and other services. Claims are paid by a network of 49 claims administration contractors called intermediaries and carriers. Intermediaries process claims from hospitals and other institutional providers under part A while carriers process part B claims. The intermediaries’ and carriers’ responsibilities include: reviewing and paying claims; maintaining program safeguards to prevent inappropriate payment; and educating and responding to provider and beneficiary concerns. Medicare contracting for intermediaries and carriers differs from that of most federal programs. Most federal agencies, under the Competition in Contracting Act and its implementing regulations known as the Federal Acquisition Regulation (FAR), generally may contract with any qualified entity for any authorized purpose so long as that entity is not debarred from government contracting and the contract is not for what is essentially a government function. Agencies are to use contractors that have a track record of successful past performance or that demonstrate a current superior ability to perform. The FAR generally requires agencies to conduct full and open competition for contracts and allows contractors to earn profits. Medicare, however, is authorized to deviate from the FAR under provisions of the Social Security Act enacted in 1965. For example, there is no full and open competition for intermediary or carrier contracts. Rather, intermediaries are selected in a process called nomination by provider associations, such as the American Hospital Association. This provision was intended at the time of Medicare’s creation to encourage hospitals to participate by giving them some choice in their claims processor. Currently, there are three intermediary contracts, including the national Blue Cross Blue Shield Association, which serves as the prime contractor for 26 local member plan subcontractors. When one of the local Blue plans declines to renew its subcontract, the Association nominates the replacement contractor. Carriers are chosen by the Secretary of Health and Human Services from a small pool of health insurers, and the number of such companies seeking Medicare claims-processing work has been dwindling in recent years. The Social Security Act also generally calls for the use of cost-based reimbursement contracts under which contractors are reimbursed for necessary and proper costs of carrying out Medicare activities but does not expressly provide for profit. Further, Medicare contractors cannot be terminated from the program unless they are first provided with an opportunity for a public hearing––a process not afforded under the FAR. Medicare could benefit from various contracting reforms. Freeing the program to directly choose contractors on a competitive basis from a broader array of entities able to perform needed tasks would enable Medicare to benefit from efficiency and performance improvements related to competition. It also could address concerns about the dwindling number of insurers with which the program now contracts. Allowing Medicare to have contractors specialize in specific functions rather than assume all claims-related activities, as is the case now, also could lead to greater efficiency and better performance. Authorizing Medicare to pay contractors based on how well they perform rather than simply reimbursing them for their costs, as well as allowing the program to terminate contracts more efficiently when program needs change or performance is inadequate, could also result in better program management. Since Medicare was implemented in 1966, the program has used health insurers to process and pay claims. Before Medicare’s enactment, providers feared that the program would give the government too much control over health care. To win acceptance, the program was designed to be administered by health insurers like Blue Cross and Blue Shield. Subsequent regulations and decades of the agency’s own practices have further limited how the program contracts for claims administration services. The result is that agency officials believe they must contract with health insurers to handle all aspects of administering Medicare claims, even though the number of such companies willing to serve as Medicare contractors has declined and the number of other entities capable of doing the work has increased. While using only health insurers for claims administration may have made sense when Medicare was created, that may be much less so today. The explosion in information technology has increased the potential for Medicare to use new types of business entities to administer its claims processing and related functions. Additionally, the need to broaden the pool of entities allowed to be contractors has increased in light of contractor attrition. Since 1980, the number of contractors has dropped by more than half, as many have decided to concentrate on other lines of business. This has left the program with fewer choices when one contractor withdraws, or is terminated, and another must be chosen to replace it. Since 1993, the agency has repeatedly submitted legislative proposals to repeal the provider nomination authority and make explicit its authority to contract for claims administration with entities other than health insurers. Just this month, the Secretary of Health and Human Services told the Senate Finance Committee that CMS should be able to competitively award contracts to the entities best qualified to perform these functions and stated that such changes would require legislative action. With such changes, when a contractor leaves the program, CMS could award its workload on a competitive basis to any qualified company or combination of companies—including those outside the existing contractor pool, such as data processing firms. Allowing Medicare to have separate contractors for specific claims administration activities—also called functional contracting—could further improve program management. Functional contracting would enable CMS to select contractors that are more skilled at certain tasks and allow these contractors to concentrate on those tasks, potentially resulting in better program service. For example, the agency could establish specific contractors to improve and bring uniformity to efforts to educate and respond to providers and beneficiaries, efforts that now vary widely among existing contractors. Currently, CMS interprets the Social Security Act and the regulations implementing it as constraining the agency from awarding separate contracts for individual claims administration activities, such as handling beneficiary inquiries or educating providers about program policies. Current regulations stipulate that, to qualify as an intermediary or carrier, the contracting organization must perform all of the Medicare claims administration functions. Thus, agency officials feel precluded from consolidating one or more functions into a single contract or a few regional contracts to achieve economies of scale and allow specialization to enhance performance. CMS has had some experience with functional contracting under authority granted in 1996 to hire entities other than health insurers to focus on program safeguards. CMS has contracted with 12 program safeguard contractors (PSC) who compete among themselves to perform task- specific contracts called task orders. These entities represent a mix of health insurers, including many with prior experience as Medicare contractors, along with consulting organizations, and other types of firms. The experience with PSCs, however, makes clear that functional contracting has challenges of its own, which are discussed later in this testimony. Allowing Medicare to offer financial incentives to contractors for high- quality performance also may have benefits. According to CMS, the Social Security Act now precludes the program from offering such incentives because it generally stipulates that payments be based on costs. Contractors are paid for necessary and proper costs of carrying out Medicare activities but do not make a profit. Repeal of cost-based restrictions would free CMS to award different types of contracts–– including those that provide contractors with financial incentives and permit them to earn profits. CMS could test different payment options to determine which work best. If effective in encouraging contractor performance, such contracts could lead to improved program operations and, potentially, to lower administrative costs. Again, implementing performance-based contracting will not be without significant challenges. Allowing Medicare to terminate contractors more efficiently may also promote better program management. The Social Security Act now limits the agency’s ability to terminate intermediaries and carriers, and the provisions are one-sided. Intermediaries and carriers may terminate their contracts without cause simply by providing CMS with 180 days notice. CMS, on the other hand, must demonstrate, that (1) the contractor has failed substantially to carry out its contract or that (2) continuation of the contract is disadvantageous or inconsistent with the effective administration of Medicare. CMS must provide the contractor with an opportunity for a public hearing prior to termination. Furthermore, CMS may not terminate a contractor without cause as can most federal agencies under the FAR. In past years, the agency has requested statutory authority to eliminate the public hearing requirement and the ability of contractors to unilaterally initiate contract termination. Such changes would bring Medicare claims administration contractors under the same legal framework as other government contractors and provide greater flexibility to more quickly terminate poor performers. Eliminating contractors’ ability to unilaterally terminate contracts also may help address challenges the agency faces in finding replacement contractors on short notice. While Medicare could benefit from greater contracting flexibility, time and care would be needed to implement changes to effectively promote better performance and accountability and avoid disrupting program services. Competitive contracting with new entities for specific claims administration services in particular will pose new challenges to CMS–– challenges that will likely take significant time to fully address. These include preparing clear statements of work and contractor selection criteria, efficiently integrating the new contractors into Medicare’s claims processing operations, and developing sound evaluation criteria for assessing performance. Because these challenges are so significant, CMS would be wise to adopt an experimental, incremental approach. The experience with authority granted in 1996 to hire special contractors for specific tasks related to program integrity can provide valuable lessons for CMS officials if new contracting authorities are granted. If given authority to contract competitively with new entities, CMS would need time to accomplish several tasks. First among these would be development of clear statements of work and associated requests for proposals detailing work to be performed and how performance will be assessed. CMS has relatively little experience in this area for Medicare claims administration because current contracts instead incorporate by reference all regulations and general instructions issued by the Secretary of Health and Human Services to define contractor responsibilities. CMS has experience with competitive contracting from hiring PSCs. It did take 3 years to determine how best to implement the new authority through its broad umbrella contract, develop the statement of work, issue the proposed regulations governing the PSCs, develop selection criteria, review proposals, and select contractors. Program officials have told us they are optimistic about their ability to act more quickly if contracting reform legislation were enacted, given the lessons they have learned. However, we expect that it would take CMS a significant amount of time to develop its implementation strategy and undertake all the necessary steps to take full advantage of any changes in its contracting authority. CMS took an incremental approach to awarding its PSC task orders, and the same would be prudent for implementing any changes in Medicare’s claims administration contracting authorities. Even after new contractors are hired, CMS should not expect immediate results. The PSC experience demonstrates that it will take time for them to begin performing their duties. PSCs had to hire staff, obtain operating space and equipment, and develop the systems needed to ultimately fulfill contract requirements––activities that often took many months to complete. Without sufficient start-up time, new contractors might not operate effectively and services to beneficiaries or providers could be disrupted. Developing a strategy for how to incorporate functional contractors into the program and coordinate their activities is key. While there may be benefits from specialization, having multiple companies performing different claims administration tasks could easily create coordination difficulties for the contractors, providers, and CMS staff. For example, between 1997 and 2000, HCFA contracted with a claims administration contractor that subcontracted with another company for the review of the medical necessity of claims before they were paid. The agency found that having two different contractors perform these functions posed logistical challenges that could make it difficult to complete prepayment reviews without creating a backlog of unprocessed claims. The need for effective coordination was also seen in the PSC experience. PSCs and the claims administration contractors need to coordinate their activities in cases where the PSCs assumed responsibility for some or all of the program safeguard functions previously performed by the contractors. In these situations, HCFA officials had to ensure that active claims did not get lost or ignored while in the processing stream. Coordination is also necessary to ensure that new efficiencies in one program area do not adversely affect another area. For example, better review of the medical necessity of claims before they are paid could lead to more accurate payment. This would clearly be beneficial, but could also lead to an increase in the number of appeals for claims denials. Careful planning would be required to ensure adequate resources were in place to adjudicate those appeals and prevent a backlog. CMS has not stated how claims administration activities might be divided if the agency could do functional contracting. It would be wise for CMS to develop a strategy for testing different options on a limited scale. In our report on HCFA’s contracting for PSC services, we recommended, and the agency generally agreed, that it should adopt such a plan because HCFA was not in a position to identify how best to use the PSCs to promote program integrity in the long term. Taking advantage of benefits from competition and performance-based contracting hinges on being able to identify goals and objectives and to measure progress in achieving them. Specific and appropriate evaluation criteria would be needed to effectively manage any new arrangements under contracting reform. Effective evaluations are dependent, in part, upon clear statements of expected outcomes tied to quantifiable measures and standards. Because it has not developed such criteria for most of its PSC task orders, we reported that CMS is not in a position to effectively evaluate its PSCs’ performance even though 8 of the 15 task orders had been ongoing for at least a year as of April 2001. If CMS begins using full and open competition to hire new entities for other specific functions, it should attempt to move quickly to develop effective outcomes, measures, and standards for evaluating such entities. Effective criteria are also critical if financial incentives are to be offered to contractors. Prior experiments with financial incentives for Medicare claims administration contractors generally have not been successful. This experience raises concerns about the possibility for success of any immediate implementation of such authority without further testing. For example, between 1977 and 1986, HCFA established eight competitive fixed-price-plus-incentive-fee contracts designed to consolidate the workload of two or more small contractors on an experimental basis. Contractors could benefit financially by achieving performance goals in certain areas at the potential detriment of performance in other activities. In 1986, we reported that two of the contracts generated administrative savings estimated at $48 million to $50 million. However, the two contractors’ activities also resulted in $130 million in benefit payment errors (both overpayments and underpayments) that may have offset the estimated savings. One of these contractors subsequently agreed to pay over $140 million in civil and criminal fines for its failure to safeguard Medicare funds. Removing the contracting limitations imposed at Medicare’s inception to promote full and open competition and increase flexibility could help to modernize the program and lead to more efficient and effective management. However, change will not yield immediate results, and lessons learned from the experience with PSC contractors underscore the need for careful and deliberate implementation of any reforms that may be enacted. This concludes my statement. I would be happy to answer any questions that either Subcommittee Chairman or Members may have. For further information regarding this testimony, please contact me at (312) 220-7600. Sheila Avruch, Bonnie Brown, Paul Cotton, and Robert Dee also made key contributions to this statement.

Discussions about how to reform and modernize the Medicare Program have, in part, focused on whether the structure that was adopted in 1965 is optimal today. Questions have been raised about whether the program could benefit from changes to the way that Medicare's claims processing contractors are chosen and the jobs they do. Medicare could benefit from full and open competition and its relative flexibility to promote better performance and accountability. If the current limits on Medicare contracting authority are removed, the Centers for Medicare and Medicaid Services could (1) select contractors on a competitive basis from a broader array of entities capable of performing needed program activities, (2) issue contracts for discrete program functions to improve contractor performance through specialization, (3) pay contractors based on how well they perform rather than simply reimbursing them for their costs, and (4) terminate poor performers more efficiently.

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Faced with a goal of increasing the Department’s investments in modernization without increasing overall defense budgets, DOD has recently focused on the cost of support operations and their associated infrastructure, with the objective of finding ways to provide required support resources and capability at reduced costs. DOD recognizes that portions of its support structure are inefficient and continue to absorb a large share of the defense budget. To the extent support costs can be reduced, available future defense dollars could be used for modernization or other defense priorities. The Office of the Secretary of Defense (OSD) requested that DSB identify DOD activities that the private sector could do more efficiently and to determine the expected savings from outsourcing. DSB, a civilian advisory board to DOD, issued two reports in 1996 addressing outsourcing and other opportunities for substantially reducing DOD support services. The first focused solely on outsourcing and privatization issues. The second, incorporating findings from the earlier report, had a broader scope that included other methods for reducing infrastructure costs. In preparation for the Quadrennial Defense Review (QDR), OSD’s Program Analysis and Evaluation (PA&E) directorate assessed the DSB’s savings estimates from the second report. Our analysis also focused on the second report’s findings and recommendations. The first DSB task force concluded that DOD could realize savings of 30 to 40 percent of logistics costs and achieve broad improvements in service delivery and responsiveness by outsourcing support services traditionally done by government personnel. The report cited evidence from the Center for Naval Analyses (CNA) public-private competition studies of commercial and depot maintenance activities. The Board also noted that an Outsourcing Institute study found that the private sector saved about 10 to 15 percent by outsourcing but that the public sector savings from outsourcing would be higher because of the inefficiency of government service organizations. The DSB task force stated that an aggressive DOD outsourcing initiative could generate savings ranging from $7 billion to $12 billion annually by fiscal year 2002. Building on the earlier study, DSB’s second task force report provided a new vision wherein DOD would only provide warfighting, direct battlefield support, policy- and decision-making, and oversight activities. All other activities would be done by the private sector. DSB said that DOD would need to make an investment of about $6 billion but would ultimately save about $30 billion annually by the year 2002, primarily through outsourcing support functions. Of these $30 billion in annual savings, $6 billion was to come from CONUS logistics infrastructure activities, which DSB defined as including inventory control points, distribution depots, maintenance depots, and installation supply and repair. About $4.2 billion of the savings would be achieved by outsourcing these activities; the remaining $1.8-billion savings would be achieved through improvements in inventory management practices and equipment reliability. Table 1 shows a breakout of the estimated logistics infrastructure savings. According to the DSB estimates, the $6-billion savings represents an approximate 40-percent reduction in the $14 billion the Board estimated DOD spends annually for CONUS logistics activities. According to a DSB task force member, estimates for the cost of installation supply and repair activities were unavailable. Therefore, the group used $14 billion as a rough estimate to approximate total CONUS logistics cost, not including activities already contracted out. Although we were unable to substantiate those numbers, the data that is available indicates that DSB’s estimate of $14 billion for CONUS logistics costs is conservative. For example, the Navy has reported that more than $8.5 billion of Navy resources was applied in fiscal year 1996 to maintenance programs in support of fleet ships and aircraft. The report also stated that to gain economies and achieve significant savings, DOD needs to consider dramatic changes in the way it does business. DSB said the Department must get out of the material management/distribution and repair business by expanding contractor logistics support to all fielded weapon systems and by expanding the use of “prime vendors” for all commodities. Contractor logistics support, which relies on a contractor to provide long-term, total life-cycle logistics support, combines depot-level maintenance with wholesale and selected retail material management functions. Under the “prime vendor” concept, DOD would rely on a single vendor to buy, warehouse, and distribute inventory to the customer as needed, thus removing the Defense Logistics Agency and the services from their present middleman role. Our reviews of best practices within the private sector and ongoing work at DOD indicate that DOD has significant opportunities for reducing logistics costs and improving performance by changing its business processes. This work also indicates that determining the most cost-effective processes to use requires an evaluation of costs and benefits of each situation. These findings are consistent with the general theme of the DSB’s reports that opportunities exist for savings in the operation of DOD’s logistics support activities. However, DSB focused on outsourcing, while our work has focused first on reengineering and streamlining, and outsourcing where appropriate and more cost-effective. Over the past several years, DOD has considered a number of actions to improve the efficiency and effectiveness of its logistics system. As with the private sector, such actions should include using highly accurate information systems, consolidating certain activities, employing various process streamlining methods, and outsourcing. For example, defense maintenance depots have about 40-percent excess capacity, and we have advocated consolidating workloads to take advantage of economies of scale and eliminate unnecessary duplication. Consolidating workloads from two closing depots would allow the Air Force, for instance, to achieve annual savings of over $200 million and reduce its excess capacity from 45 percent to about 8 percent. In addition, our work has pointed out the benefits of outsourcing when careful economic analysis indicates the private sector can provide required support at less cost than a DOD activity can. For example, the Defense Logistics Agency has successfully taken steps to use prime vendors to supply personnel items directly to military facilities. The consumable items under these vendor programs account for 2 percent of the consumable items DOD manages. DOD’s prime vendor program for medical supplies, along with other inventory reduction efforts, has resulted in savings that we estimate exceed $700 million. More importantly, this program has moved DOD out of the inventory storage and distribution function for these supplies, thus emptying warehouses, eliminating unnecessary layers of inventory, and reducing the overall size of the DOD supply system. Also, service is improved because DOD buys only the items that are currently needed and consumers can order and receive inventory within hours of the time the items are used. While DOD has achieved benefits from outsourcing, it has been shown that adequate competition has been key to achieving significant reductions. Public-private competition studies by CNA have stressed this point. In its 1993 review of the Navy’s Commercial Activities Program, CNA noted that about half the competitions were won by the in-house team and that when competitions with no savings were excluded, the savings from contracts awarded to the public sector were 50 percent and those to the private sector were 40 percent. CNA officials concluded that because of competition both sectors were spurred to increase efficiency and reduce costs and DOD achieved greater savings. CNA also concluded that savings would have been less had the public sector been excluded from competition. Likewise, our review of DOD’s public-private competition program for depot maintenance determined that such competitions resulted in reduced costs. Facing increasing pressures to maintain market competitiveness, private companies have been reevaluating their organization and processes to cut costs and improve customer service. The most successful improvements include (1) using highly accurate information systems that provide cost, tracking, and control data; (2) consolidating and/or centralizing certain activities; (3) employing various methods to streamline work processes; and (4) shifting certain activities to third-party providers. Each company’s overall business strategy and assessment of “core competencies” guide which tools to use and how to use them. Private companies use a variety of approaches to meet their logistics support needs. For example, Southwest Airlines contracts out almost all maintenance, thus avoiding costly investments in facilities, personnel, and inventory. However, in contrast, having already made a significant investment in building infrastructure and training personnel, British Airways reached a different decision about its support operations. While it has sold off and/or outsourced some activities (namely engine repair and parts supply) and improved remaining in-house repair operations, the airline now has become a third-party supplier of aircraft overhaul. Whether the organization decides to consolidate, reengineer, or outsource activities, or to do some combination thereof, the private firms and consultants with whom we met stressed that identifying and understanding the organization’s core activities and obtaining accurate cost data for all in-house operations are critical to making informed business decisions and assessing overall performance. Core activities are those that are essential for meeting an organization’s mission. Before making decisions on what cost-saving options should be used, an organization should develop a performance-based, risk-adjusted analysis of benefits and costs for each option to provide (1) the foundation for comparing the baseline benefits and costs with proposed options and (2) a basis for decisionmakers to use in selecting a feasible option that meets performance goals. The organization should also factor into the analysis the barriers and risks in implementing the options. Thus, the best practice would be to make an outsourcing decision only after a core assessment and comprehensive cost-benefit analysis have been performed rather than to take a blanket approach and outsource everything in a certain area. PA&E’s analysis of the DSB’s estimated $6 billion in annual logistics savings found that the estimate was overstated by about $1 billion and that another $3 billion in projected savings would be difficult to achieve or unlikely to be achieved. According to PA&E officials, DSB’s $6-billion savings estimate was overstated by about $1 billion because contract administration and oversight costs were understated and one-time inventory savings (spread over 6 years) was claimed as steady state savings. Further, in assessing the degree of difficulty in achieving the savings, PA&E concluded that about $1 billion would be difficult to achieve, but was possible if Congress changed the required 60/40 public-private split to 50-50, which has since occurred. PA&E also believed that another $2 billion was unlikely to be saved primarily because of timing and DOD’s culture. It did not believe that DOD could carry out the proposals within the DSB’s 6-year schedule, if at all. PA&E’s assessment concluded that the remaining $2 billion of the DSB’s $6-billion savings estimate was achievable or already identified in DOD’s future year defense program. PA&E officials defined as achievable those savings that they believed could be realized given DSB’s 25-percent savings assumption and the then-current legal restrictions on outsourcing depot maintenance activities. About $0.2 billion in savings would involve maximizing the use of outsourcing under legislative constraints as they existed at that time, such as the 60/40 rule. The remainder of the achievable savings have already been identified in DOD’s future year defense program. Table 2 shows PA&E’s revised estimate of the DSB’s logistics savings. Our analysis confirms PA&E’s conclusion that the DSB’s logistics savings estimates are not well supported and are unlikely to be as large as estimated. Specifically, we found that (1) the Board’s projected annual savings from reliability improvements are overstated by over $1 billion; (2) the DSB’s 25-percent savings rate from outsourcing appears to be overly optimistic; and (3) DSB, while recognizing it would be difficult to do so, assumed that DOD would overcome impediments that prevent the outsourcing of all logistics functions. We do not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable. In addition to overstating inventory management savings noted by PA&E, the DSB task force overstated its estimate of annual savings from equipment reliability improvements. The Board’s estimate of $1.5 billion in annual savings by year 2002 (6 years from the year of DSB’s study) is overstated by at least $1.2 billion. DSB based its estimate on a Logistics Management Institute (LMI) study that assessed the reductions of operation and support costs that result from improved reliability and maintainability due to technological advancements. Such advancements may include using improved materials and fewer component parts; thus reducing the number of spare purchases and the need for scheduled and unscheduled maintenance. Accomplishing these advancements requires an investment that must be evaluated in light of the expected return on investment. For its study, LMI assumed an aggressive technology improvement program. For example, it assumed a 9 to 1 return on investment that would accrue over 20 years, with savings starting the second year. Further, it assumed that any given investment would generate a savings stream for at least 10 years. Based on these assumptions and its analysis, LMI concluded that with an annual investment starting at $100 million and leveling at $500 million within 5 years, DOD could achieve $300 million in savings in the sixth year. DOD would not achieve the $1.5-billion savings that DSB included in its savings estimate until the fourteenth year. Thus, even without questioning LMI’s aggressive assumptions, the DSB’s savings estimate is overstated by at least $1.2 billion. DSB assumed that outsourcing all logistics activities would reduce DOD’s logistics costs by 25 percent. The Board based this projection on public-private competition studies, industry studies by such companies as Caterpillar and Boeing, and anecdotal evidence. While we believe that savings can be achieved through appropriate outsourcing, these savings are a result of competition rather than from outsourcing itself. The studies DSB cited were primarily for commercial activities—such as base operations, real property maintenance, and food service. As we have reported, these activities generally have highly competitive markets. For some logistics activities, such as nonship depot maintenance, our recent work has shown that competitive markets do not currently exist. To the extent that competitive markets do not exist, the amount of savings that can be generated through outsourcing may be reduced. As we reported in 1996, 76 percent of the 240 open depot maintenance contracts we examined were awarded noncompetitively (i.e., sole source). More recently, we reported that the percentage of noncompetitive depot maintenance contracts had increased for activities other than shipyards. For the three services, about 91 percent of the 15,346 new depot maintenance contracts awarded from the beginning of fiscal year 1996 to date were sole source. Moreover, the DSB recommended contractor logistics support arrangements for new and modified weapon systems. Our past work demonstrates that most contractor logistics support depot work is sole sourced to the original equipment manufacturer, raising cost and future competition concerns. Furthermore, eliminating the public sector from competition, as advocated by DSB, could further decrease savings. In developing its savings estimates for CONUS logistics, DSB assumed that DOD would outsource all logistics activity. However, certain barriers, including legal and cultural impediments, must be overcome to fully implement DSB’s recommendations. While it may be possible to implement DSB’s recommendations, in some cases, implementation may require congressional action, and in others, implementation may take substantially longer than DSB’s 6-year estimate. We did not quantify how much these impediments will reduce DSB’s savings, but consistent with PA&E’s analysis, these factors will mitigate portions of the projected savings. Although it recommended that essentially all logistics—including material management and depot maintenance, distribution, and other activities—be outsourced, DSB recognized that outsourcing is limited or precluded by various laws and regulations. For example, fundamental to determining whether or not to outsource is the identification of core functions and activities. Section 2464 of title 10 U.S.C. states that DOD activities should maintain the government-owned and government-operated core logistics capability necessary to maintain and repair weapon systems and other military equipment needed to fulfill national strategic and contingency plans. The delineation of core activities has historically proven to be extremely difficult. For example, proponents of increased privatization have questioned the justification for retaining many support activities as core and have recommended revising the core logistics requirement. Section 311 of the 1996 DOD Authorization Act directed the Secretary of Defense to develop a comprehensive depot maintenance policy, including a definition of DOD’s required core depot maintenance capability. While DOD has identified a process for determining core depot maintenance capability requirements, it has not completed its evaluation. Moreover, DOD has not developed a process for identifying core requirements for other logistics functions and activities. Thus, core requirements in these areas are also unknown. The 1998 DOD Authorization Act again requires that the Department identify its core depot maintenance requirements, this time under the new provisions described above. Additionally, 10 U.S.C. 2466 states that no more than 50 percent of the depot maintenance funds made available in a given fiscal year may be spent for depot maintenance conducted by nonfederal personnel. This provision, along with other relevant provisions significantly affects DSB’s savings estimate because about 50 percent of depot maintenance would not be subject to outsourcing. Section 2469 of title 10 states that DOD-performed depot maintenance and repair workloads valued at not less than $3 million cannot be changed to contractor-performed work without using competitive procedures that include both public and private entities. This requirement for public-private competition affects the DSB savings estimate because DSB assumed the requirement would be eliminated. The 1998 DOD Authorization Act also added a new section 2469a to title 10 that affects public-private competitions for certain workloads from closed or realigned installations. Further, during the congressional deliberation on the 1997 DOD Authorization Act, DOD provided Congress a list of statutory encumbrances to outsourcing, including 10 U.S.C. 2461, which requires studies and reports before converting public workloads to a contractor; 10 U.S.C. 2465, which prohibits contracts for performance of fire-fighting and security guard functions; section 317 of the National Defense Authorization Act for Fiscal Year 1987 (P.L. 99-661), which prohibits the Secretary of Defense from contracting for the functions performed at Crane Army Ammunition Activity or McAllister Army Ammunition Plant; 10 U.S.C. 4532, which requires the Army to have supplies made by factories and arsenals if they can do so economically; and 10 U.S.C. 2305 (a)(1), which specifies that in preparing for the procurement of property or services, the Secretary of Defense shall specify the agency’s needs and solicit bids or proposals in a manner designed to achieve full and open competition. DOD officials have repeatedly recognized the importance of using resources for the highest priority operational and investment needs rather than maintaining unneeded property, facilities, and overhead. However, DOD has found that infrastructure reductions, whether through outsourcing or some other means, are difficult and painful because achieving significant cost savings may require up-front investments, the closure of installations, and the elimination of military and civilian jobs. In addition, according to DOD officials, the military services fear that savings achieved from outsourcing would be diverted to support other DOD requirements and may not be available to the outsourcing organization to fund service needs. DSB recognized DOD’s cultural resistance to outsourcing logistics activities and said that overcoming resistance may take some time. DOD has a tradition of remarkable military achievement but it also has an entrenched culture that resists dramatic changes from well-established patterns of behavior. In 1992, we reported that academic experts and business executives generally agreed that a culture change is a long-term effort that takes at least 5 to 10 years to complete. Although a change in DOD’s management culture is underway, continual support of its top managers is critical to successful completion of cultural change. We agree with DSB that there are many opportunities for significant reductions in logistics infrastructure costs. However, the Board’s projected savings are overly optimistic. Further, savings opportunities from consolidating and reengineering must be considered in addition to outsourcing. Even though the Board recognized that there are impediments to outsourcing, PA&E’s and our analyses show that because of such impediments, not all logistics activities can be outsourced. This is particularly true for the legislative barriers—principally, the legislated workload mix between the public and private sectors. Moreover, PA&E’s and our analyses show estimating errors of about $1 billion for contract administration and inventory reductions and another $1 billion for reliability improvements. These combined adjustments will further reduce the Board’s projected savings by another 30 percent. Notwithstanding the problems with DSB’s estimates, DOD’s effort to reduce costs and achieve savings is extremely important, and we encourage DOD to move forward as quickly as possible to develop a realistic and achievable cost-reduction program. As discussed in our high-risk infrastructure report, breaking down cultural resistance to change, overcoming service parochialism, and setting forth a clear framework for a reduced defense infrastructure are key to effectively implementing savings. To aid in achieving the most savings possible, we recommend that the Secretary of Defense require the development of a detailed implementation plan for improving the efficiency and effectiveness of DOD’s logistics infrastructure, including reengineering, consolidating, outsourcing logistics activities where appropriate, and reducing excess infrastructure. We recommend that the plan establish time frames for identifying and evaluating alternative support options and implementing the most cost-effective solutions and identify required resources, including personnel and funding, for accomplishing the cost-reduction initiatives. We also recommend that DOD present the plan to Congress in much the same way it presented its force structure reductions in the Base Force Plan and the bottom-up review. This would provide Congress a basis to oversee DOD’s plan and would allow the affected parties to see what is going to happen and when. In commenting on a draft of this report (see app. II), DOD said that DSB had considered legal barriers to outsourcing and had expressly sought to identify the savings that could result if they were lifted. As noted in the report, we believe it is unlikely that the legal barriers cited would be lifted within the time frame DSB envisioned. DOD said that actions consistent with our recommendation were underway and there was no need for the recommended plan. Specifically, DOD said that the Secretary of Defense was preparing a more detailed plan for implementing the strategy formulated by QDR. Subsequently, on November 12, 1997, the Secretary of Defense announced the publication of the Defense Reform Initiative Report. This report contained the results of the task force on defense reform established as a result of QDR. The task force, which was charged with identifying ways to improve DOD’s organization and procedures, defined a series of initiatives in four major areas: reengineering, by adopting modern business practices to achieve world-class standards of performance; consolidating, by streamlining organizations to remove redundancy and competing, by applying market mechanisms to improve quality, reduce costs, and respond to customer needs; and eliminating infrastructure, by reducing excess support structure to free resources and focus on competencies. This report is a step in the right direction and sets forth certain strategic goals and direction. However, the intent of our recommendation was that a detailed implementation plan be developed, and we have modified our final recommendations accordingly. Our scope and methodology are provided in appendix I. We are sending copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director of the Office of Management and Budget; and interested congressional committees. Copies will be made available to others upon request. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report were James Wiggins, Julia Denman, Hilary Sullivan, and Jeffrey Knott. John Brosnan from our Office of General Counsel provided the legal review. The scope of our review was limited to reviewing the Defense Science Board’s (DSB) projected $6 billion annual savings for the continental United States (CONUS) logistics. To determine the basis of DSB’s savings estimate and recommendations, we reviewed the two DSB reports that made savings estimates based on outsourcing: Report of the Defense Science Board Task Force on Outsourcing and Privatization, August 28, 1996, and Report of the Defense Science Board 1996 Summer Study on Achieving an Innovative Support Structure for 21st Century Military Superiority: Higher Performance at Lower Costs, November 1996. We discussed the assumptions with task force members and reviewed supporting data that was available to us. We requested DSB task force minutes pertaining to these studies; however, we did not receive them in time to include them in our review. We reviewed the Center for Naval Analyses (CNA) studies of public-private competitions cited by DSB as well as CNA’s more recent studies and discussed those studies with CNA officials. A CNA official said that CNA analysts performed limited testing of the computer-generated data they had used in analyzing the results from the commercial activity competitions. He said that the data was reasonably accurate for the purposes of their studies. We did not independently verify the data used in CNA’s studies because we did not rely solely on CNA’s studies for our conclusions. To further evaluate DSB’s savings estimates and recommendations we (1) reviewed Program Analysis and Evaluation’s (PA&E) analysis and discussed that analysis and conclusions with PA&E officials and (2) reviewed the Logistics Management Institute’s (LMI) study, Using Technology to Reduce Cost of Ownership, Volume 1: Annotated Briefing (LG404RD4, April 1996), and discussed the studies’ assumptions and conclusions with LMI officials. In addition, we reviewed our past reports and testimony on depot maintenance, public-private competitions, and infrastructure reductions. To determine other infrastructure savings opportunities for the Department of Defense (DOD), we relied on our past reports and testimony on commercial “best practices,” public-private competitions, and depot maintenance. In addition, we also drew on ongoing work on outsourcing practices within the private sector. We performed our review at the following locations: Logistics Management Institute, Arlington, Va.; DOD’s Office of Maintenance Policy, Office of Program Analysis and Evaluation; and the Defense Science Board, Washington, D.C. We also had discussions with officials from the Center for Naval Analyses, Alexandria, Va. We conducted our review in July and August 1997, and, except where noted, in accordance with generally accepted government auditing standards. Air Force Depot Maintenance: Information on the Cost Effectiveness of B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997). Navy Depot Maintenance: Privatizing the Louisville Operations in Place Is Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997). Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997). Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18, 1997) and (GAO/T/NSIAD-112, Apr. 10, 1997). Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997). Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses (GAO/AIMD/NSIAD-97-74, Mar. 14, 1997). High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997). Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996). Army Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996). Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place the Louisville, Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996). Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996). Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996). Defense Depot Maintenance: More Comprehensive and Consistent Workload Data Needed for Decisionmakers (GAO/NSIAD-96-166, May 21, 1996). Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/T-NSIAD-96-148, Apr. 17, 1996). Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). Depot Maintenance: Opportunities to Privatize Repair of Military Engines (GAO/NSIAD-96-33, Mar. 5, 1996). Closing Maintenance Depots: Savings, Personnel, and Workload Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996). Navy Maintenance: Assessment of the Public-Private Competition Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan. 22, 1996). Depot Maintenance: The Navy’s Decision to Stop F/A-18 Repairs at Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995). Military Bases: Case Studies on Selected Bases Closed in 1988 and 1991 (GAO/NSIAD-95-139, Aug. 15, 1995). Military Base Closure: Analysis of DOD’s Process and Recommendations for 1995 (GAO/T-NSIAD-95-132, Apr. 17, 1995). Military Bases: Analysis of DOD’s 1995 Process and Recommendations for Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995). Aerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994). Navy Maintenance: Assessment of the Public and Private Shipyard Competition Program (GAO/NSIAD-94-184, May 25, 1994). Depot Maintenance: Issues in Allocating Workload Between the Public and Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994). Depot Maintenance (GAO/NSIAD-93-292R, Sept. 30, 1993). Depot Maintenance: Issues in Management and Restructuring to Support a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993). Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb. 25, 1993). Defense Force Management: Challenges Facing DOD as It Continues to Downsize Its Civilian Workforce (GAO/NSIAD-93-123, Feb. 12, 1993). Navy Maintenance: Public-Private Competition for F-14 Aircraft Maintenance (GAO/NSIAD-92-143, May 20, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the basis for the Defense Science Board's (DSB) estimate that the Department of Defense (DOD) could potentially save $6 billion annually by reducing its logistics infrastructure costs within the continental United States, focusing on: (1) the opportunities for logistics infrastructure savings; and (2) DOD's and GAO's analyses of the DSB's projected logistics infrastructure savings. GAO noted that: (1) GAO agrees with the DSB that DOD can reduce the costs of its logistics activities through outsourcing and other initiatives; (2) DOD has already achieved over $700 million in savings from the use of a prime vendor program and other inventory-related reduction efforts for defense medical supplies; (3) according to studies by the Center for Naval Analyses, competition for work, including competition between the public sector and the private sector--regardless of which one wins--can result in cost savings; (4) many private-sector firms have successfully used outsourcing to reduce their costs of operations; (5) the DOD Program Analysis and Evaluation (PA&E) directorate's analysis shows, however, that the DSB's estimated annual savings of $6 billion is overstated by about $4 billion because of errors in estimates, overly optimistic savings assumptions, and legal and cultural impediments; (6) according to PA&E's analysis, this $4 billion includes: (a) $1 billion in overstated contract administration and oversight savings and one-time inventory savings; and (b) $3 billion in savings that would be unlikely or would be difficult to achieve within the Board's 6-year time frame, given certain legislative requirements and DOD's resistance to outsourcing all logistics functions; (7) GAO's analysis confirmed PA&E's conclusion that the Board's estimated savings were overstated; (8) GAO's analysis also raised questions about the Board's projected savings, but GAO does not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable; (9) GAO questioned whether DOD would achieve a 25-percent savings from outsourcing, as the Board assumed, because the savings were based primarily on studies of public-private competitions in highly competitive private-sector markets; (10) however, competitive markets may not exist in some areas; (11) notwithstanding GAO's concerns about the magnitude of savings, DOD can make significant reductions in logistics costs; (12) the Secretary of Defense recently issued a strategic plan for achieving such reductions; (13) this report is a step in the right direction; and (14) DOD now needs an implementation plan based on a realistic assessment of the savings potential of various cost-reduction alternatives and the time frames for accomplishing various activities required to identify and implement the most cost-effective solutions.

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Beginning in 1993, both Congress and the administration agreed that federal employment levels should be cut as a means of reducing federal costs and controlling deficits. Through a series of executive orders and legislation, goals were established for reducing federal staffing levels. Two driving forces in the reductions were the Federal Workforce Restructuring Act of 1994 and the National Performance Review. The act, passed in March 1994, mandated governmentwide reductions of 272,900 FTE positions through fiscal year 1999. The National Performance Review, the administration’s major management reform initiative, recommended that any reductions be accomplished through agency efforts to streamline operations, reduce management control and headquarters positions, and improve government operations through reinvention and quality management techniques. In addition to reducing their workforces and streamlining their operations, agencies are required to measure their performance. The Government Performance and Results Act of 1993 requires agencies to (1) develop strategic plans covering a period of at least 5 years and submit the first of these plans to Congress and OMB by the end of fiscal year 1997, (2) develop and submit annual performance plans to OMB and Congress beginning for fiscal year 1999 containing the agencies’ annual performance goals and the measures they will use to gauge progress toward achieving the goals, and (3) submit annual reports on program performance for the previous fiscal year to Congress and the President beginning with fiscal year 2000. In addition, the Results Act established requirements for pilot projects so that participating agencies could gain experience in using key provisions of the Results Act and provide lessons for other agencies as well. Over 70 federal organizations, including GSA, HUD, and OPM, participated in the pilot projects for performance planning and reporting. Between fiscal years 1993 and 1996, when the federal civilian workforce was cut by about 12 percent, the workforces of certain agencies were reduced by larger percentages. These included cuts of 14 percent at HUD, 13 percent at DOI, 22 percent at GSA, 13 percent at NASA, and 42 percent at OPM. To determine which components within HUD, DOI, GSA, NASA, and OPM were downsized and to what extent, we examined agency FTE data for fiscal years 1993 through 1996. These data were organized by component. To address our remaining objectives, we selected one component from each agency, primarily on the basis of the percentage it downsized; however, we also considered such factors as public interest, the effects of downsizing on safety, and privatization of agency functions as selection criteria. We selected HUD’s Office of Housing and GSA’s PBS because, on a percentage basis, they accounted for the largest portion of their parent agencies’ staffing reductions. We selected DOI’s BOR because it was one of the most heavily downsized of DOI’s components, and within BOR, we focused on the Denver Reclamation Service Center because of its central role in BOR operations. Within NASA, the Human Space Flight Program experienced the greatest percentage of downsizing, and from the program’s centers, we focused on KSC because of its high profile as the space shuttle launch and recovery site and because of public concerns that had been expressed about shuttle safety. We selected OPM’s Investigations Service because many of its functions had been privatized. To determine what actions were taken to maintain performance in the selected components as a result of downsizing, the results of these actions on performance, the effects of downsizing on customer satisfaction, and lessons learned, we interviewed officials from the parent agencies, components, unions, and employee associations. We also interviewed a small number of randomly selected BOR and KSC employees who were not represented by unions to obtain their views on agency performance during downsizing. We reviewed streamlining, performance, and customer service plans; where available, we examined performance and customer satisfaction measurement data. We did not evaluate the performance or customer satisfaction measures used by the components or verify their performance measurement or customer satisfaction scores. Because of limited customer satisfaction data at the Office of Housing, BOR, and the Investigations Service, we interviewed a small number of randomly selected customers to determine their satisfaction with performance during downsizing. The lessons learned by components reflect the judgment of component officials. We did not independently assess how well these lessons were followed during components’ actual downsizing experiences. The results of our work are limited to the components reviewed and cannot be projected to the entire agency or governmentwide. Our work was performed at the headquarters of the parent agencies and components in Washington, D.C.; at the KSC in Florida; and at BOR’s Reclamation Service Center in Denver, CO. We also interviewed BOR employees, KSC employees, HUD customers, BOR customers, and OPM customers in various locations throughout the United States. We performed our work between October 1996 and November 1997 in accordance with generally accepted government auditing standards. We asked HUD, DOI, GSA, NASA, and OPM to provide comments on a draft of this report. The comments provided are discussed at the end of this letter. Nearly all organizational components in each agency were affected, some more than others. The downsizing of components at the five parent agencies we reviewed ranged from around 2 percent to 100 percent. In addition, the effect of each component’s downsizing on the parent agency’s total reductions varied. For example, HUD’s Office of Housing’s FTE reductions between fiscal years 1993 and 1996 were 52 percent of HUD’s total reductions, while BOR’s FTE reductions were 15 percent of DOI’s total reductions for the period. The extent of agency downsizing by selected organizational component is shown in table 1. Although officials told us it was difficult to isolate actions that agencies and their components took to maintain performance independently of downsizing from those taken because of downsizing, the actions they said were taken to maintain performance amid downsizing fell into three categories: refocusing their missions, reengineering their work processes, and taking steps to build and maintain employee skills. Detailed information on each component is provided in appendixes I through V. The National Performance Review, budget reductions, and workforce reductions generally have led federal agencies to rethink how they operate and work to reinvent themselves to become more efficient organizations. According to component officials, most of the five components, under the guidance of their parent agencies, refocused their missions primarily to increase their efficiency. For example, BOR changed its emphasis from water project construction to water resources management because of the increased demand on limited water resources and cutbacks in federal spending. NASA’s Human Space Flight program shifted its focus and scarce resources from operations—which it believed could be conducted more efficiently by private vendors—to its primary mission, research and development. OPM created US Investigations Services (USIS), Inc., to do the background investigations work OPM’s Investigations Service previously provided to other agencies. In addition to refocusing missions, components reengineered their work processes to improve effectiveness and/or efficiency. Changes to work processes included consolidating functions into fewer locations, aligning operations more closely with private sector business practices, modernizing data processing systems, placing increased decisionmaking authority in field offices, and increasing reliance on contractors. HUD’s Office of Housing, for example, consolidated single family housing activities from 17 field offices into 1 homeownership center, which officials said helped reduce processing times. The Office plans further consolidations by the year 2000. KSC changed from its traditional contractor oversight role to one of “insight.” Under oversight, KSC directly oversaw contractors on a continual basis, but under insight, KSC will directly oversee contractor processes on a periodic basis. Another component, OPM’s Investigations Service, privatized its investigations operations through the establishment of a private corporation owned by former Investigations Services employees under an Employee Stock Ownership Plan. An Investigations Service official said that USIS completed about 20 percent more investigations in fiscal year 1997 than the Investigations Service did in fiscal year 1996. Along with reengineering their work processes, components generally took steps to help ensure that they had the skilled workforces needed to maintain their performance in a downsized environment. These steps included retraining employees for additional responsibilities and consolidating expertise in fewer locations. For example, according to a PBS official, PBS lacked a workforce suited to its mission; however, it was training its staff to develop a workforce with the necessary skills. BOR officials said that although their workforce had retained the appropriate skills and experience, employees were being retrained and rotated among functions to develop future supervisors and managers. Nevertheless, some officials were concerned about the sufficiency of current or future workforces for some components. In March 1997, the HUD Inspector General (IG) reported that the Office of Housing did not have the staffing levels and skill mixes it needed. The IG also reported staffing shortages in some areas, barriers to effective staff redeployment, and mismatches between skills and needs. The report stated that staff reductions would be compounded as anticipated budget restrictions led to further reductions by the end of fiscal year 2000. The report also said staffing needs continued to be most critical in the multifamily insured portfolio monitoring area and, to a lesser degree, in the multifamily note servicing area. The IG said this prevented the component from placing adequate resources on multifamily loss mitigation functions and properly managing troubled multifamily assets. In October 1997, HUD began implementing its 2020 Management Reform Plan, which included a specific initiative to refocus HUD’s mission and retrain its workforce to perform a wider variety of interdisciplinary tasks. Office of Housing officials reported to us that one expected effect of the HUD 2020 Management Reforms will be that Housing will be able to focus a highly trained staff with adequate automated systems on the multifamily portfolio. Also, because of concern about the safety of the space shuttle as KSC downsized and a new contract for shuttle operations was implemented, NASA’s Aerospace Safety Advisory Panel reviewed issues associated with program safety and management. It found that, overall, efforts to streamline the space shuttle program had not created unacceptable risks, but it was concerned with the long-term loss of critical skills and experience. The panel said these personnel issues were challenging and had the potential to adversely affect risk in the future. Component officials, employee representatives, and employees we spoke with believed that efforts to maintain performance had generally been successful. However, some expressed concern about whether performance could be maintained with additional downsizing. They also largely believed that their customers remained satisfied, a view generally supported by the limited customer survey data available; however, customers we spoke with did not always agree with that assessment. Officials, employee representatives, and employees we spoke with at all five components said that they generally believed performance had been maintained; however, some officials expressed concern about whether performance could be maintained with additional downsizing. Office of Housing officials, for example, believed downsizing had not greatly affected the Office’s performance. Further, they reported to us that they anticipate the component’s performance would not only be maintained but would improve after the additional downsizing called for by HUD’s management reform plan is completed in the year 2000. Office of Housing union representatives had mixed opinions, with one agreeing with the Housing officials that there were few performance problems to date and another believing that performance had been negatively affected. KSC officials said they believed KSC was still able to perform its mission. However, they also said they were concerned about retaining the human resources needed to react to problems, meet unplanned requirements, and sustain work as the workforce continued to decline. Most KSC employees we spoke with supported their management’s view. They said mission performance had been unaffected by downsizing but that it could be affected by future downsizing. We found limited performance measurement baseline or trend data to validate the belief of component officials and employees that performance had been maintained. However, the data that were available showed that the components generally met performance goals they set for themselves. For example, at the time of our review, PBS had been developing performance measures under a Government Performance and Results Act pilot project, and while there were little trend data, the data that existed showed that PBS met or exceeded more than half of the goals it set for itself during downsizing. At KSC, available performance measurement data indicated that KSC had maintained performance during downsizing. The data showed that KSC had maintained its shuttle launch schedule at lower cost and that the number of in-flight problems caused by ground processing had declined. BOR officials were unable to provide any BOR-wide performance measurement data to use in corroborating officials’ views that performance had been maintained. The Results Act requires that agencies collect performance measurement data for managing their programs, and component officials told us they are currently developing these data. Officials, employee representatives, and employees we spoke with at all five components largely believed that their customers remained satisfied even as the organizations took action to maintain their performance during downsizing. This view was generally supported by the limited customer survey data available. However, customers of the Office of Housing and BOR that we spoke with did not always agree. PBS and KSC officials cited customer survey results that supported their positive views of customer satisfaction during downsizing. PBS reported surveys of its buildings’ tenants showed satisfaction increasing from 74 percent to 77 percent between fiscal years 1993 and 1996. KSC reported that its payload customers’ satisfaction remained at about 4.2 on a scale of 1 to 5 with 5 being excellent service, despite downsizing, during fiscal years 1993 through 1996. Because BOR, the Office of Housing, and the Investigations Service had little customer satisfaction data to support their opinions, we interviewed a small number of their customers. We interviewed seven randomly selected BOR customers consisting of six water districts located in rural areas in the western United States and one state agency. One customer was satisfied with BOR’s performance, five were not satisfied, and one reported declining satisfaction. The most common reason cited for dissatisfaction was the view that BOR more often favored the water demands of politically powerful groups at the expense of rural farmers. However, none of the customers we talked to blamed their dissatisfaction on downsizing. Of the five Office of Housing customers we interviewed, three either were not satisfied or had mixed feelings with Housing’s performance. All three said downsizing caused major losses of staff with adequate technical expertise. The two Investigations Service customers we spoke with said there had been no change in their satisfaction level since the Service had privatized. Although officials from the components identified a number of lessons that they said helped them maintain performance during downsizing, most cited two overarching lessons. They believed that open lines of communication between management and employees were a must and that management must solicit employee input into the planning process. NASA officials told us that unions, employee associations, and employees should be involved with developing the agency downsizing implementation strategy. In addition, officials said that (1) people must be treated with compassion and must know they are valued by the agency; (2) there must be no favoritism even though management may be reluctant to let some people leave; (3) buyouts need to be planned to prevent a sudden loss of expertise; and (4) critical skills should be backed up by more than one person so that, if people leave, the agency still has employees with the required skills. We requested comments on a draft of this report from the heads of each of the five agencies or their designees from which we had obtained information. We received written comments from NASA in a letter dated January 22, 1998, from the Acting Deputy Administrator. The Acting Deputy Administrator had no comments on any of the substantive content of the draft report. However, he did suggest one technical change, which we have made in the report. See appendix VI for a reprint of NASA’s letter. We requested comments from the Administrator, GSA, but despite several follow-up inquiries, no comments were received. On January 28 and 29, 1998, we spoke with the GAO Liaisons at OPM, DOI, and HUD, respectively. The OPM GAO Liaison said that OPM had no substantive comments on the draft report. He suggested several technical comments to improve the accuracy or context in the draft report; we made these changes in this report where appropriate. The DOI GAO Liaison had no comments on the draft report. The HUD GAO Liaison told us that except for one statement attributed to Office of Housing officials that the Department cannot support, the agency had no comments on the draft report. Consequently, we deleted the sentence from this report. As arranged with your office, unless you announce the contents of this report earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies to the Ranking Minority Member of the Subcommittee on Civil Service, House Committee on Government Reform and Oversight, and to the Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs. We will also send copies to the Secretaries of HUD and DOI, the Administrators of GSA and NASA, and the Director of OPM. We will make copies available to others on request. The major contributors to this report are listed in appendix VII. If you have any questions about the report, please call me on (202) 512-8676. The Department of Housing and Urban Development (HUD) reduced its workforce by 1,894 FTEs between fiscal years 1993 and 1996. As shown in Table I.1, the Office of Housing accounted for the largest percentage of HUD’s downsizing. Actions taken that helped HUD’s Office of Housing maintain performance during downsizing can be categorized into three general areas: (1) HUD refocused its mission, (2) Office of Housing reengineered its work processes, and (3) Office of Housing took steps to build and maintain employee skills. HUD, according to its streamlining plan, had operated for years without a clear mission, resulting in an inability to mobilize its resources to meet the needs of America’s communities. In a 1996 statement highlighting the agency’s reinvention efforts, the Secretary of HUD stated that HUD’s mission is to help people create communities of opportunities and that the programs and resources of HUD help Americans create cohesive, economically healthy communities. HUD’s Office of Housing has responsibility for (1) underwriting single family, multifamily, property improvement, and manufactured home loans and (2) administering special purpose programs designed specifically for the elderly, the handicapped, and the chronically mentally ill. In addition, the Office of Housing administers assisted-housing programs for low-income families, administers grants to fund resident ownership of multifamily housing properties development, and protects consumers against fraudulent practices of land developers and promoters. In support of its mission, HUD officials said that Office of Housing took or planned a number of actions to help maintain performance during this period of downsizing. Routine, location neutral activities were consolidated into fewer offices. In August 1994, the Office of Housing consolidated single family housing activities from 17 field offices into the Denver Homeownership Center and reported reduced processing times as a result. By 2000, Housing plans to consolidate remaining single family loan processing, quality assurance, marketing and outreach, and asset management activities from its 81 field offices into 4 homeownership centers (including Denver), which officials said should enable them to reduce single family personnel by 50 percent. The multifamily housing program consolidated voucher processing in Kansas City in August 1995, property disposition in Atlanta and Fort Worth in October 1996, and risk-sharing lender activities in Greensboro, NC, in January 1997 to reduce processing time, improve customer service, and use staff resources more efficiently. Multifamily housing officials planned to continue consolidating its 51 hub locations until activities are located in 18 hub locations and 33 additional smaller sites by fiscal year 1998. According to these officials, this will create economies of scale and maximize use of limited resources while still maintaining a local presence. They explained these consolidations were not done specifically because of downsizing, but they were part of an ongoing HUD reinvention effort, which permitted HUD to adjust to a fluctuating workload and maintain performance during downsizing. In addition to the consolidations, the Office of Housing began implementing paperless processing of mortgage record changes, default reporting, and other record changes. Office of Housing officials told us their employees generally had the appropriate skills and experience to maintain performance during this downsizing period. However, in certain instances, the Office of Housing used contractors to supplement shrinking staff and provide technical expertise, such as physical inspections and property disposition rehabilitation reviews. The various consolidations reduced the need to have expertise in all functions in all offices. To augment employee skills, the multifamily housing program implemented work sharing using a “matrix” scheme of 5 teams consisting of 18 to 20 offices each. Under this scheme, offices within a matrix shared work so that, if an office needed help with a function, it could get it from another office in the team. Union officials we spoke with also believed that Office of Housing employees had the skills and experience needed to maintain performance in most but not all locations; however, they warned that the skills would not be available as downsizing continued. Although Office of Housing and union officials believed Housing had the skills and experience necessary to maintain performance, a March 1997 IG’s audit was less optimistic. It found staffing shortages in some areas, barriers to effective staff redeployment, and mismatches between skills and needs. The IG report stated that staff reductions would be compounded as anticipated budget restrictions led to further reductions by the end of fiscal year 2000. The report said staffing needs continued to be most critical in the multifamily insured portfolio monitoring area and, to a lesser degree, in the multifamily note servicing area. Office of Housing officials reported to us that the realignment of functions and responsibilities as outlined in HUD’s 2020 Management Reform Plan, initiated in October 1997, will enable Housing to focus a highly trained staff with adequate automated systems on the multifamily portfolio. The Office of Housing reported that the creation of new methods to deal with its workload, such as the single family homeownership centers and work sharing, had allowed it to maintain, and in some cases, improve performance. Union officials differed on whether downsizing had affected performance. Two union officials thought performance had been negatively affected, while one union official said it had not been because employees took pride in their work and were willing to do what was necessary to get it done. Office of Housing performance measurement goals changed from year to year so there were few trend data, but the available data showed that Housing generally met or exceeded the goals it set for itself during this downsizing period. Trend data for one goal, to close sales on 95 percent of each year’s single family inventory, were available. They showed closed sales were 95 percent of inventory in fiscal year 1994, 109 percent in fiscal year 1995, and 194 percent in fiscal year 1996. Housing officials told us that HUD was developing performance measures in compliance with the Government Performance and Results Act. HUD’s 2020 Management Reform Plan seeks to (1) consolidate most of its recordkeeping and many program activities in selected cities around the country and (2) focus the agency on assessing the quality of the government housing stock, and curtailing waste, fraud, and abuse. As part of this plan, HUD would continue its downsizing efforts. In a November 25, 1997, audit-related memorandum providing for an interim review of HUD’s reform plan, HUD’s IG criticized the plan for setting a downsizing target without first analyzing HUD’s workload and mission. The IG reported that HUD’s staff reductions are resulting in a serious loss of technical expertise leading to concerns about the relative capacity of HUD’s remaining staff to carry out their mission and responsibilities once reforms are in place. HUD officials had not yet responded to the audit-related memorandum at the time we concluded our work. Office of Housing officials, citing feedback from lending institutions and a decreased number of complaints, believed customers were satisfied with their performance. A union official believed that customer satisfaction on the part of the private real estate industry had increased because private companies were asked to do more for themselves, which they applaud, but satisfaction on the part of the public had decreased because downsizing had reduced the opportunities for the public to interact with the Office of Housing. Another union official believed that customers had generally remained satisfied in spite of downsizing because the extra time employees were devoting to their jobs enabled the Office of Housing to continue providing levels of service after downsizing that were comparable to those provided before downsizing. The Office of Housing provided results of two customer satisfaction surveys done during downsizing. A Denver Single Family Processing Center customer survey in 1995 with an 8 percent response rate indicated that the respondents were satisfied. A 1996 survey found moderate satisfaction among lenders and low satisfaction among realtors for the Section 203(k) Rehabilitation Mortgage Insurance Program, and it found high satisfaction among lenders and moderate satisfaction among realtors for the Section 203(b) Mortgage Insurance Program. However, in the absence of any similar surveys prior to downsizing, we could not tell if satisfaction among these customers had increased or decreased during downsizing. Further, the low response rates for the surveys undermine their value as accurate measures of customer satisfaction. In the absence of agency data measuring changes in customer satisfaction during downsizing, we interviewed a small number of Office of Housing customers. The Office of Housing provided customer lists containing 80 customers composed primarily of nonprofit organizations representing industry groups and homeowners. From the 80 customers, we randomly selected 10. We asked them if their satisfaction with the Office of Housing’s performance had changed since 1992 and if their satisfaction had been affected by downsizing. Three of the organizations denied being customers, one could not be contacted, and one did not respond to our questions. Of the remaining five, two were satisfied with the Office of Housing’s performance, but three were either dissatisfied or had mixed feelings. The dissatisfaction all three expressed was due to major losses, at headquarters or field offices, of staff with adequate technical expertise, and all three blamed downsizing. The organizations said these losses made it difficult for the organizations and their constituents to obtain information they needed. One organization described the situation at the Office of Housing as a “brain drain.” Office of Housing officials identified a number of lessons learned they believed helped maintain performance during downsizing. They said agencies should involve employees who will be affected by downsizing in the planning and development of new organizational procedures. They said managers need to “be straight” with employees about what is happening because it makes acceptance easier; tell employees the situation as soon as possible so they can make decisions about their futures; not change direction after the inevitable is accepted because that causes downtime while employees become reoriented; and make every effort to convey to the employees how important they are to the agency’s success and to ensure that the employees feel they are part of a team. Officials also said it is important to develop a cooperative relationship with employee unions. The Department of the Interior (DOI) reduced its workforce by almost 10,200 FTEs between fiscal years 1993 and 1996. Table II.1 shows components with the largest downsizing percentages. Actions taken that helped Bureau of Reclamation (BOR) maintain performance amid downsizing can be categorized into three general areas: BOR (1) refocused its mission, (2) reengineered its work processes, and (3) took steps to build and maintain employee skills. According to the Secretary of the Interior, his agency’s mission is to protect and provide access to the nation’s natural and cultural heritage and to honor its trust responsibilities to tribes. DOI’s internal operating manual states that BOR’s mission is to manage, develop, and protect water and related resources in an environmentally and economically sound manner in the interest of the American public. In fulfilling its mission, BOR designs and constructs water resources projects; develops and enhances recreational uses at BOR projects; conducts research and encourages technology transfer to improve resource management development and protection; assists other federal and state agencies in protecting and restoring surface water and ground water resources from hazardous waste contamination; and provides engineering and technical support to federal and state agencies, Native American tribes, and other nations. Over the past decade, BOR shifted its mission emphasis from water project construction to water resources management, including water conservation, environmental restoration, and solutions to the water problems of Native Americans and urban water suppliers. According to BOR officials, this reemphasis occurred at the same time as downsizing, but not because of downsizing. In October 1994, BOR reengineered its Denver facilities into the Reclamation Service Center to provide administrative, research, scientific, and technical services to BOR, other DOI organizational components, water districts, and others. These services are provided through four major units, specifically, the Administrative Service Center, the Human Resources Office, the Management Services Office, and the Technical Service Center. As part of the restructuring, the Technical Service Center became self-supporting—dependent on client payments for its financing. In addition to establishing the Reclamation Service Center, BOR’s 35 project offices were consolidated into 26 area offices. BOR officials believed that BOR employees had the appropriate skills and experience to maintain performance amid downsizing, although they also believed additional younger people needed to be hired. To develop a cadre of people to be future supervisors and managers, the officials said BOR was rotating people among functions and retraining them. A union official also believed that BOR had the appropriate skills and experience to maintain acceptable performance with the workforce currently on board. Employees we spoke with generally agreed that BOR had the necessary skills, but they were concerned about the future. One employee said that skills were thinly spread, and although the work would get done, its quality might suffer. Another employee said there were skill gaps, and unless BOR was careful, it would not have the skills needed. Some employees also expressed concern that employees were leaving who would have been BOR’s future leaders and that few young people were being hired. BOR headquarters officials believed no performance problems had emerged because of downsizing; however, Reclamation Service Center officials were less positive. While Service Center officials generally agreed performance had not suffered greatly, they also noted that some problems had emerged, particularly in the Service Center’s ability to provide computer support to other BOR units. Service Center officials believed that people were working harder and were tired because of fewer people to carry the same or even an increased workload, and performance may ultimately suffer because stress leads to mistakes. Service Center officials said there had already been incidents such as threats of violence and bizarre behavior brought on by stress. A union official concurred that some performance problems had emerged, particularly the ability to provide all the computer support needed. Employees we spoke with, for the most part, agreed with headquarters officials that downsizing had not yet led to performance problems, although some said downsizing had caused a loss of expertise. We found no BOR-wide performance measurement data to use in corroborating officials’ views that performance had been maintained. The Power Programs’ Power Management Laboratory had identified a number of fiscal year 1994 measures, such as FTEs per operating unit and per megawatt, but there were no data for other fiscal years. A Power Program official said data for other fiscal years were being gathered but would not be available for several months, and consequently there were no data showing performance trends during downsizing. The 1994 data showed that BOR was performing within an acceptable range of the power industry’s standards. At the Reclamation Service Center, an official suggested one performance measure would be whether its Technical Service Center unit broke even each year. The official pointed out that, although the Technical Service Center suffered a deficit of about $180,000 in its first year of operation as a self-supporting activity in fiscal year 1995, it earned a surplus of about $270,000 in its second year even after recovering the previous year’s deficit. BOR officials said the agency was developing performance measures in compliance with the Government Performance and Results Act. BOR officials told us that, based on informal feedback, their customers remained satisfied with their work. One measure of satisfaction cited was that Technical Service Center customers continued to seek and pay for services. Furthermore, an official said, downsizing had benefited customer satisfaction because it forced BOR employees to become more customer-oriented. Employees we spoke with were not unanimous, but most employees felt that customers remained satisfied. One employee echoed management’s statement that downsizing had benefited customer satisfaction because BOR employees had become more customer-oriented and added that having fewer people on projects resulted in more direct communication with customers about routine matters. On the other hand, one employee said BOR had been unable to adequately service two federal agencies and a water district, and another employee said it was hard to provide staff for all of the unit’s projects. A BOR official said there were no agencywide customer satisfaction data; however, BOR was developing an agencywide customer satisfaction survey that it hoped to administer at 3-year intervals. BOR’s Power Program surveyed 942 customers in 1995 and found that 84 percent of the respondents thought BOR was doing a good to excellent job. There were no predownsizing data for comparison, but the Power Program intended to continue seeking customer feedback in the future. In the absence of BOR-wide customer satisfaction data, we interviewed a small number of customers. BOR provided customer lists containing 627 customers. Customers included other federal agencies, international customers, and state agencies, but most of them were water districts located in rural areas in the western United States. From the 627 customers, we randomly selected 10 to survey of which 9 were rural water districts and 1 was a state agency. We asked them if their satisfaction with BOR’s performance had changed since 1992 and if their satisfaction had been affected by downsizing. Two organizations denied being BOR customers, and one did not respond. Of the remaining seven, one was satisfied with BOR’s performance, five were not satisfied, and one reported declining satisfaction. Reasons cited for dissatisfaction included longer turnaround time for decisions, diminished technical support, increased reporting requirements, and higher water fees. However, the most common reason cited for dissatisfaction was customers’ belief that BOR is prone to favor the water demands of politically powerful groups, such as large population centers and environmental groups, at the expense of rural farmers. Four of the dissatisfied customers did not think that downsizing caused their dissatisfaction, and two were not sure. BOR officials identified a number of lessons learned they believed helped maintain performance amid downsizing. First, officials said that agencies should include employees in planning and implementing the downsizing. The officials believed it was impossible to communicate with employees too much, and said to be open and honest with them. If there must be a reduction-in-force, officials said it should be conducted without favoritism even though there are some employees managers may not want to lose. By adhering to this principle, they said only two appeals resulted from BOR’s reduction-in-force, both of which they said were quickly resolved. Officials also stressed the need to plan for buyouts. Although BOR’s first buyout round was open to everyone, by phasing the time when employees left, officials said BOR prevented a sudden loss of expertise. In addition, the officials cited the need to provide training for employees in coping with downsizing, and to also provide them time to talk out troubling issues with their peers. One official said, in addition to rewarding employees, agencies should also hold them accountable for their actions. The official said BOR cannot afford to tolerate poor performers since it has downsized and relies on customer reimbursement for funding. The General Services Administration (GSA) reduced its workforce by 4,535 FTEs between fiscal years 1993 and 1996. As shown in table III.1, the Public Buildings Service (PBS) accounted for the largest percentage of GSA’s downsizing. Actions taken that helped PBS maintain performance during downsizing can be categorized into two general areas: (1) reengineering work processes and (2) PBS taking steps to build and maintain employee skills. According to its fiscal year 1998 budget overview, GSA’s mission is to improve the effectiveness of the federal government by ensuring quality work environments for its employees. To that end, GSA began moving from being a mandatory source of services to being a provider of choice, which must compete with other providers in terms of cost, quality, and timeliness. GSA reported it is increasingly competing effectively for customer purchases of real property services. In support of GSA’s mission, PBS is responsible for the design, construction, management, operation, alteration, and remodeling of space, owned and leased, in which accommodations for government activities are provided, and where authorized, for the acquisition, use, custody, and accountability of GSA real property and related personal property. In addition, PBS has responsibility for providing leadership in the development and maintenance of needed property management information systems for the government. In January 1995, PBS reengineered its work processes to align itself more closely with private sector business practices, allow regional offices to operate more independently, and fill gaps left by downsizing. PBS decentralized property development operations to field offices to allow for increased contact with customers. In July 1996, GSA implemented the “Can’t Beat GSA Leasing” program to reduce delivery times and enhance cost-effectiveness by cutting procedures and offering greater competition and choices to federal agencies. In November 1996, it initiated the “Can’t Beat GSA Space Alterations” program for the procurement of construction services that aim to be better, cheaper, and faster for customers. According to an official, PBS also solicited several national real estate services to identify private sector service providers with which PBS could contract to deliver leasing services to federal agencies. The official said these contracts will allow PBS’ smaller staff to continue to satisfy customers by outsourcing routine transactional details. Further, the official said PBS planned, in fiscal year 1998, to begin transitioning its automated data processing system from multiple applications operating on an antiquated mainframe computer to the use of integrated commercial applications to provide on-line transaction processing, permit data sharing, and support an easy to use query facility. A PBS official said PBS lacked the necessary skills mix suited to today’s mission; however, it was developing the necessary mix, for example, by retraining staff in asset management and empty building space disposal. The official further said that PBS was losing experienced employees, forcing those remaining to assume higher-level responsibilities, but this situation also allowed PBS to train people to replace lost managers by providing opportunities for employees to act in management roles. The official added that PBS would have sufficient staff with the appropriate skills and experience to maintain performance only if its improved automated data processing system is successfully implemented. PBS employee representatives differed in their views about whether PBS had the necessary employee skill mix. Officials of one union believed that PBS did not have the appropriate skill mix and experience to maintain performance, while an official of another union believed the skill mix and experience were sufficient to maintain acceptable performance. An employee association official also believed that PBS currently had a sufficient skill and experience mix and added that GSA had greatly increased employee training. A PBS official said it was not possible to describe the effects of downsizing alone on PBS performance because it occurred concurrently with changes GSA had already planned to make before downsizing was mandated. However, the official said streamlining its operations enabled PBS to maintain its performance, and implementation of the new data processing system planned for fiscal year 1998 will further enhance its ability to maintain performance. In addition, the official said downsizing forced PBS to implement changes faster, and in that respect, downsizing had been healthy. Employee representatives we spoke with disagreed about the effect of downsizing on PBS performance. Officials of one union believed it had been affected because constant change did not allow people to settle in and learn their jobs and because, in his opinion, contractor employees cannot perform the work as well as federal employees. An official of another union believed performance had not been greatly affected because of good planning and preparation by the agency. An employee association official said performance was initially affected because employees were placed in jobs for which they were not qualified, and experienced employees were replaced by temporary workers. The PBS official said GSA did not have good baseline performance measurement data because it had historically done little performance measurement; however, it is now focusing its attention on developing performance measures to meet Results Act requirements. PBS had developed performance measures under a Results Act pilot project, but they had been evolving from year to year, and there were little data showing trends. The data did show, however, that PBS met or exceeded more than half of the pilot project goals it set for itself during fiscal years 1994, 1995, and 1996. PBS surveyed its buildings’ tenants between fiscal years 1993 and 1996, and the results showed an upward trend in satisfaction ranging from 74 percent in fiscal year 1993 to 77 percent in fiscal year 1996. However, because different buildings’ tenants were surveyed in different years, the results did not measure changes in satisfaction of the same tenants. Union officials we spoke with disagreed on the extent of customer satisfaction. One union believed that the customer survey data misrepresented customer satisfaction because of a low response rate; however, another union believed that customer satisfaction was improving. A PBS official said GSA made a mistake in its first round of buyouts by not targeting them. In some areas and occupations, too many employees left, while in others, too few left, causing a mismatch between buyout results and organization needs. GSA had to use the staff who remained as best it could to repair the damage. The official said it was also a mistake for GSA to offer deferred buyouts over an 18-month period. Although deferred buyouts gave GSA more time to adjust to a downsized workforce, according to the official, the motivation of employees who knew they would be leaving was never the same. NASA reduced its workforce by nearly 4,000 FTEs between fiscal years 1993 and 1996. Table IV.1 shows the components with the largest percentage in downsizing. As table IV.1 shows, NASA’s Human Space Flight Program experienced the largest percentage FTE reduction between fiscal years 1993 and 1996. Table IV.2 shows downsizing at Johnson, Kennedy, Marshall, and Stennis space centers, which are part of the Human Space Flight Program. Percent of FY 1993 FTEs reduced (KSC) Actions taken that helped KSC maintain performance can be categorized into three general areas: (1) refocusing its mission (NASA), (2) reengineering its work processes (KSC), and (3) taking steps to build and maintain employee skills (KSC). According to the Administrator of NASA, NASA’s mission encompasses the following: (1) explore, use, and enable the development of space for human enterprise; (2) advance scientific knowledge and understanding of the Earth, the solar system, and the universe; (3) use the environment of space for research; and (4) research, develop, verify, and transfer advanced aeronautics, space, and related technologies. NASA has shifted the focus of its mission from operations to research and development. It has cut back on operations, bought commercial services from the private sector, and focused its efforts on technology development. In carrying out its part of NASA’s refocused mission, KSC designs, constructs, operates, and maintains space vehicle facilities and ground support equipment for launch and recovery operations. It maintains responsibility for prelaunch and launch operations, payload processing for the space shuttle and expendable launch vehicle programs, landing operations for the space shuttle orbiter, and recovery and refurbishment of the reusable solid rocket booster. As NASA refocused on being a high-tech research and development agency, it turned over more of its operations to contractors and in September 1996, it awarded a space flight operations contract to United Space Alliance. This contract consolidated a number of existing contracts under one prime contractor and gave the prime contractor overall responsibility for space shuttle operations, including orbiter vehicles, solid rocket boosters, external fuel tank, flight crew equipment, ground support systems, and integration of payloads. The space shuttle program remained NASA managed; however, according to KSC officials KSC changed from its traditional oversight role to “insight.” Under oversight, KSC maintained continual surveillance over the contractor, telling it not only what to do but how to do it. Under insight, KSC will directly oversee contractor processes only periodically. KSC officials said they will maintain technical visibility through audit, surveillance, assessment of trends, software verification, the flight readiness review process, and independent assessment of problems. KSC officials believed KSC had the workforce needed to carry out its shuttle operations; however, they were concerned about the future. Because KSC programs had lost “centuries” of operating and engineering knowledge, the officials worried about having the appropriate skills mix and experience to maintain performance as downsizing continued. Employees we spoke with generally agreed that KSC’s skill mix and experience remained adequate, but some employees believed that if downsizing continued, skills and experience would become inadequate. To help ensure that KSC would continue to have needed skills, its fiscal year 1997 buyout plan was designed to limit skill loss by limiting the number of buyouts in shuttle processing, safety and mission assurance, and payload processing. Further, some senior executive service positions, for example, shuttle processing and safety and mission assurance program directors, were excluded from buyout eligibility. In addition, KSC officials said they were planning for the succession of managers and other senior people that did leave. KSC instituted individual development plans for future managers and, as part of its senior executive service candidate program, offered programs in management development, project management, and skills training. To prepare for work on the international space station, KSC was cross-utilizing people currently working on the space laboratory program, which was winding down. KSC officials said that KSC was still able to perform its mission. However, they were concerned about retaining the human resources needed to react to problems, to meet unplanned and new requirements, and to sustain the work as the workforce continued to decrease. Most of the employees we spoke with believed downsizing had not yet affected KSC’s performance or shuttle safety. One employee, however, believed downsizing had begun affecting performance and said the quality of safety inspections would decline if personnel were not restored and the workload was not reduced. The employee believed safety of the shuttle program had been affected and cited a wrench left inside a solid rocket booster and water spilled on a maneuver pod as causes for concern. Other employees said, although the work gets done, they were concerned about the effect of further downsizing or overload of remaining employees on performance. Performance measurement data showed KSC maintained its shuttle launch schedule at lower cost during downsizing. In addition, as flight costs decreased, quality increased as measured by the decrease in the number of in-flight problems caused by ground processing. According to KSC surveys, customers remained satisfied with KSC’s performance during downsizing. Payload customers rated KSC’s service on a five-point scale ranging from 1 for poor service to 5 for excellent service. Ratings during downsizing were 4.2 in 1993, 4.3 in 1994, 4.2 in 1995, and 4.2 in 1996. KSC found the apparent leveling off of satisfaction disturbing but attributed it to several factors: (1) during the survey’s early years, KSC concentrated on improving those issues that drew the most frequent customer comments, but subsequently it concentrated on smaller, but important, improvements; (2) inconsistent methods for counting survey results may have skewed the results; and (3) as KSC’s performance improved, customers came to expect even more from it and became more critical in their survey responses. KSC viewed this critical customer feedback as positive because its customers recognized its commitment to improving customer service and became increasingly forthcoming with suggestions for improvements. Employees we spoke with also believed that customers so far remained satisfied with KSC’s performance. As KSC downsized and transitioned to the space flight operations contract negotiated with United Space Alliance, concern grew about the safety of the space shuttle. This led to a review by NASA’s Aerospace Safety Advisory Panel of issues associated with the safe operation and management of the space shuttle program. The panel’s conclusion concurred with NASA officials’ beliefs that shuttle safety had not been adversely affected. The panel found that NASA’s efforts to streamline the space shuttle program had not created unacceptable risks. However, the panel also said there was a clear need for NASA to take steps to ensure the availability of a skilled and experienced civil service workforce in sufficient numbers to meet ongoing safety needs. The panel said these personnel issues were challenging and had the potential to adversely affect risk in the future. The panel said the space flight operations contract appeared to be a comprehensive and workable document espousing safety as paramount throughout. It also said there were minimal adverse safety implications, especially in the short term, largely because the people currently in place were dedicated to making the new scheme work. However, the panel was concerned with the loss of critical skills and experience among NASA personnel over the long term. It said that NASA should not be misled by the apparent initial success of all the transition efforts and that a major test of the new approach would likely be faced after there was significant turnover among incumbents at all levels. KSC officials identified a number of lessons learned that helped maintain performance during downsizing. The officials said agencies should recognize that they are going to have to downsize, be proactive, and not wait for downsizing to happen before acting. They said unions, employee associations, and employees should be involved in developing the agency downsizing implementation strategy. The officials said communication with employees should be open and honest. Communication, the officials said, builds credibility, while silence makes workers think something is going on behind the scenes, and openness helps retain key people by reducing their concerns about their jobs. The officials suggested that agencies should do positive things for employees—for example, hold job fairs, which promote the message that the agency is trying to help them, and offer training courses to help people cope with change. The officials said employee anxiety should be recognized and addressed. They believed that employees should be treated with compassion and should know that they are valued by the agency. Employees should be told the agency does not want them to leave, but if they do leave, respect them for taking actions they feel are in their own best interests. The officials said agencies should back up critical skills so that, if people leave, the agency still has employees with those skills. The Office of Personnel Management (OPM) reduced its workforce by 2,489 FTEs between fiscal years 1993 and 1996. Components experiencing the largest downsizing percentages are shown in table V.1. Although the Investigations Service downsized by 61 percent according to its full fiscal year 1996 usage, the OPM GAO Liaison noted that if the Investigations Service downsizing was measured using the FTE complement at the close of fiscal year 1996, a reduction of 96 percent occurred from the fiscal year 1993 level. The privatization of Investigations occurred in the last quarter of fiscal year 1996, which dramatically lowered the end-of-year staffing level. Actions taken that helped OPM’s Investigations Service maintain performance during downsizing can be categorized into two general areas. The Investigations Service (1) refocused its mission, and (2) reengineered its work processes. Among other things, OPM’s mission includes supporting agencies in merit-based examining and hiring. OPM oversees the merit principles and hiring and retention procedures used by agencies to select applicants for competitive positions in the federal service at general schedule grades and for federal wage system positions. Personnel background investigations are used in support of the selection and appointment process. The Office of Investigations formerly performed these background investigations of federal employees, contractors, and applicants to provide a basis for determining an individual’s suitability for federal employment and whether an individual should be granted clearance for access to national security information. Investigation Service officials said they began downsizing the Investigations Service in 1993 by offering buyouts to employees. In May 1994 the Investigations Service laid off approximately 440 (of about 1,440) employees. As a result of continuing downsizing and reinvention of government initiatives, the investigations function was privatized in 1996 through the establishment of a private corporation known as the US Investigations Service, Inc. (USIS). USIS’ workforce, with the exception of people with specialized skills, primarily marketing, finance, and human resources, was drawn from OPM’s Investigations Service staff. At the time the Investigations Service was privatized, approximately 90 percent of those who worked in the office and received reduction-in-force notices accepted USIS job offers at the same salary, and with comparable benefits. The other 10 percent either stayed as part of OPM’s Investigations Service, transferred to another agency, or retired. With a total staff of about 40 individuals, OPM’s Investigations Service currently limits its functions to policy, agency oversight, contract management, processing of Freedom of Information and Privacy Act requests, adjudicating cases, and the making of suitability determinations. The Investigations Service reengineered its work processes, which enabled it to maintain performance during downsizing. No longer designed to do background investigations, the Investigations Service oversees the government’s contract with USIS. Officials told us that the creation of USIS, an employee-owned firm (owned by former federal civil servants) and the subsequent award of a 3-year contract to USIS to conduct federal background investigations, resulted in a seamless transition for OPM’s former federal customers. An Investigations Service official said performance was maintained or improved even as investigations were privatized. The official said that USIS completed about 20 percent more investigations in fiscal year 1997 than the Investigations Service did in fiscal year 1996, and also maintained the Service’s timeliness record. In addition, the official said there had been no decrease in the quality of cases processed by USIS. A May 1997 USIS employee survey showed that 85 percent of the respondents recognized the importance of quality, and 80 percent believed that USIS puts the customer’s needs first. Investigations Service officials believed that USIS’ customers were satisfied with its investigations; however, we found no customer satisfaction survey data to support this position. Two customers we spoke with said there had been no change in their respective satisfaction levels since prior to privatization. An OPM employee association official said there was no indication that customers were dissatisfied. An OPM union representative said that the union wanted to be more proactive and discuss the downsizing and possible impacts with OPM management early on, but that initial communications between management, employees, and union representatives were not very good. An Investigations Service official identified open communication as a lesson learned during the Investigation Service’s downsizing and ensuing privatization. The official said there was no such thing as too much communication, and there should be open lines of communication whereby information can be passed in all directions. The official added that agencies and components should realize they will not be able to do everything and should concentrate on their most critical areas and functions. They should listen to their customers and ensure that their satisfaction is taken into account before making major decisions. Robert P. Pickering, Evaluator-in-Charge Robert W. Stewart, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development (HUD), the Department of the Interior, the General Services Administration (GSA), the National Aeronautics and Space Administration (NASA), and the Office of Personnel Management (OPM) to obtain information on the effects downsizing has had on their performance and what actions were taken to maintain performance, focusing on: (1) which components within the five agencies were downsized and to what extent; (2) what actions were taken to maintain performance for one selected downsized component at each parent agency, the results of those actions on the component's performance, and the effect of the downsizing on customer service; and (3) the lessons that the five components learned about maintaining performance during a period of downsizing. GAO noted that: (1) most components within the five parent agencies were downsized to some extent, although how much varied considerably; (2) the percentage of agency components' full-time equivalent reductions from fiscal year (FY) 1993 through 1996 ranged from 3 percent to 100 percent at HUD, 2 percent to 87.5 percent at Interior, 10 percent to 37 percent at GSA, 3 percent to 42 percent at NASA, and 2 percent to 100 percent at OPM; (3) according to officials of the parent agencies and the five selected components, several actions helped the components maintain performance levels during the period of downsizing; (4) they explained that it was difficult to isolate actions taken independently of downsizing from those taken because of downsizing; (5) however, the actions the officials told GAO about generally fell into three categories: (a) refocusing of missions; (b) reengineering of work processes; and (c) building and maintaining employee skills; (6) the officials stated that the five components were generally able to maintain performance and fulfill the requirements of their missions despite the relatively large downsizing that occurred from FY 1993 to FY 1996; (7) although the officials stated that they could not connect specific actions taken with specific outcomes, they stated that without the three actions mentioned, the performance levels of the components would not have been maintained; (8) officials at some components stated that additional downsizing could hamper future performance; (9) it should be noted that GAO's results primarily reflect the viewpoints of officials from the agencies and components and are a snapshot at the time of its review; (10) performance measurement data, particularly baseline data with which current data could be compared, that would support agency officials' views or enable policymakers to track program performance and make informed decisions were limited; (11) the data that were available tended to substantiate the views of component officials that they were meeting goals they had set for themselves; (12) according to component officials and employees or their representatives at the five components, customers remained satisfied with the components' performance during the period of downsizing; and (13) among the lessons learned, officials stated that the most important was the need for early planning and open communication with employees.

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IRS designed NRP to obtain new information about taxpayers’ compliance with the tax laws. While IRS is using NRP to measure voluntary filing, reporting, and payment compliance, the majority of NRP efforts are devoted to obtaining accurate voluntary reporting compliance data. In measuring reporting compliance, IRS’s two primary goals are to obtain accurate information but minimize the burden on the approximately 47,000 taxpayers with returns in the NRP sample. IRS plans to use NRP data to update return selection formulas, allow IRS to design prefiling programs that will help taxpayers comply with the tax law, and permit IRS to focus its limited resources on the most significant areas of noncompliance. NRP’s reporting compliance study consists of three major processes: (1) casebuilding—creating information files on returns selected for the NRP sample, (2) classification—using that information to classify the returns according to what, if any, items on the returns cannot be verified without additional information from the taxpayers, and (3) taxpayer audits limited to those items that cannot be independently verified. We reported in June 2002 that NRP’s design, if implemented as planned, is likely to yield the sort of detailed information that IRS needs to measure overall compliance, develop formulas to select likely noncompliant returns for audit, and identify compliance problems for the agency to address. Figure 1 shows NRP’s main elements. IRS designed the casebuilding process to bring together available data to allow the agency to establish the accuracy of information reported by taxpayers on their returns. For each taxpayer with a return in the NRP sample, IRS is compiling internal information, such as past years’ returns and information reported to IRS by third parties, such as employers and banks, and information from outside databases, such as property listings, address listings, and stock sale price data. Classification is where IRS uses the casebuilding information to determine whether an NRP audit is necessary and which items need to be verified through an audit. Classifiers place NRP returns into one of four categories: (1) accepted as filed, (2) accepted with adjustments, (3) correspondence audit, and (4) face-to-face audit. If the casebuilding material allows IRS to verify all of the information that a taxpayer reported on his or her tax return, then the taxpayer will not be contacted and the return will be classified as accepted as filed. On returns where minor adjustments are necessary, the adjustments will be recorded for research purposes, but the taxpayers will not be contacted. These returns will be classified as accepted with adjustments. NRP returns that have one or two items from a specified list requiring examination will be classified for correspondence audits. All other NRP returns for which the casebuilding material does not enable IRS to independently verify the information reported on the returns will be classified for face-to-face audits. NRP audits will take place either through correspondence with the taxpayers or through face-to-face audits. When classifiers determine that an NRP return will be sent for a correspondence audit, IRS will request that the taxpayer send documentation verifying the line items in question. To ensure accurate and consistent data collection, NRP audits will address all issues identified by classifiers and will not be focused only on substantial issues or cases for which there is a reasonable likelihood of collecting unpaid taxes, according to IRS officials. NRP auditors also may expand the scope of the audits to cover items that were not classified initially. IRS plans to conduct detailed, line-by-line audits on 1,683 of the approximately 47,000 returns in the NRP sample in order to assess the accuracy of NRP classification and, if necessary, to adjust NRP results—a process called calibration. One-third of the returns in the calibration sample will be returns that were classified accepted as filed (either with or without adjustments), one-third from those classified for correspondence audits, and one-third from those classified for face-to-face audits. None of the taxpayers with returns in the calibration sample will have been audited or otherwise contacted by IRS prior to the start of these line-by-line audits. To describe IRS’s implementation of NRP, we have conducted frequent meetings with officials in IRS’s NRP Office and other IRS officials as they have implemented the program. We reviewed NRP training materials and observed NRP classifier, correspondence examination, and field examination training sessions. We also observed NRP process tests and conducted site visits to IRS area offices in Baltimore, Maryland; Brooklyn, New York; Oakland, California; Philadelphia, Pennsylvania; and St. Paul, Minnesota, in order to observe and review NRP classification in field offices. We considered whether NRP is being implemented in accordance with its design. In our report issued on June 27, 2002, we found that NRP’s design, if implemented as planned, is likely to provide IRS with the type of information it needs to ensure overall compliance, update workload selection formulas, and discover other compliance problems that the agency needs to address. For this review, we also considered whether IRS was maintaining a focus on meeting NRP’s objectives of obtaining quality research results while, at the same time, minimizing taxpayer burden. This assessment was also based on IRS’s NRP implementation plans. As of the completion of our work, IRS had a significant amount of NRP implementation to carry out. Our evaluation of IRS’s efforts to implement NRP, therefore, only provides an assessment of efforts that have taken place through the time of our work. Additionally, we did not attempt to assess IRS’s efforts to measure filing compliance and payment compliance through NRP. Our evaluation focuses only on IRS’s efforts to obtain voluntary reporting compliance information. A more detailed description of NRP can also be found in our 2002 report. We conducted our work from September 2002 through April 2003 in accordance with generally accepted government auditing standards. In addition to the two tests described in our prior report on NRP, IRS conducted two more tests of NRP processes prior to implementing the program. IRS tested the casebuilding and classification processes in an NRP simulation in July 2002, and conducted another classification process test during the initial classification training session in September 2002. IRS used the preliminary results of both of these tests to estimate NRP classification outcomes and to evaluate the effectiveness of NRP training. As we recommended in our June 2002 report, IRS substantially completed this testing prior to full NRP implementation, though final reports from the tests were not completed until later. In July 2002, IRS used draft NRP training materials to train 16 auditors from IRS field offices in the use of NRP casebuilding materials to carry out the NRP classification process. The newly trained classifiers then classified 506 tax year 2000 returns. NRP staff members reviewed the classifiers’ results and found that, overall, the results of this NRP simulation were positive. They found that the classifiers understood the NRP approach to classification but that there were instances where the classifiers overlooked some of the issues indicated by the casebuilding materials or made other errors. In September 2002, IRS conducted another test of the NRP classification process immediately following the initial training session using final classification training materials. As we recommended in our June 2002 report, IRS had NRP classifiers classify previously audited tax returns in order to compare classifiers’ results with the results of actual audits. Twenty-two newly trained classifiers classified 44 previously audited returns, with each return classified by 5 different classifiers. All of the earlier audits resulted in some changes. NRP staff members then compared the classifiers’ results with those of the other classifiers and with the results of the earlier audits. NRP officials reported that the test showed that about three-fourths of the time the trained NRP classifiers were able to identify issues where noncompliance was found through an audit. IRS used preliminary results of these tests to identify and implement improvements to NRP. For example, NRP staff members noticed early in the course of the second test that NRP classifiers were failing to classify some line items in accordance with NRP guidelines. Trainers reiterated the importance of following the classification guidelines for these items. NRP staff members also saw that the format of the form that classifiers were to use to record their classification decisions made it easy to make mistakes. They revised the form to make decision recording less error-prone. IRS also used these tests to identify the need for more stringent classification review guidelines than initially planned in order to ensure that classifiers understand and follow the classification guidelines. IRS did not finish analysis and documentation of the NRP simulation and assessment and the classification process test until after the beginning of classification in IRS area offices. NRP classification began at IRS area offices during November 2002, but IRS did not finalize its report on the July 2002 NRP simulation until December 2002, and the report on the September 2002 NRP process test was finalized in December 2002. According to NRP officials, this did not create problems because they made changes to NRP processes and training materials before the reports of these tests were final. Though the final reports were not completed until later, these tests and the NRP modifications they generated were complete before full implementation of NRP. IRS identified and trained staff to complete NRP classification and audits. IRS selected NRP classifiers and auditors from field offices across the country to handle NRP cases along with the non-NRP enforcement cases and carried out plans for special training of the staff members tasked with NRP responsibilities. IRS delayed the delivery of computer software training to managers and clerks involved in NRP audits due to technical problems with NRP software. This initially delayed the start of NRP audits, but the training is now complete. The timing of NRP staff selection and training fit the conclusion and recommendation in our June 2002 report that IRS should make sure that these key steps are carried out in the appropriate sequence and not rushed to meet an earlier, self-imposed deadline. IRS selected over 3,000 auditors to handle NRP cases. Most of these auditors are assigned to the Small Business/Self Employed operating division. IRS selected 138 Small Business/Self Employed auditors to be NRP classifiers and about 3,500 to handle NRP face-to-face audits. According to NRP staff members, IRS offices across the country now have one or more auditors trained to handle the NRP cases that come to those offices. IRS area office managers determined how many auditors should receive NRP training based on the projected distribution of NRP returns to their areas. Unlike face-to-face audits, NRP correspondence audits are being handled out of a single office. IRS selected two groups of correspondence auditors—26 correspondence auditors—from the Wage and Investment operating division’s Kansas City office to handle NRP correspondence audits. IRS originally planned to select a cadre of auditors to work only on NRP face-to-face audits. According to NRP officials, the geographic distribution of NRP returns would have made it difficult to have a cadre of auditors dedicated entirely to NRP examinations because they would have had to travel extensively to carry out NRP audits. IRS officials said that even though they did not implement the plan for a dedicated cadre of NRP auditors, the number of full-time equivalent employees needed for NRP— about 1,000 in fiscal year 2003—has not changed. In September 2002, IRS trained 138 auditors to perform NRP classification. The classifiers learned how to apply the guidelines for NRP classification and were shown how to use NRP casebuilding materials. Instructors stressed the concept of “when in doubt, classify the item” meaning that, unless the casebuilding materials explicitly verify the line item in question, the classifier should classify the item as needing to be verified through an audit. Instructors explained that with a random sample such as in NRP, every return represents many others so even small oversights on the part of classifiers or auditors can have a substantial impact on data quality. After the classification training, the classifiers remained at the training location and began classifying NRP returns. Specially trained classification reviewers reviewed most of the classified cases and provided rapid feedback to the newly trained NRP classifiers. The intent of this was to ensure that NRP classifiers understood and consistently applied the NRP classification guidelines and received any needed retraining before returning to their respective field offices and participating in future NRP classification sessions. IRS delivered NRP correspondence and face-to-face auditor training during late 2002 and early 2003. Instructors provided an overview of NRP goals and objectives, reviewed the casebuilding materials that auditors would have at their disposal, and explained the guidelines for NRP audits. IRS trained about 3,500 auditors to conduct NRP face-to-face audits. This training took place in IRS field offices across the country from October 2002 through February 2003. Each face-to-face NRP audit training session lasted 3 days. The training consisted of an overview of NRP goals and objectives, an explanation of how NRP audits differ from traditional enforcement audits, and a description of how to apply NRP guidelines during NRP audits. Trainers stressed that, for the purposes of consistent and accurate data collection, NRP auditors should not focus solely on significant issues or take into consideration the likelihood of collecting unpaid taxes when conducting NRP audits, but should make sure that every item identified by the classifier is carefully verified in the course of the audit. Correspondence auditor training was similarly focused, and the 1-day training took place in September 2002. Staff members were trained before they began to carry out NRP tasks. IRS needed to provide training to NRP auditors and to IRS managers and clerks with NRP responsibilities in order for staff members to understand how to use the computer program IRS developed to capture NRP information. Because of some problems IRS encountered in installing the NRP software in offices across the agency, IRS had to delay training some clerks and managers. This led to delays in starting some NRP audits because managers were unable to assign NRP cases to auditors and clerks were unable to assist in loading NRP cases on NRP auditors’ laptop computers. IRS resolved these problems and finished delivering the majority of this training by the end of January 2003. IRS is nearly finished creating NRP casebuilding files, has classified nearly three-fourths of the NRP returns, and has begun conducting NRP audits. As of the end of March 2003, IRS completed NRP casebuilding for about 94 percent of the approximately 47,000 returns in the NRP sample and about 73 percent of NRP returns have been classified. Also, for 3,651 NRP cases, IRS completed all necessary audit work. Some of these are cases where correspondence or face-to-face audits are finished, but most of the NRP cases closed so far—2,709—are those that did not require audits. Cases involving audits take longer to complete, so few have been closed thus far. IRS made substantial progress in casebuilding and classification starting in 2002, and the number of cases assigned to NRP auditors has been increasing quickly since January 2003. Figure 2 shows the progress IRS has made in casebuilding, classifying, and closing cases. The number of completed NRP casebuilding files began to grow during the second half of 2002, as shown in figure 3. As figure 3 also illustrates, NRP classification began in September 2002. These were the cases classified during sessions held immediately after classifier training. Over 9,000 NRP returns were classified by the end of October 2002. After these sessions, classification became an area office function, with some offices scheduling weeklong classification sessions on a somewhat regular basis and others classifying returns as they come into the office. IRS began conducting some NRP audits during November 2002, though these audits began in earnest during the first quarter of 2003. By the end of January 2003, IRS had assigned over 4,600 NRP cases to auditors to begin conducting face-to-face and correspondence audits. By the end of March 2003, about 18,000 taxpayers had been contacted regarding NRP audits. IRS recognizes the need for accurate NRP data and, as planned, has built into the program several measures to ensure the quality of NRP results. IRS designed the NRP classification process to include quality assurance reviews and has added additional quality assurance measures in response to suggestions we made in the course of this engagement. The NRP audit process also includes quality assurance measures that include both in- process and completed case reviews, with all NRP audits reviewed before they are formally closed with the taxpayer. IRS also built accuracy checks into the data capture steps that take place throughout the NRP process. IRS designed NRP classification to include regular reviews of classifiers’ decisions. We found that these reviews are generally taking place according to NRP guidelines. We also found that additional measures could further improve NRP classification accuracy, and IRS implemented our suggestions. NRP guidelines specify that NRP classification reviewers review all cases for which returns are classified as needing either no audit at all or only correspondence audits to confirm their accuracy. Additionally, reviewers must initially review 25 percent of the cases classified by each auditor that are selected for face-to-face audits until they are satisfied with the quality and consistency with NRP guidelines of the classifier’s work. After that standard has been met, the guidelines specify that reviewers need only review approximately 10 percent of the cases that each classifier selects for face-to-face audit. We conducted site visits to five IRS area offices where NRP classification was taking place and found that IRS’s plans to implement the classification steps of the program were generally well understood by the classifiers carrying them out. Classifiers were knowledgeable about the differences between the NRP classification process and the classification process used in the enforcement audit environment and supported NRP goals in general. However, we also found instances where NRP classifiers were not consistently following NRP classification guidelines. Another issue we identified involved the use of the classification review sheets that reviewers fill out when they find problems with classifiers’ decisions. We learned that there was no provision for further review of these forms. In some cases, we found that reviewers were not always documenting classification errors on the forms. We discussed with NRP officials the potential benefits of using NRP classification review sheets for more than identifying issues at the area office level. Specifically, we suggested that classification review sheets be forwarded from the area offices to a central location in order to identify problems that may be occurring in different locations around the country or other trends that the NRP Office may need to address during the course of NRP classification. The NRP Office agreed with our suggestion and added centralized review of classification review sheets to its other classification quality assurance measures. The NRP Office adopted our suggestion that it conduct site visits to area offices to identify NRP classification implementation issues. Similar to the visits we conducted, NRP staff members visited area offices and met with classifiers, reviewers, and managers to identify issues encountered in carrying out NRP classification and possible areas where NRP guidelines may have been misinterpreted. Among the issues they are asking about is the usefulness of the various materials included in the casebuilding files, information which may prove useful in the design of the casebuilding portion of future iterations of NRP. NRP staff members are also conducting separate reviews of completed classification cases. IRS has designed NRP to include several steps to identify NRP audit quality problems at both the individual auditor level and across the program. Reviews include quality checks while cases are in progress and after work is complete, and reviews by managers at different levels. Importantly, IRS’s plans call for every NRP audit to be reviewed at least once at a point where it is still possible to return to the taxpayer and complete additional audit steps, if necessary. These quality assurance measures will serve to mitigate the risk of IRS including erroneous or incomplete data in the NRP database. NRP guidelines task group managers with reviewing one open NRP audit for each auditor in the first 90 days of that auditor’s NRP activity and another in the first 180 days. NRP officials intend for these in-process reviews to be extensive and timed early enough in the program to identify individual auditors’ misunderstandings of the program, correct them on the audits under review, and prevent them on future NRP audits. IRS has also created Quality Review Teams both to oversee individual audit cases and identify problems at the area office level and systemically across NRP. These teams are made up of IRS managers and are tasked with checking for compliance with NRP-specific and overall IRS standards on 40 open cases and 20 closed cases for each of IRS’s 15 area offices. These reviews will be repeated in each area about once every 3 months throughout the planned 18-month NRP audit period. The IRS standards applied by the teams to the audits they review are the same standards employed by IRS’s Examination Quality Measurement System (EQMS). Similar to the visits NRP officials made to area offices to review classification activities, NRP officials are also visiting area offices to review NRP audit activities. NRP officials said that any systemic issues identified through Quality Review Team reviews will then be addressed across NRP. Another NRP audit quality assurance element calls for all face-to-face audits to be checked by group managers after work is completed but before the cases are formally closed with the taxpayers. This review will include assessing technical correctness, mathematical accuracy, completeness, and adherence to procedural requirements. IRS officials said that these requirements include adherence to the NRP-specific requirement that audits include verification of all items identified through the NRP classification process. These reviews also include assessing adherence to IRS standards in areas such as audit depth and reviewing large, unusual, or questionable items on the audited return. We were initially concerned that IRS planned for these reviews to take place after NRP audits were completely closed, precluding IRS from reopening the cases or otherwise obtaining additional information from the taxpayers even if the reviewers found that the original NRP audits were incomplete. However, senior IRS officials informed us in March 2003 that these reviews will take place after NRP auditors consider their audit work to be complete but before the taxpayers are notified that the audits are over. The officials explained that these reviews of all NRP cases will be timed to provide an important means of ensuring that complete and accurate audit results are entered into the NRP database. They also explained that the importance of NRP audit reviews has been stressed throughout NRP implementation and will be the subject of ongoing communication with managers in the field. It is very important that IRS conduct reviews of NRP audits before they are closed because IRS data show that auditors do not always meet enforcement audit quality standards. In fiscal year 2002, IRS’s EQMS found that auditors in the field did not meet the audit depth standard about 15 percent of the time on field audits; the standard for auditing taxpayer income was not met about 25 percent of the time on field audits; and the standard concerning audits of large, unusual, or questionable items was not met 40 percent of the time on field audits. IRS officials said that accurate audit results in these areas are critical to NRP’s overall accuracy. IRS officials pointed out that the error rate for NRP audits should be lower than in the enforcement audit environment because NRP auditors received special training and because the NRP classification process will enhance NRP audit quality. For example, NRP guidelines call for classifiers to identify large, unusual, or questionable items on returns (the largest EQMS error category) and NRP auditors must address all classified items. However, IRS did not implement its earlier plan of having a selected cadre of auditors work only on NRP cases. While NRP-specific training will serve to prevent many audit errors, NRP audits are now being conducted by a cross section of auditors from IRS field offices across the country and more typical of the auditors who generated the 2002 EQMS error rates. Because every return in the NRP sample represents many returns in the whole population of 1040 filers, even a small number of cases closed with incomplete information could affect the accuracy of NRP data. IRS officials also noted that their plan to conduct early reviews of NRP cases will identify problems with auditors’ understanding of NRP and help to keep them from recurring on subsequent NRP audits. At least two of each NRP auditor’s early cases will have extensive manager involvement while the cases are still in progress, and other managers will be looking at a sample of both completed and open cases to identify problems. IRS officials believe that these measures are sufficient to ensure NRP audit quality. IRS is including a series of data consistency checks in the NRP database to verify that the information NRP auditors record in IRS’s NRP reporting system agrees with the information that IRS recorded from the tax returns earlier in processing. NRP auditors must first record the results of NRP audits in the report-generating software that was modified for NRP purposes. Once auditors have recorded audit results, NRP coordinators must use a data conversion program to transfer the data into a format that the NRP database will accept. Following data conversion, IRS coordinators transfer the audit data to the NRP database. Once the data are transferred to the NRP database, a series of data consistency checks take place to confirm that the data IRS originally transcribed from the tax return are consistent, within specified tolerances, with the data that NRP auditors recorded in the NRP reporting software. If any of the consistency checks fail for a return in the NRP sample, the NRP area coordinator will be notified and the mistake will need to be corrected. According to IRS officials, they will impress upon NRP auditors the importance of entering data into the NRP software correctly the first time because it will be time-consuming to correct errors. NRP officials have developed a case tracking system in order to monitor which cases still need to pass all of the consistency tests and which tests they need to pass. IRS officials reported that, as of early April 2003, the NRP database and related programs were running and that completed NRP cases were being entered into the database. They said that they were still making some enhancements, but that the programs were fully functional. As IRS planned, NRP casebuilding and classification processes are helping minimize the burden on taxpayers with returns in the NRP sample. In addition, the size of the NRP sample is now smaller than IRS expected it to be. However, the number of taxpayers who will be subject to NRP audits has increased. IRS plans to survey taxpayers who receive NRP audits to assess their perceptions of the burden posed by those audits. IRS also used input from tax practitioners to identify ways to improve interactions with taxpayers subject to NRP audits. IRS is following its plans to reduce burden on taxpayers selected as part of the NRP sample by (1) compiling NRP casebuilding materials that allow IRS to verify certain items on tax returns without requesting the information from the taxpayer, (2) classifying returns according to items that need to be verified through an audit, and (3) limiting most NRP audits to items that cannot be verified without an audit. IRS officials also intend to compare classification decisions with the results of NRP audits to identify ways of improving the classification process for future rounds of NRP. Moreover, IRS’s intent in carrying out NRP is to reduce the burden on taxpayers in general by developing better audit selection formulas and reducing the number of audits of fully compliant taxpayers. The NRP casebuilding and classification processes described on page 4 are having their intended effect of reducing the burden NRP creates for taxpayers with returns in the NRP sample. IRS has assembled IRS and third-party data on most of the returns in the NRP sample and classifiers have used these data to verify information on the returns, where possible, without contacting taxpayers. The remaining casebuilding and classification work was under way as of the end of March 2003. The material in the casebuilding files has allowed IRS to fully verify about 10 percent of NRP returns without any audit. Classifiers were able to use the casebuilding material to verify all but one or two items on another 5 percent of NRP returns, and these were sent for correspondence audits. Classifiers identified line items needing verification through a face-to-face audit on about 85 percent of NRP returns classified as of the end of March 2003. Because of the casebuilding and classification processes IRS developed for NRP, these audits will generally be limited to line items that cannot be verified using the information in the casebuilding files. This is a substantial change from earlier compliance research efforts, in which all returns were subject to audits of every line on the return. Only the 1,683 taxpayers with returns selected for NRP calibration audits will be subject to complete audits of their returns. IRS plans to use NRP results to improve future iterations of NRP. For example, NRP officials plan to compare classification outcomes with NRP audit results to help them to identify possible changes needed in casebuilding materials and the NRP classification process. They have told us that it may be possible to further reduce the number of accurately reported line items that are subject to compliance research audits. On the other hand, IRS may also find through NRP calibration audits that classification missed many items that should have been audited, so more line items should receive some form of audit in future rounds of NRP in order for the research results to be useful. IRS also intends to apply lessons learned in NRP classification to classification in the enforcement audit environment. As we noted in our prior report, NRP should also lead to reductions in taxpayer burden in general. IRS plans to use NRP results to help identify and reduce causes of noncompliance and to better target enforcement audits to noncompliant taxpayers, reducing the number of audits of fully compliant taxpayers. IRS projects that, without improved audit selection formulas based on NRP results, the percentage of enforcement audits that result in no tax change will be about 35 percent higher in 2005 than it was in 1993, the first year that selection formulas from the 1988 compliance study were available. Taxpayer burden will decrease if successful execution of NRP enables IRS to reduce the number of these audits of compliant taxpayers. The NRP sample consists of 46,860 tax returns. We reported in June 2002 that the NRP sample would consist of 49,251 returns. The current number is smaller than the initial estimate because IRS originally estimated the NRP sample size based on the characteristics of the filing population that existed during the 1988 reporting compliance study. According to IRS officials, when they applied the NRP sampling plan to the 2001 filing population, the number of returns necessary to satisfy the requirements for some of the NRP strata declined because filing rates for those strata were smaller than IRS officials had projected. The final NRP sample consists of about 2,400 fewer returns than initially planned. IRS officials are currently finding that the NRP classification results are different than initially planned. IRS now estimates that more face-to-face audits will take place than initially projected because (1) as the NRP plan recognized, IRS’s initial estimates were uncertain and based on aging data and (2) the final form of NRP classification guidelines meant more face-to- face and fewer correspondence audits. IRS initially estimated that out of an NRP sample of over 49,000 tax returns, classification would result in about 30,000 face-to-face audits of selected line items, about 9,000 correspondence audits covering no more than two line items, and about 8,000 taxpayers who would not undergo any audit because classifiers were able to either verify all of the items on their returns or could correct some line items without contacting the taxpayers. The final NRP sample is 46,860 returns, and IRS now estimates that NRP classification will result in face-to-face audits of about 39,000 taxpayers, with approximately an additional 2,300 receiving correspondence audits and 3,800 subject to no audit at all. IRS also plans to conduct 1,683 line-by- line calibration audits, drawing 561 returns from each of the three classification categories—these numbers have not changed. Figure 4 shows IRS’s current estimate of how the three NRP classification categories will be distributed. NRP officials explained that the number of face-to-face NRP audits is higher than expected because they were relying on aging data and preliminary classification guidelines. Our 2002 report on NRP also noted the preliminary nature of these estimates. Initial classification breakdown estimates were made using 14-year-old data from the 1988 Taxpayer Compliance Measurement Program study. NRP staff members said that changes in the tax code and in the economic makeup of the filing population since the 1988 study make the returns from that study an unreliable tool for predicting NRP classification results, though that was all they had to work with. They also said that some of the change can be attributed to changes they made in the final form of NRP classification guidelines. NRP staff members said that they modified the NRP classification guidelines as a result of discussions that took place between NRP staff members and representatives from IRS’s business operating divisions. They instituted the changes to the classification guidelines in order to better match the training and skills of the examiners selected to conduct NRP correspondence and face-to-face audits with the types of issues to be covered by those audits. One change is that discrepancies between the casebuilding files and the tax returns for issues such as Individual Retirement Account contributions and Social Security income were removed from the list of issues that could be verified through a correspondence audit. Another change is that the final guidelines call for virtually all business returns to receive face-to-face audits—initial assumptions about the classification process allowed for some business returns to be accepted as filed or receive only correspondence audits. IRS will survey taxpayers who are subject to NRP audits to assess overall customer satisfaction and their perceptions of the burden audits created for them. IRS will ask taxpayers to fill out the same survey it uses to assess customer satisfaction in the enforcement audit environment and compare the results for the two populations. The surveys include issues related to taxpayer burden in the form of questions about the amount of time taxpayers spent preparing for the audits and the amount of time that they spent on the audits themselves. The surveys also ask whether taxpayers receiving NRP audits believe the information that they were asked to provide seemed reasonable and whether they feel they received fair treatment from IRS. After collecting the survey results, IRS will then develop a “score” for each question on the survey that relates to burden. IRS will compare the results from the NRP customer satisfaction survey to the results from surveys completed after enforcement audits. IRS consulted with outside stakeholders to enhance its efforts to minimize the burden NRP created for taxpayers with returns in the sample. IRS consulted with members of organizations that provide feedback to IRS on matters concerning taxpayers, including the National Public Liaison, the Information Reporting Program Advisory Committee, and the Internal Revenue Service Advisory Council. According to IRS, practitioner input led to wording changes on taxpayer notification letters and improvements to training materials, which strengthened the emphasis on maintaining good relations with NRP-selected taxpayers. Representatives of the National Public Liaison also participated in the training for the staff members who were selected to conduct NRP auditor training. IRS continues to be on track for meeting its NRP goal of obtaining meaningful compliance data while minimizing the burden on taxpayers with returns in the NRP sample. IRS has followed the key elements of the plans it laid out last year and has responded to identified needs to modify the program that have come from its own testing as well as from outside stakeholders. Because of this, we are not making any recommendations in this report. We recognize that IRS efforts to gather information about NRP implementation while the program is under way are very important to IRS’s continued success in carrying out NRP. Classification review results, audit review results, and customer satisfaction surveys all provide the means for IRS to make immediate adjustments to NRP now and to enhance the design of future iterations of the program. Provisions for 100 percent review of NRP audits before they are closed are particularly important because even a small number of erroneous or incomplete cases will negatively affect the quality of NRP data. On May 22, 2003, we received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. I). The commissioner noted the importance of NRP and IRS’s continued emphasis on minimizing taxpayer burden and delivering quality results. We also received technical comments from NRP staff members, which we have incorporated into this report where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies of this report to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions, please contact Ralph Block at (415) 904-2150, David Lewis at (202) 512-7176, or me at (202) 512-9110. Thomas Gilbert was also a key contributor to this assignment.

The Internal Revenue Service (IRS) needs up-to-date information on voluntary compliance in order to assess and improve its programs. IRS's last detailed study of voluntary compliance was done in the late 1980s, so the compliance information IRS is using today is not current. IRS is now carrying out the National Research Program (NRP), through which IRS auditors are reviewing about 47,000 randomly selected tax year 2001 individual tax returns. In June 2002, GAO reported that NRP was necessary, that its design was sound, and that it appeared to meet IRS's goals of acquiring useful compliance data while minimizing burden on taxpayers with returns in the sample. GAO was asked to review IRS's implementation of NRP. GAO reviewed IRS's method of gathering internal and third-party data (casebuilding) and IRS's process of reviewing casebuilding materials to determine if audits are necessary (classification) and assessed IRS's plans to ensure consistent data collection while minimizing burden on taxpayers. IRS's NRP is being implemented as planned and consequently is on track to meet the agency's objectives of obtaining quality research results while minimizing the burden on the approximately 47,000 taxpayers with returns in the NRP sample. IRS officials have completed the development and testing of NRP processes and have selected and trained staff members to carry out the program. Additionally, as the graphic illustrates, IRS is currently nearing the completion of casebuilding and has made progress in classifying NRP returns. Audits, when required, began in November 2002. As of the end of March 2003, IRS had closed 3,651 NRP cases. In accordance with IRS's plans to minimize burden on taxpayers with returns in the NRP sample, some cases have been closed without any taxpayer contact or with only limited audits. The NRP plan recognized that the initial estimates for the overall NRP sample size and the number of returns to be audited were uncertain because they were based on aging data. The overall NRP sample size will be smaller and IRS officials expect to conduct more face-to face audits than initially estimated. As IRS completes NRP casebuilding, classification, and audits, it is implementing quality assurance steps, including efforts to ensure that key audit steps are completed on all NRP audits before they are formally closed with taxpayers. This is important since the data collected from each NRP audit represent information from thousands of similar taxpayers.

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Thorough and comprehensive planning and preparation are crucial to the ultimate cost-effectiveness of any large, long-term project, particularly one with the scope, magnitude, and immutable deadlines of the decennial census. Indeed, the Bureau’s past experience has shown that the lack of proper planning can increase the costs and risks of downstream operations. Moreover, sound planning is critical to obtaining congressional support and funding because it helps demonstrate that the Bureau has chosen the optimal design given various trade-offs and constraints and that it will effectively manage operations and control costs. However, Congress, GAO, the Department of Commerce Inspector General, and even the Bureau itself have noted how the 2000 Census was marked by poor planning, which unnecessarily added to the cost, risk, and controversy of the last national head count. For example, our earlier work, and that of the Department of Commerce Inspector General, reported that in planning the 2000 Census, the Bureau, among other shortcomings, did not involve key operations staff in the initial design phases; did not translate key performance goals into operational, measurable terms that could be used as a basis for planning; did not develop and document a design until mid-decade; and initially failed to provide sufficient data to stakeholders on the likely effects of its initiatives for addressing the key goals for the census— reduced costs and improved accuracy and equity. Planning weaknesses were not limited to the 2000 Census. In fact, a variety of problems plagued the planning of the 1990 Census. To help prevent the Bureau from repeating those mistakes as it plans the 2010 Census, in our October 2002 report, we recommended that the Secretary of Commerce direct the Bureau to provide comprehensive information backed by supporting documentation in its future funding requests for planning and development activities, including, but not limited to, specific performance goals for the 2010 Census and information on how the Bureau’s programs would contribute to those goals; detailed information on program feasibility, priorities, and potential key implementation issues and decision milestones; and performance measures. The consequences of a poorly planned census are high given the billions of dollars spent on the enterprise and the importance of collecting quality data. The Constitution requires a census as a basis for apportioning seats in the House of Representatives. Census data are also used to redraw congressional districts, allocate billions of dollars in federal assistance to state and local governments, and provide information for many other public and private sector purposes. As agreed with your offices, our objectives for this report were to review the Bureau’s current plans for the 2010 Census and the extent to which they might address shortcomings with the 2000 Census, analyze the Bureau’s cost estimates, and assess the rigor of the Bureau’s 2010 planning process. To achieve these three objectives, we interviewed officials from the Bureau’s Decennial Management Division and other units involved with planning the 2010 Census. We also reviewed relevant design and budget documents as well as our prior work and that of the Department of Commerce Inspector General, on planning the 2000 and earlier censuses. We also reviewed reports by the National Academy of Sciences on planning the 2010 Census. We did not independently verify the cost information the Bureau provided. To help determine the key elements for successful project planning, we reviewed a number of guides to project management and business process reengineering. Our work was performed from January through September 2003 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of Commerce and the Director of the Office of Management and Budget. On November 6, 2003, we received the Secretary’s written comments on the draft (see app. I). On October 14, 2003, the Director of OMB forwarded OMB’s comments on the draft (see app. II). They are addressed in the Agency Comments and Our Evaluation section of this report. In designing the 2010 Census, Bureau officials had four principal goals in mind: (1) increase the relevance and timeliness of census long-form data, (2) reduce operational risk, (3) increase the coverage and accuracy of the census, and (4) contain costs. The goals were a direct response to problems the Bureau experienced in conducting the 2000 Census, such as untimely long-form data; inaccurate maps; coverage difficulties; and expensive, labor-intensive, and paper-laden field data collection. The Bureau recognized that its traditional approach to counting the population was insufficient for meeting these four objectives. In its place, the Bureau developed what it believes is a paradigm shift to taking the census, basing its reform efforts on three interrelated components the Bureau refers to as a “three-legged stool.” The mainstay of a successful census is an accurate address list and its associated maps. The Bureau uses MAF and TIGER to provide (1) maps for field operations and data reference, (2) the geographic location of every structure, (3) address lists for the decennial census, and (4) names and codes of entities for data tabulation and data for use by the commercial geographic information systems industry. The Bureau’s experience in conducting the 2000 Census highlighted the need to update and modernize MAF/TIGER prior to 2010. For example, the centerlines of streets in TIGER did not accurately reflect their true geographic locations, which could cause houses to be placed in the wrong census blocks. Also, according to the Bureau, the 1980s software used to develop TIGER is now outdated and cumbersome to update. To fix these and other problems, the Bureau launched the MAF/TIGER Enhancements Program (MTEP) as part of the 2010 Census modernization efforts. Its objectives include correcting the locations of each MAF address, street, and other map developing and deploying a new MAF/TIGER processing environment; expanding and encouraging geographic intergovernmental partnership programs; implementing the Community Address Updating System (CAUS), an initiative to partner with local governments to update MAF data; and initiating quality assurance evaluation activities. The Bureau estimates the total cost for these five objectives to be $536 million. According to Bureau officials, while some elements of MAF will be improved as part of the overall MAF/TIGER enhancements program, the primary focus of the effort is on TIGER modernization and data correction. This modernization program will not reengineer the MAF process. ACS is intended to be a monthly survey of 250,000 households that would replace the long form used in past decennial censuses. According to the Bureau, the benefits of ACS include (1) more timely long-form data at detailed geographic levels that would be as accurate as subnational annual data from existing surveys, such as the Current Population and American Housing Surveys, and (2) the ability to improve the accuracy of the decennial census population counts by eliminating the long-form questionnaire. The ACS data will be published annually for geographic areas with populations over 65,000; as a 3-year average for geographic areas with populations of 20,000 to 65,000; and as a 5-year average for geographic areas with populations under 20,000. According to the Bureau, because of the larger sample size associated with long-form data, the annual and 3- year average data will be significantly less accurate than the long-form data. The 5-year data would be about as accurate as the long form. The Bureau believes that eliminating the long form will result in a number of benefits to decennial data collection and general field operations. For example, according to the Bureau, the reduction in paper will enable it to process data with three data capture centers instead of the four centers used during Census 2000. The Bureau also would not need as many local census offices, thereby allowing it to reduce the rolls of clerical and administrative staff. According to the Bureau, a short-form-only census also allows the Bureau to use such technology as handheld mobile computing devices so that enumerators can locate and update data on housing units, help conduct interviews, transmit data directly to the data capture centers, and receive regularly updated field assignments. The devices will be linked to the satellite-based Global Positioning System (GPS) to enable field workers to locate addresses more precisely and efficiently. The Bureau also plans to incorporate changes that are not dependent on ACS and MAF/TIGER. For example, the Bureau plans to expand the respondents’ ability to complete their questionnaires via the Internet. As shown in table 1, the Bureau’s three-legged stool strategy is generally aligned with three of its four key goals for the 2010 Census and, if successful, could put the Bureau on track toward achieving them. Less clear is how the Bureau will achieve its goal of reducing operational risk using its current plan. Although the Bureau’s position that early testing will enable it to identify and correct flaws is both a common sense business practice and supported by its past experience (assuming its testing program is adequately designed), as described below, the operational and other hurdles associated with successfully implementing the three-legged stool actually introduce new risks and challenges. This does not necessarily mean that the Bureau’s design is flawed. To the contrary, the obstacles to a cost-effective head count call for the Bureau to consider bold and innovative initiatives, and these are not risk free. At the same time, given the enormity of the census and all of its complexities, the three-legged stool by itself will not automatically guarantee the successful accomplishment of the Bureau’s goals. Our work on transforming agencies into high-performing organizations has underscored the importance of an agency’s leadership and core business practices. Critical success factors include, among others, effective communication strategies to ensure coordination, synergy, and integration; strategic planning; aligning the agency’s organization to be consistent with the goals and objectives established in the strategic plan; and effective performance, financial, acquisition, and information technology management. In all, the Bureau faces at least three key challenges. Among the more significant challenges the Bureau faces is securing congressional approval for its proposed approach. As we noted in our January 2003 performance and accountability report, congressional support for the 2010 design is necessary to ensure adequate planning, testing, and funding levels. Conversely, the lack of an agreed-upon design raises the risk that basic design elements might change in the years ahead, while the opportunities to test those changes and integrate them with other operations will diminish. In other words, in order for the Bureau to conduct proper planning and development activities, the basic design of the 2010 Census needs to be stable. According to the Bureau, a go/no-go decision on key aspects of the design—a short-form-only census and replacing the long form with ACS— will need to be made around 2006. Bureau officials told us that if ACS were dropped after 2007, the Bureau would not be able to reinstate the long form with the short form in 2010 because of logistical obstacles. They noted that the Bureau is already testing the short-form-only census and, in late-2005 or early-2006, expects to sign a contract for data capture operations. If the Bureau had to revert to a long-form census at that point, it would add significant risks and costs to the 2010 Census. During the 2000 Census, the lack of an agreement between the administration and Congress on the fundamental design—and particularly, the Bureau’s planned use of sampling—increased the likelihood of an unsuccessful head count and was one of the principal reasons why, in 1997, we designated the 2000 Census a high-risk area. Members of Congress questioned the use of sampling and estimation for legal and methodological reasons. Contributing to Congress’s skepticism was the Bureau’s failure to provide sufficiently detailed data on the effects of its proposed approach. Although the U.S. Supreme Court settled the dispute in January 1999, the Bureau ultimately wound up having to plan for both a “traditional” census and one involving sampling, which added to the costs and risks of the 2000 decennial census. To help secure congressional support for its 2010 reform efforts, it will be important for the Bureau to convincingly demonstrate that it has chosen the optimum design given various resource and other constraints and that it will effectively manage operations and costs. A critical first step in this regard is to have comprehensive and transparent information that lays out the specifics of the Bureau’s plans, explains their benefits, and supports assumptions. However, as discussed more fully in the next section, while the Bureau’s planning for the 2010 Census has improved compared with its efforts for the 2000 Census, certain information gaps remain. For example, the Bureau’s most recent budget submissions have not included complete life cycle cost estimates that could enable Congress to make more informed decisions about the cost implications of the three-legged stool design, including ACS. Most of the reforms, savings, and improvements in accuracy the Bureau anticipates will not be possible unless it conducts a short-form-only census. However, the Bureau’s planned replacement for the long form, ACS, faces methodological and other questions that need to be resolved soon. Consequently, the Bureau is taking a significant risk by pinning the success of its reform efforts largely on a survey that may not be an adequate replacement for the long form. The Bureau believes that without ACS, it will need to repeat the Census 2000 design. One methodological question is whether to administer ACS as a mandatory or voluntary survey. Under the Bureau’s current approach, survey recipients will be legally required to respond to ACS. However, in response to congressional concerns that a mandatory survey is intrusive, the Bureau tested conducting ACS as a voluntary survey. Based on the results of the test, the Bureau estimates that a voluntary survey could produce a response rate around 4.2 percentage points lower than a mandatory survey. The Bureau estimates that costs would increase by $59.2 million per year to maintain the same level of reliability achieved from a mandatory survey. Moreover, the Bureau’s efforts to ensure that ACS data will serve as a satisfactory replacement for the long-form data are not yet complete. Among the remaining issues, most of which are critical to the reliability of the small geographic area ACS data, are the following: 1. Benchmarking ACS data or small geographic areas to the population counts and characteristics from the 2010 short form. 2. Inconsistency of ACS residency rules—which determine the geographic area in which a person is supposed to be counted—with those used for the census. 3. Consistency of ACS data with long-form data from the 2000 Census. 4. For multiyear averages of ACS data for small areas, consistency with annual ACS data for larger areas and utilization as a measure of change. Each leg of the Bureau’s three-legged stool is dependent on the other; that is, the implementation of one leg allows the other two legs to operate successfully. For example, ACS is facilitated by first updating the MAF/TIGER database for the ACS sample. Similarly, as noted above, the Bureau’s plan to conduct a short-form-only enumeration depends on ACS. Consequently, the Bureau’s design assumes that by 2008, (1) ACS will be in place nationwide and producing data, (2) a GPS-aligned and modernized MAF/TIGER will be available, and (3) all reengineering efforts will be complete to allow for a true dress rehearsal. Completing any one of these tasks would be a considerable undertaking; for 2010, the Bureau plans to develop, refine, and integrate all three in the space of just a few years. Moreover, the Bureau has no contingency plans other than to revert to a “traditional” census. According to the Bureau, while the failure of any one leg would not doom the census, it could jeopardize the Bureau’s goals. For example, if the MAF/TIGER modernization is not completed on schedule, the Bureau would be unable to employ the GPS-enabled handheld mobile computing devices that enumerators are to use when conducting nonresponse follow-up. This in turn could affect the efficiency of the effort and the quality of the data collected. In addition, the Bureau would not have time to conduct the research and testing necessary to improve the long form based on lessons learned in the 2000 Census. Because of limitations in census taking methods, some degree of error in the form of persons missed or counted more than once is inevitable. Since 1980, the Bureau has used statistical methods to generate detailed measures of the undercounts of particular ethnic, racial, and other population groups. To assess the quality of population data for the 2000 Census and to possibly adjust for any errors, the Bureau conducted the Accuracy and Coverage Evaluation (A.C.E.) program. Although the U.S. Supreme Court ruled in 1999 that the Census Act prohibited the use of statistical sampling for purposes of apportioning seats in the House of Representatives, the Court did not specifically address the use of statistical sampling for other purposes. In March 2001, the Acting Director of the U.S. Census Bureau recommended to the Secretary of Commerce that only unadjusted data be released for purposes of congressional redistricting. The Acting Director made this recommendation when, after considerable research, the Bureau was unable to conclude that the adjusted data were more accurate for use in redistricting. Specifically, the Acting Director cited the apparent inconsistency in population growth over the decade as estimated by the A.C.E., and demographic analysis, which estimated the population using birth, death, and similar records. He noted that the inconsistency raised the possibility of an unidentified error in either the A.C.E. estimates or the census numbers, and the inconsistency could not be resolved prior to April 1, 2001, the legally mandated deadline for releasing redistricting data. Later that year, following additional research, the Acting Director decided against using adjusted census data for nonredistricting purposes, such as allocating federal aid, because A.C.E. estimates failed to identify a significant number of people erroneously included in the census. The Acting Director noted that “this finding of substantial error, in conjunction with remaining uncertainties, necessitates that revisions, based on additional review and analysis, be made to the A.C.E. estimates before any potential uses of these data can be considered.” As the Bureau turned toward the 2010 Census, it needed to decide whether it would have a coverage measurement program and how the results would be used. Because of the 1999 U.S. Supreme Court ruling noted earlier, the Bureau could not use coverage measurement results to adjust census data for purposes of congressional apportionment. However, adjusting census data for other purposes remained an open question. In our January 2003 report on the objectives and results of the 2000 A.C.E. program, we noted that an evaluation of the accuracy and completeness of the census is critical given the many uses of census data, the importance of identifying the magnitude and characteristics of any undercounts and overcounts, and the cost of the census overall. We cautioned that the longer the 2010 planning process continues without a firm decision on the role of coverage measurement, the greater the risk of wasted resources and disappointing results. Consequently, we recommended that the Bureau, in conjunction with Congress and other stakeholders, come to an early decision on whether and how coverage measurement will be used in the 2010 Census. In reaching this decision, we recommended that the Bureau (1) demonstrate both the operational and technical feasibility of its coverage measurement methods, (2) determine the level of geography at which coverage can be reliably measured, (3) keep Congress and other stakeholders informed of its plans, and (4) adequately test its coverage measurement methodology prior to full implementation. The Bureau agreed with our recommendations, noting that we had identified important steps that should be followed in developing a coverage measurement methodology for the 2010 Census. While certain aspects of the Bureau’s coverage measurement plans are still being developed, the Bureau is not currently planning to develop a procedure that would allow it to adjust census numbers for purposes of redistricting. According to the Director of the U.S. Census Bureau, although the Bureau plans to evaluate the accuracy of the coverage it achieves in the 2010 Census, its experience during the 2000 Census demonstrated “that the science is insufficiently advanced to allow making statistical adjustment to population counts of a successful decennial census in which the percentage of error is presumed to be so small that adjustment would introduce as much or more error than it was designed to correct.” Furthermore, irrespective of whether it is both legal and appropriate to do so, the Bureau does not believe that it can both collect coverage measurement data and complete the analysis of those data’s accuracy in time to deliver the information to the states to meet their redistricting deadlines. Although the Bureau’s experience during the 2000 Census shows that its approach to measuring coverage needs to be improved if it is to be used to adjust census numbers, the Bureau has not yet determined the feasibility of refinements to the 2000 approach or alternative methodologies. Consequently, the Bureau’s decision on how coverage evaluation data will be used in 2010 appears to be premature. Indeed, while the Bureau has reported that the 2000 Census had better coverage compared to the 1990 Census, as noted below, the U.S. population is becoming increasingly difficult to count, a factor that could affect the quality of the 2010 Census. More generally, the decennial census is an inherently fragile endeavor, where an accurate population count requires the near-perfect alignment of a myriad of factors ranging from the successful execution of dozens of census-taking operations to the public’s willingness to cooperate with enumerators. External factors such as the state of the economy and world events might also affect the outcome of the census. The bottom line is that while the census is under way, the tolerance for any breakdowns is quite small. Therefore, the Bureau’s ability to maintain the level of quality reported for the 2000 Census is far from guaranteed. Thus, to ensure that the nation uses the best available census data, it will be important for the Bureau to research procedures that depending on what the results of the coverage evaluation say about the quality of the census data, would allow adjustment, if necessary, for those purposes for which it is both legal and appropriate to do so. The Bureau should conduct this effort on a timetable that allows it to adequately test and refine those procedures, as well as obtain input from both majority and minority parties in the Senate and House of Representatives. In June 2001, the Bureau estimated that the reengineered 2010 Census would cost $11.3 billion in current dollars. This would make the 2010 head count the most expensive in the nation’s history, even after adjusting for inflation. According to the Bureau estimates in June 2001, a repeat of the 2000 approach would cost even more, over $11.7 billion. This estimate of repeating the 2000 approach was revised to approximately $12.2 billion in April 2003. Moreover, the actual cost of the census could end up considerably higher as the Bureau’s initial cost projections for previous censuses proved to be too low because of such factors as unforeseen operational problems or changes to the fundamental design. For example, while the Bureau estimated that the 2000 Census would cost around $4 billion using sampling, and that a traditional census without sampling would cost around $5 billion, the final price tag for the 2000 Census (without sampling) was over $6.5 billion. The Bureau’s cost projections for the 2010 decennial census continue an escalating trend. As shown in figure 1, in constant 2000 dollars, the estimated $9.3 billion cost of the 2010 Census represents a tenfold jump over the $920 million spent on the 1970 Census (as noted above, the Bureau estimates the 2010 Census will cost $11.3 billion in current dollars). Although some cost growth can be expected in part because the number of housing units—and hence the Bureau’s workload—has gotten larger, the cost growth has far exceeded the housing unit increase. The Bureau estimates that the number of housing units for the 2010 Census will increase by 10 percent over 2000 Census levels. Meanwhile, the average cost per housing unit for 2010 is expected to increase by approximately 29 percent from 2000 levels (from $56 to $72), nearly five and a half times greater than the $13 it cost to count each household in 1970 (see fig. 2). As for previous censuses, the major cost for the 2010 Census is what the Bureau calls “field data collection and support systems.” Over half of decennial census life cycle costs are attributed to this area. Specific components include the costly and labor-intensive nonresponse follow-up operation as well as support activities such as the opening and staffing of hundreds of temporary local census offices. One reason why field data collection is so expensive is because the Bureau is finding it increasingly difficult to locate people and get them to participate in the census. According to Bureau officials, societal trends, such as the increasing number of respondents who do not speak English, the growing difficulty of finding respondents at home, and the general increase of privacy concerns, impede a cost-effective head count. Further, the legal requirement to count everyone leads the Bureau to employ operations that only marginally improve coverage but that are relatively expensive to conduct. Societal changes have also reduced the cost-effectiveness of the census, and it has become increasingly difficult to simply stay on par with the results of previous enumerations. For example, during the 1990 Census, the Bureau spent $0.88 per housing unit (in 2000 dollars) to market the census and encourage participation and achieved a response rate of 65 percent. During the 2000 Census, the Bureau spent $3.19 per housing unit (in 2000 dollars) to promote participation, but the response rate was 64 percent. The constitutional mandate to count the nation’s population explicitly commits or “exposes” the government to spending money on the census each decade. In this way, the census is similar to other fiscal exposures such as retirement benefits, environmental cleanup costs, and the payment of Social Security benefits in that the government is obligated to a certain level of future outlays. Early in each census cycle, expenditures are relatively low as the Bureau plans the census and conducts various tests. As the decade continues, spending increases, spiking during the decennial year when costly data collection activities take place. As shown in figure 3, during the 2000 Census, $4.1 billion—almost two-thirds of the money spent on the entire census—was spent in fiscal year 2000 alone. Current budget reporting, however, does not always fully capture or require explicit consideration of some future fiscal exposures. In fact, this is particularly true with the census, as annual budget requests and reports provided to Congress early in the decennial census life cycle do not reflect the full cash consequences of the spending and policy decisions. Thus, as it begins funding the 2010 Census early in the decade at relatively low levels, Congress will have implicitly accepted a future spike in costs—essentially a balloon payment in 2010—without requiring the Bureau to clearly define what those costs might be, why they are justified, and what alternatives might exist. As we noted in our January 2003 report on improving the budgetary focus on long-term costs and uncertainties, information on the existence and estimated cost of fiscal exposures needs to be considered along with other factors when making policy decisions. With respect to the census, not capturing the long-term costs of annual spending decisions limits Congress’s ability to control the government’s exposure at the time decisions are made, consider trade-offs with other national priorities, and curtail the growth in census costs. Consequently, fiscal transparency is critical to better reflect the magnitude of the government’s long-term spending on the census and signal unanticipated cost growth. Greater fiscal transparency can also facilitate an independent review and provide an opportunity to improve stakeholder confidence and commitment to the Bureau’s reengineered decennial census design. Our January 2003 report noted that increased supplemental reporting could help improve fiscal transparency and described several options for how to accomplish this. Although that report recommended that OMB consider implementing these options governmentwide, at least two options could be adapted specifically for the Bureau and its parent agency, the Department of Commerce. The two options are (1) annually reporting the planned life cycle cash flow and explaining any material changes from previous plans (currently, the Bureau does not make this information available) and (2) setting triggers to signal when the amount of money expected to be spent in any one year exceeded a predetermined amount. Combined, these actions could prompt more explicit deliberations on the cost and affordability of the census and help inform specific cost control measures by Congress, if warranted. The assumptions the Bureau used to develop the life cycle cost estimate could also benefit from greater transparency. More robust information on the likelihood that the values the Bureau assigned to key cost drivers might differ from those initially assumed, and the impact that any differences would have on the total life cycle cost, could provide Congress with better information on the range and probability of the fiscal exposure the nation faces from the upcoming census. As shown in figure 4, the Bureau derived the baseline for its 2010 cost estimate using the actual cost of the 2000 Census and assumptions about certain cost drivers, estimating the cost of the 2010 Census as if the Bureau were to repeat its 2000 design. The key assumptions include a 35 percent decrease in enumerator productivity, a pay rate increase for census workers from 2000 levels, a mail-back response rate lower than Census 2000 levels, and inflation. The projected costs and savings of repeating the 2000 design versus the Bureau’s approach based on the three-legged stool, are shown in table 2. Transparent information is especially important since decennial cost estimates are sensitive to many key assumptions. In fact, for the 2000 Census, the Bureau’s supplemental funding request for $1.7 billion in fiscal year 2000 primarily involved changes in assumptions related to increased workload, reduced employee productivity, and increased advertising. Given the cost estimates’ sensitivity to key assumptions, greater transparency could be obtained by showing the range and likelihood of how true cost drivers could differ from those assumed and how those differences would affect estimates of total cost. Thus, if early research and testing show that response rates may be higher than originally anticipated, or that enumerator productivity could be better than expected, the Bureau can report on the nature of its changing assumptions and its effect on life cycle costs. Also important, by providing information on the likely accuracy of assumptions concerning cost drivers, the Bureau would better enable Congress to consider funding levels in an uncertain environment. Other key areas in which changes in assumptions can greatly affect costs are salary rates for enumerators, the future price of handheld mobile computing devices, and inflation. Our prior work has described how agencies provide supporting information when developing budget assumptions. For example, the Nuclear Regulatory Commission identifies a basis and a certainty level for its budget assumptions used for internal reporting. A basis summarizes the facts that were evaluated to justify the assumption, while a certainty level depicts the likelihood of its occurrence as high, medium, or low. Finally, it is important to have timely cost information for congressional decision making. The Bureau’s life cycle estimates were updated in April 2003 after being first presented in June 2001—nearly a 2-year interval. In addition, when we requested additional information on life cycle costs the Bureau took several months to provide information on its life cycle cost estimates and assumptions, ultimately revising its total cost estimates before providing us with the data. The Bureau has taken several positive steps to correct problems encountered planning past censuses, and the Bureau appears to be further along in planning the 2010 Census than at this same point during the 2000 Census cycle. Although an improvement over past efforts, the Bureau’s 2010 planning process still contains certain weak points that if not addressed could undermine a cost-effective head count and make it more difficult to obtain the support of Congress and other stakeholders. The characteristics of the census—long-term, large-scale, high-risk, costly, and politically sensitive—together make a cost-effective enumeration a monumental project management challenge, one that demands meticulous planning. To help determine the principal ingredients of successful project planning, we reviewed a number of guides to project management and business process reengineering. Although there is no one best approach to project planning, the guides we reviewed contained many elements in common, including the following: Developing a project plan. The plan should consider all phases of the project and should have clear and measurable goals; all assumptions, schedules, and deadlines clearly stated; and needed skills and resources identified. Evaluating human resource implications. This includes assessing needed competencies and how they will be acquired and retained. Involving stakeholders and incorporating lessons learned. Stakeholders—both internal and external to an organization—have skills and knowledge that could contribute to a project and should be involved in the decision-making process. An organization should focus on the highest priority stakeholder needs and mission goals. Evaluating past performance and capitalizing on lessons learned is also important for improving performance. Analyzing and mitigating risks. This involves identifying, analyzing, prioritizing, and documenting risks. Ideally, more than one alternative should be assessed. Monitoring progress. Measurable performance goals should be identified and performance data should be gathered to determine how well the goals are being achieved. The Bureau has made considerable progress in planning the 2010 Census, and some of the positive steps taken to date include the following efforts. Early in the decade, senior Bureau staff considered various goals for the 2010 Census and articulated a design strategy to achieve those goals. Senior Bureau officials collaborated on this initial design plan to set the stage for further refinements during later field testing and research activities. The Bureau has involved experienced staff in the design process through cross-divisional planning groups. Staff involved in these planning groups will ultimately be responsible for implementing the 2010 Census. According to Bureau officials, this is a departure from the 2000 Census planning effort when Bureau staff with little experience in conducting the census played a key role in designing the decennial census, which resulted in impractical reforms that could not be implemented. The Bureau has recognized the importance of strategically managing its human capital to meet future requirements. The planning and development of the 2010 Census will take place at a time when the Bureau could find itself experiencing substantial employee turnover (three senior Bureau managers left the agency in 2002, and according to a report by the Department of Commerce Inspector General, the Bureau could lose through retirement around half of the senior staff who carried out the 2000 Census). The Bureau, as part of a broader risk assessment, plans to provide less experienced staff the opportunity to obtain operational experience prior to the actual 2010 Census. In addition, the Bureau has provided training in project management and has encouraged staff to take training courses in management and planning. However, other aspects of the Bureau’s 2010 planning process could be improved. A more rigorous plan would better position the Bureau to fulfill its key objectives for the 2010 Census and help demonstrate to Congress and other stakeholders that it can effectively design and manage operations as well as control costs. Although the Bureau has developed project plans for some of the key components of its 2010 strategy, the Bureau has not yet crafted an overall project plan that (1) includes milestones for completing key activities; (2) itemizes the estimated cost of each component; (3) articulates a clear system of coordination among project components; and (4) translates key goals into measurable, operational terms to provide meaningful guidance for planning and measuring progress. OMB Circular A-11 specifies that an agency’s general goals should be sufficiently precise to direct and guide agency staff in actions that carry out the agency’s mission and aid the agency in developing annual performance goals. The importance of this information for improving accountability and performance can be seen, for example, in the Bureau’s principal goal to increase coverage and accuracy. Though laudable, the Bureau has yet to assign any numbers to this goal. This makes it difficult to evaluate the costs and benefits of alternative designs, determine the level of resources needed to achieve this goal, measure the Bureau’s progress, or hold managers accountable for results. Bureau managers provided us with several documents that pieced together present 2010 Census goals and strategies, life cycle costs, and schedules, but no single, comprehensive document exists that integrates this information. For example, the Bureau’s life cycle cost estimates and information on its performance goals were contained in two separate documents, making it hard to see the connection between cost and the Bureau’s objectives. Likewise, a draft document, entitled 2010 Reengineered Census Milestone Schedule, included various milestones by fiscal quarter, but did not contain information on dependencies and interrelationships among the various aspects of the project. In its 2001 letter to the Bureau’s acting director, the National Academy of Sciences’ (NAS) Panel on Research on Future Census Methods raised similar concerns about the need for a coherent project plan. The panel noted that it wanted “to see a clearer case for components of the 2010 census strategy, itemizing the goals, costs, and benefits of each initiative and indicating how they integrate and contribute to a high quality census.” To that end, NAS recommended that the Bureau develop what it called a business plan for 2010. The Bureau is making an effort to develop and incorporate the lessons learned from the 2000 Census and, in fact, created an elaborate evaluation program to help inform this effort. Moreover, the Bureau chartered 11 planning groups consisting of knowledgeable census staff (see app. III for the 2010 planning organization). However, the Bureau’s ability to build on the results of 2000 could be hampered by the fact that while the evaluation program assessed numerous aspects of the census, the Bureau still lacks data and information on the performance of key census activities, as well as on how specific census operations contributed to two of the Bureau’s key goals for 2000: improved accuracy and cost-effectiveness. For example, as noted earlier, the cost of the 2010 Census is increasing relative to 2000 partly because the Bureau expects nonresponse follow-up enumerators will be less productive in 2010. Because of various societal factors, it will simply take enumerators more time to complete their work. And yet, despite the importance of accurate productivity data to inform the Bureau’s planning and budgeting processes for 2010, the Bureau had trouble obtaining quality productivity data following the 2000 Census. Although the Bureau later committed additional resources to refine the numbers, the adjustment was coarse and addressed just one of the two known problems. Moreover, because of differences in the way the Bureau measured staffing levels and hours worked from census to census, none of the productivity data from the last few censuses are comparable. Another area in which the Bureau lacks useful performance information is in the extent to which the dozen or so separate activities used to build MAF in 2000 contributed to its overall accuracy relative to one another. Without this information, the Bureau has limited data with which to guide investment and trade-off questions for 2010, such as which activity provided the biggest “bang for the buck” and should thus be repeated, or whether it would be more effective for the Bureau to improve accuracy and coverage by putting more resources into MAF-building activities or some other operation altogether, such as marketing. To date, the Bureau’s planning groups have incorporated a variety of lessons learned from the evaluations of the 2000 Census. As an example, the Coverage Improvement Planning Group observed an increase in inconsistent responses from 2000 Census compared to the previous census (e.g., some questionnaires were marked “uninhabited,” but individuals were enumerated at the sites). According to a Bureau official, one hypothesis for the higher rate of inconsistent responses was that enumerators were encouraged to fill in information even when not all of the relevant information was known. The Bureau plans to address this issue by building in “edits” to its planned handheld mobile computing devices so that inconsistent data cannot be entered. In addition, the Coverage Improvement Planning Group also looked at the 2000 Census experience to provide recommendations for the Bureau’s 2004 test. Risk management is important for preparing for contingencies or changes in the external operating environment. At the time of our review, the Bureau had completed a risk assessment of some aspects of its operations as part of its OMB Circular A-11, Exhibit 300 submission, and for certain aspects of the reengineering efforts. However, the Bureau had not developed a risk assessment that addressed the entire 2010 Census, including ACS and the MAF/TIGER modernization. The risk assessment for the reengineering effort uses a consistent scoring system to assess the severity of the risks identified and addresses various contingencies and mitigation strategies, such as preparing for the retirement of key personnel and using succession planning to offset the attrition. The scoring system and how it was applied is clearly described in the plan, making it easy to evaluate the way it was used. However, the assessment does not provide extensive detail on the mitigation actions proposed. Also, it does not indicate how risks were identified and whether any risks were excluded. A notable exclusion was that it did not address the risks if ACS or MAF/TIGER fail or are not funded and the impact this might have on the census as a whole. As mentioned earlier, the Bureau’s three-legged stool strategy assumes that all three legs must work together to achieve its goals. One of the reasons for doing a risk analysis is to prepare to make trade-offs when faced with inevitable budgetary pressures, operational delays, or other risks. Lacking information on trade-offs, the Bureau maintains that its only alternative to the reengineering is to repeat the 2000 Census design, an approach that Bureau officials believe will be extremely expensive. The obstacles to conducting a cost-effective census have grown with each decade, and as the Bureau looks toward 2010, it confronts its biggest challenge yet. Consequently, the Bureau will need to balance the growing cost, complexity, and political sensitivity of the census with meticulous planning. As the Bureau’s past experience has shown, early investments in planning can help reduce the costs and risks of its downstream operations. Moreover, a rigorous plan is essential for securing early agreement between the Bureau and Congress on the Bureau’s fundamental strategy for 2010. Congressional support—regardless of whether the Bureau’s current approach or an alternative is ultimately selected—is crucial for creating a stable environment in which to prepare for the census and avoiding a repeat of the 2000 Census when disagreement over the Bureau’s methodology led to late design changes and additional costs and risks. The Bureau has laid out an ambitious schedule of planning, testing, and evaluation for the coming years, culminating with a “dress rehearsal” in 2008. While midcourse corrections are to be expected as a result of these efforts, it will be important for the Bureau to proceed with as few alterations to its fundamental strategy as possible so that all of the operations used in 2010 have been thoroughly road tested. The Bureau appears to be further along in planning the 2010 Census compared to a similar point during the 2000 Census cycle, and its efforts to enhance past planning practices are commendable. Focusing its activities on early design, research, and testing and organizing its reengineering activities around cross-divisional planning groups, are just some of the noteworthy improvements the Bureau has made. However, the Bureau’s plans for 2010, while not unreasonable on the surface, lack a substantial amount of supporting analysis, budgetary transparency, and other information, making it difficult for us, Congress, and other stakeholders to properly assess the feasibility of the Bureau’s design and the extent to which it could lead to greater cost-effectiveness compared to alternative approaches. Questions surrounding the Bureau’s underlying budget assumptions; uncertainties over ACS; the failure to translate key goals into measurable, operational terms; and the lack of important performance data from the 2000 Census to inform 2010 decision making are just some of the problematic aspects of the 2010 planning process. More than simply paperwork or documentation issues, this information is essential for improving the performance and accountability of the Bureau and of the decennial census in particular. To be sure, some challenges are to be expected in an endeavor as demanding as counting a population that is mobile and demographically complex and whose members reside under a multitude of living arrangements. Further, shortcomings with prior censuses call for the Bureau to consider bold initiatives for 2010 that entail some risk. However, if Congress is to accept and fund the Bureau’s approach—now estimated at more than $11 billion—then the Bureau needs to more effectively demonstrate that it has (1) selected a design that will lead to the most cost- effective results and (2) establish a rigorous capacity to manage risks, control costs, and deliver a successful head count. Moreover, to ensure the nation uses the best available data, it will be important for the Bureau to research procedures that would allow it to adjust census results for purposes for which it is both legal and appropriate to do so, if it is determined that the adjusted figures would provide greater accuracy than the enumeration data. Such procedures could function as a safety net should there be problems with the initial census count. It will also be important for policymakers to consider, early in the decade, the long-term costs associated with the census and finding the right balance between controlling mushrooming costs and improving accuracy. Although initial spending on the census is relatively low, it will accelerate in the years ahead, culminating with a balloon payment in 2010 when data collection and other costly operations take place. Greater fiscal transparency prior to getting locked into a particular level of spending could help inform deliberations on the extent to which (1) the cost of the census is reasonable, (2) trade-offs will need to be made with competing national priorities, and (3) additional dollars spent on the census yield better quality data. Just over 6 years remain until Census Day 2010. While this might seem like an ample amount of time to shore up the Bureau’s planning process and take steps to control costs, past experience has shown that the chain of interrelated preparations that need to occur at specific times and in the right sequence leave little room for delay or missteps. To help control the cost of the 2010 Census and inform deliberations on the acceptability of those costs, we recommend that the Director of the Office of Management and Budget take steps to ensure that the Bureau improves the transparency of the fiscal exposure associated with the census. Specifically, OMB should ensure that the Bureau, in a notational item in the Program and Financing schedule of the President’s budget, include an updated estimate of the life cycle costs of the census and the amount of money the Bureau expects to spend in each year of the cycle, as well as an explanation of any material changes from previous plans. The information should also contain an analysis of the sensitivity of the cost figures to specific assumptions, including a range of values for key cost assumptions, their impact on total cost estimates of the census, the likelihood associated with those ranges, and their impact on the total estimated cost of the census. As part of this process, OMB should establish triggers that would signal when the yearly 2010 Census costs, total 2010 Census costs, or both exceeded some predetermined amount. In such instances, the Bureau should then be required to prepare a special report to Congress and OMB justifying why the additional costs were necessary and what alternatives were considered. Further, to enhance the Bureau’s performance and accountability, as well as to help convince Congress and other stakeholders that the Bureau has chosen an optimum design and will manage operations and control costs effectively, we recommend that the Secretary of Commerce direct the Bureau to improve the rigor of its planning process by developing an operational plan that consolidates budget, methodological, and other relevant information about the 2010 Census into a single, comprehensive project plan that would be updated as needed. Individual elements could include specific performance goals, how the Bureau’s efforts, procedures, and projects would contribute to those goals, and what performance measures would be used; risk and mitigation plans that fully address all significant potential risks; detailed milestone estimates that identify all significant annually updated life cycle cost estimates, including a sensitivity analysis, and an explanation of significant changes in the assumptions on which these costs are based. Moreover, to help ensure that the nation has at its disposal the best possible data should there be problems with the quality of 2010 Census, the Bureau, with input from both majority and minority parties in the Senate and House of Representatives, should research the feasibility of procedures that could allow it to adjust census results for those purposes for which it is both legal and appropriate to do so and, if found to be feasible, test those procedures during the 2006 census test and 2008 census dress rehearsal. The Secretary of Commerce forwarded written comments from the U.S. Census Bureau on a draft of this report that we received November 6, 2003. The comments are reprinted in appendix I. The Bureau generally disagreed with many of our key findings, conclusions, and recommendations. The Bureau believes that the report, in its discussion of escalating census costs, ignores the fact that a key cost driver is stakeholders’ demand for better accuracy. We agree with the Bureau that its mandate to count each and every resident in the face of countervailing societal trends is an important reason for the cost increases. As we noted in the report, societal changes have reduced the cost-effectiveness of the census, and it has become more and more difficult to stay on par with the results of previous enumerations. Similarly, we stated that “the legal requirement to count everyone leads the Bureau to employ operations that only marginally improve coverage but that are relatively expensive to conduct.” Further, we do not, as the Bureau asserts, treat the cost issue in a vacuum, and agree with the Bureau that little would be gained by focusing on the cost of the 2010 Census alone. Rather, any deliberations on the 2010 Census need to focus on how changes in spending on the census might affect the quality of the count. Our draft report emphasized this exact point noting that “The growing cost of the head count, at a time when the nation is facing historic budget deficits, highlights the importance of congressional deliberations on the extent to which each additional dollar spent on the census results in better data, as well as how best to balance the need for a complete count, with the need to ensure the cost of a complete count does not become unreasonable.” Similarly, we concluded that “it will also be important for policymakers to consider, early in the decade, the long-term costs associated with the census and finding the right balance between controlling mushrooming costs and improving accuracy.” The Bureau also believes the report implies that the cost increases are caused by the reengineering effort. Our draft report did not state, nor did we intend to imply, that the reengineering effort would cause most of the projected cost increases for the 2010 Census. In fact, our report even notes that the Bureau's reengineering strategy has the potential to reduce costs relative to a design that would repeat the Census 2000 approach. To help clarify this point, we added text that describes how a repeat of the 2000 approach would be more costly than the reengineered design, according to Bureau estimates. The Bureau disagreed with our recommendation to OMB regarding the need for greater budgetary transparency, noting that the real reason for the vagueness of out-year cost estimates stems from a fundamental difference of opinion between the administration and Congress over the appropriate time to share that information. We believe that it is important for the administration to provide details of out-year cost projections for the decennial census for the reason stated in our draft report: annual budget requests and reports provided to Congress early in the decennial census life cycle do not reflect the full cash consequences of the spending in later years of the decade. We understand that the Bureau has followed the administration’s guidance on providing out-year cost estimates; this is also why we directed our recommendation for greater fiscal transparency to OMB, which we discuss in greater detail below. The Bureau disagreed with our recommendation to improve the rigor of its planning process by developing an operational plan that consolidates budget, methodological, and other relevant information into a single, comprehensive project plan. The Bureau noted that these documents already exist and are widely available, and the Bureau already shares them with Congress, us, the National Academy of Sciences (NAS) Panel on Research on Future Census Methods—the panel responsible for reviewing the census, and other stakeholders. While we agree with the Bureau that some of this information is available (and we noted this fact in our draft report), it is piecemeal—one can only obtain it by cobbling together the Bureau’s budget submission, its strategic plan, and several other documents, and even then, key information such as performance goals would still be lacking. Further, although the Bureau notes that it has provided this information to the NAS panel, as we stated in our report, NAS, like us, also found the information wanting. As we described in the report, the panel shared our concerns over the need for a coherent project plan, and called on the Bureau to develop a business plan that among other things, itemized the goals, costs, and benefits of each census component and a describes how they contributed to a high-quality census. Whether it is called a business plan or a project plan, such information is not, as the Bureau maintains, simply “more process.” Quite the contrary, this information is essential for improving performance; facilitating a thorough, independent review of the Bureau’s plans; and demonstrating to Congress and other stakeholders that the Bureau can effectively design and manage operations and control costs. The Bureau incorrectly asserts that our report criticizes it for not completing the evaluations of the 2000 Census in a timely manner. Our report did not address this matter, although NAS’s Second Interim Report on Planning the 2010 Census urged the Bureau to “give high priority to evaluation studies” and complete them as expeditiously as possible. We agree that the Bureau’s planning staff do have access to the draft evaluations, and in fact, we noted in the report that they are using them in planning for the 2010 Census. The key point, however, is the Bureau’s ability to build on the results of the 2000 Census. This could be hampered by the fact that while the evaluation program assessed numerous aspects of the census, the Bureau still lacks data on the performance of key census activities as well as how specific census operations contributed to two of the Bureau’s key goals for 2000: improved accuracy and cost-effectiveness. The Bureau agreed with us that it is important to bring closure to the discussion on whether and how coverage measurement will be used in the 2010 Census. However, the Bureau believes that the approach used for the 2000 Census proved that it was not feasible to produce a final analysis of coverage measurement in time to meet redistricting requirements. We agree with the Bureau’s assessment that the coverage measurement approach used in the 2000 Census needs to be reworked. However, this should not preclude it from researching alternative approaches for the 2010 Census in light of the fact that the Bureau’s ability to maintain the level of quality reported for the 2000 Census is less than certain. Finally, the Bureau questioned our assessment that the only contingency plan for conducting the 2010 Census, if the reengineered effort fails, was to fall back on the Census 2000 methods. The Bureau maintains that the 2000 Census was by most accounts a very successful census and, accordingly, the Bureau already has available the methods and procedures for taking an excellent census. Our report does not advocate the development of another set of census methods. Rather, we were trying to illustrate the challenge the Bureau faces in implementing its reengineering plans, where the failure of any one leg could compromise the other two, thereby requiring the Bureau to rely on the approach it used for the 2000 Census. According to Bureau officials, this in turn could make it difficult for the Bureau to accomplish its goals for the 2010 Census, which include cost containment and better quality data. On October 14, 2003, the Associate Director for General Government Programs, OMB, provided written comments on a draft of this report, which are reprinted in appendix II. OMB shared our view that the costs and risks associated with the 2010 Census must be carefully monitored and evaluated throughout the decade. OMB also agreed that it is essential to understand the key cost drivers and said that it is working with the U.S. Census Bureau to ensure that the Bureau develops high-quality, transparent life cycle cost estimates. However, OMB disagreed with our recommendation that it ensure that the Bureau, include a notational item in the Program and Financing (P&F) schedule of the President’s Budget with an updated estimate of the life cycle costs of the census and the amount of money the Bureau expects to spend in each year of the cycle, as well as an explanation of any significant changes from previous plans. OMB believes that the Bureau’s report on the life cycle costs, which is updated regularly, is the best mechanism to present estimates of the total life cycle costs and explanations for any material changes from previous plans. Further, OMB noted that presenting this information in the P&F schedule is cumbersome and unnecessary because the Analytical Perspectives volume of the President’s Budget currently shows out-year estimates that incorporate anticipated programmatic changes of the Decennial Census within the Periodic Censuses and Program account. As noted in our report, we do not believe the information OMB currently reports to Congress is sufficiently timely or detailed to provide the level of transparency needed for effective congressional oversight and cost control. Indeed, while OMB cites the Bureau’s life cycle report, the document that we reviewed for this report took the Bureau nearly 2 years to revise. Moreover, the revised estimates, like the original estimates, overstated the life cycle cost estimate by $300 million because the Bureau did not take into account a surplus of that amount that it identified near the end of fiscal year 2000. Although the Bureau is to reissue the 2010 life cycle cost estimates early in calendar year 2004, the incorrect estimates will have been in circulation for more than 2 years. Additionally, the information contained in the Analytical Perspectives volume of the President’s Budget is limited. For example, it only provides information on out-year estimates for 5 years. As a result, the volume will not include estimates for the high-cost year of 2010 until the release of the President’s fiscal year 2006 budget. Further, the Analytical Perspectives volume lacks information on the sensitivity of cost figures to specific assumptions and the likelihood of these estimates. It also does not contain any explanations of changes in cost estimates from year to year. Complete and transparent information on out-year costs is important to inform deliberations on the acceptability of these costs and to ensure that Congress understands the possible range of census life cycle costs. OMB also disagreed with our recommendation to establish triggers to signal when the yearly 2010 Census costs, total 2010 Census costs, or both exceeded some predetermined amount. OMB noted that it has established internal procedures within its budget reviews to monitor 2010 Census costs and believes they are sufficient for ensuring that estimates are not exceeded without clear justification. OMB added that this justification could be included in the Bureau’s updates to its life cycle cost estimates. Although OMB’s internal procedures might be sufficient for OMB’s requirements, they do little to address the fundamental need for greater fiscal transparency. Continued reliance on these procedures would inhibit independent review by congressional and other external stakeholders, as well as limit informed discussion of the trade-offs of dollars versus accuracy and what cost control measures, if any, might be needed to make the 2010 Census more affordable. In closing, OMB commented that the Bureau’s reengineering plan is being reviewed by NAS as well as seven advisory committees. OMB stated that the analyses stemming from these reviews, such as NAS’s recently issued report on census planning, enhance the Bureau’s accountability and help ensure “that the ultimate 2010 Census design is optimal.” We agree with OMB that NAS and the advisory committees are important for reviewing the Bureau’s plans and holding the Bureau accountable for a cost-effective census in 2010. And this is precisely why we made the recommendations that we did. Without a transparent budgeting and planning process, a thorough, independent review by these and other external groups would be difficult to impossible. That greater transparency is needed in both these areas is highlighted not just in our report, but in the very NAS study that OMB cites. Indeed, NAS found that “a major conclusion of the panel is that discussion of the 2010 Census design needs to be more fully informed by the evaluation of various trade- offs—the costs and benefits of various reasonable approaches in order to make wise decisions.” As agreed with your offices, unless you release its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time we will send copies to other interested congressional committees, the Secretary of Commerce, the Director of the U.S. Census Bureau, and the Director of the Office of Management and Budget. Copies will be made available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-6806 or [email protected] or Robert Goldenkoff, Assistant Director, at (202) 512-2757 or [email protected]. Key contributors to this report were Richard Donaldson, Ty Mitchell, Robert Yetvin, and Christine Bonham. The U.S. Census Bureau (Bureau) has given its Decennial Management Division responsibility for planning the 2010 Census, including the American Community Survey (ACS) and the Master Address File/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) enhancements. The division established an executive steering committee, shown in figure 5, for this purpose. Each group under the 2010 Census planning organization has specific activities that it was charged with studying. Listed below are the research and development planning groups chartered at the time of our review and a list of these activities. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. 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The key to a successful census is meticulous planning as it helps ensure greater cost-effectiveness. However, the 2000 and previous censuses have been marked by poor planning, which unnecessarily raised the costs and risks of those efforts. GAO was asked to (1) review the U.S. Census Bureau's (Bureau) current plans for 2010 and whether they might address shortcomings of the 2000 Census, (2) analyze the Bureau's cost estimates, and (3) review the rigor of the Bureau's 2010 planning process. While preparations for the 2010 Census appear to be further along compared to a similar point prior to the 2000 Census, cost and design information had to be pieced together from various documents. The Bureau's plans also lack a substantial amount of supporting analysis, budgetary transparency, and other information that made it difficult to verify the Bureau's assertions concerning the costs and benefits of its proposed approach. Further, unlike in previous censuses, the Bureau does not intend to develop coverage measurement procedures that would allow it to adjust census data for certain purposes. Although its experience in 2000 shows that its coverage measurement methodology needs improvement, GAO believes the Bureau should have researched alternative approaches more thoroughly and disclosed the results of its research before making a decision. In designing the 2010 Census, the Bureau hoped to address several shortcomings of the 2000 enumeration, namely to (1) increase the relevance and timeliness of data, (2) reduce operational risk, (3) increase coverage and accuracy, and (4) contain costs. To achieve these goals, three components--all new operations--are key to the Bureau's plans for 2010. They include enhancing procedures for building the census address list and associated maps, replacing the census long-form questionnaire with a more frequent sample survey, and conducting a short-form-only census. The Bureau's approach has the potential to achieve the first three goals, but reducing operational risk could prove to be more difficult as each of the three components actually introduces new risks. The Bureau will also be challenged to control the cost of the 2010 Census, now estimated at over $11 billion. The current budget reporting process masks the long-term costs of the census, most of which will be incurred in 2010; making it difficult for Congress to monitor the Bureau's planned expenditures. Certain actions by the Office of Management and Budget could produce greater fiscal transparency, and thus help inform congressional deliberations on how to best balance the need for an accurate census, with the need to ensure a reasonable cost for this endeavor.

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According to HHS, widespread use of health information technology could improve the quality of care received by patients and reduce health care costs. One such technology, electronic prescribing, can be used, for example, to electronically transmit a prescription or prescription-related information between a health care provider and a pharmacy or to provide other technological capabilities, such as alerting a provider to a potential interaction between a drug and the patient’s existing medications. In traditional, or paper-based, prescribing, health care providers that are licensed to issue prescriptions for drugs (e.g., physicians or others licensed by the state) write a prescription, and calling it into or have the patient take that prescription to a dispenser (e.g., pharmacy) to be filled. In contrast, use of an electronic prescribing system consists of a licensed health care provider using a computer or hand-held device to write and transmit a prescription directly to the dispenser. Before doing so, the health care provider can request the beneficiary’s eligibility, formulary, benefits, and medication history. Figure 1 illustrates an example of the flow of information during the electronic prescribing process. In order to transmit a prescription electronically, multiple entities need to have access to an individual’s identifiable health information in an electronic format. Federal laws and regulations dictate the acceptable use and disclosure activities that can be performed with individually identifiable health information, defined as protected health information (PHI). These activities include treatment, payment, health care operations, and—provided certain conditions are met—public health or research purposes. For example, electronic health information can be held by covered entities that perform treatment functions for directly providing clinical care to a patient through electronic prescribing. These covered entities and business associates, such as medical professionals, pharmacies, health information networks, and pharmacy benefit managers, work together to gather and confirm patients’ electronic health information for prescribing, such as a beneficiary’s eligibility, formulary, benefits, and medication history. To electronically transmit prescription drug data between a health care provider and a pharmacy, an electronic health record can be used to obtain information about the health of an individual or the care provided by a health practitioner. In both paper-based and electronic prescribing, information is also provided to the individual’s health plan for payment, which would include the identification of the beneficiary, the pharmacy, and the drug cost information. In the case of Medicare beneficiaries’ prescription drug data, the information is provided to CMS for Part D payment calculations. Every time a beneficiary fills a prescription under Medicare Part D, a prescription drug plan sponsor must submit a summary record called prescription drug event data to CMS. The prescription drug event data record contains PHI, such as date of birth, the pharmacy that filled the prescription, and the drug dispensed, that enables CMS to make payments to plans. Appendix II provides a summary of the permitted uses and disclosures of PHI. Under certain circumstances, PHI, including prescription drug use information, can be used for purposes not related to directly providing clinical care to an individual. For example, CMS makes Medicare beneficiaries’ prescription drug event data available for use in research studies. Release of these elements outside of CMS must be in accordance with its policies and data-sharing procedures. For example, in order to obtain access to this information interested parties must send in an application and submit a user agreement. Table 1 provides other examples of using prescription drug use data for purposes other than directly providing clinical care. Depending on the nature of the use, the prescription drug use information is used and transmitted in identifiable form or in de-identified format, which involves the removal of PHI (e.g., name, date of birth, and Social Security number) that can be used to identify an individual. Key privacy and security protections associated with individually identifiable health information, including prescription drug information used for purposes other than directly providing clinical care, are established in two federal laws, HIPAA and the HITECH Act. Recognizing that benefits and efficiencies could be gained by the use of information technology in health care, as well as the importance of protecting the privacy of health information, Congress passed HIPAA in 1996. Under HIPAA, the Secretary of HHS is authorized to promulgate regulations that establish standards to protect the privacy of certain health information and is also required to establish security standards that require covered entities that maintain or transmit health information to maintain reasonable and appropriate safeguards. HIPAA’s Administrative Simplification Provisions provided for the establishment of national privacy and security standards, as well as the establishment of civil money and criminal penalties for HIPAA violations. HHS promulgated regulations implementing the act’s provisions through its issuance of the HIPAA rules–the Privacy Rule, the Security Rule, and the Enforcement Rule. The rules cover PHI and require that covered entities only use or disclose the information in a manner permitted by the Privacy Rule, and take certain measures to ensure the confidentiality and integrity of the information and to protect it against reasonably anticipated unauthorized use or disclosure and threats or hazards to its security. HIPAA provides authority to the Secretary to enforce these standards. The Enforcement Rule provides rules governing HHS’s investigation of compliance by covered entities, both through the investigation of complaints and the conduct of compliance reviews, and also establishes rules governing the process and grounds for establishing the amount of a civil money penalty for a HIPAA violation. The Secretary has delegated administration and enforcement of privacy and security standards to the department’s Office for Civil Rights (OCR). The HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009 (Recovery Act), is intended to promote the adoption and meaningful use of health information technology to help improve health care delivery and patient care. The act adopts amendments designed to strengthen the privacy and security protections of health information established by HIPAA and also adopts provisions designed to strengthen and expand HIPAA’s enforcement provisions. Table 2 below provides a brief overview of the HITECH Act’s key provisions for strengthening HIPAA privacy and security protection requirements. Under the HITECH Act, the Secretary of HHS has significant responsibilities for enhancing existing enforcement efforts, providing public education related to HIPAA protections, and providing for periodic audits to ensure HIPAA compliance. In implementing the act’s requirements, OCR’s oversight and enforcement efforts are to be documented and reported annually to Congress. These annual reports provide information regarding complaints of alleged HIPAA violations and the measures taken to resolve the complaints. These reports and other related information are required by the HITECH Act to be made publicly available on HHS’s website. In response to requirements set forth in HIPAA and the HITECH Act, HHS, through OCR, has established a framework for protecting the privacy and security of individually identifiable health information, including Medicare beneficiaries’ prescription drug use information used for purposes other than directly providing clinical care. This framework includes (1) establishing regulatory requirements, (2) issuing guidance and performing outreach efforts, and (3) conducting enforcement activities to ensure compliance with the rules. However, OCR has not issued required guidance to assist entities in de-identifying individually identifiable health information due to—according to officials—competing priorities for resources and internal and external reviews. Furthermore, although it has recently initiated a pilot audit program, the office has not implemented periodic compliance audits as required by the HITECH Act. Until these requirements are fulfilled, OCR will have limited assurance that covered entities and business associates are complying with HIPAA regulations. The Secretary of HHS issued regulations, such as the HIPAA rules, that implement HIPAA requirements and amendments required by the HITECH Act to govern the privacy and security of individually identifiable health information, known as PHI. These rules establish the required protections and acceptable uses and disclosures of individually identifiable health information, including Medicare beneficiaries’ prescription drug use information. HIPAA provided for the Secretary of HHS to, among other things, (1) issue privacy regulations governing the use and disclosure of PHI and (2) adopt security regulations requiring covered entities to maintain reasonable and appropriate technical, administrative, and physical safeguards to protect the information. In December 2000, to address the privacy regulation requirement, HHS issued the Privacy Rule. The Privacy Rule regulates covered entities’ use and disclosure of PHI. Under the Privacy Rule, a covered entity may not use or disclose an individual’s PHI without the individual’s written authorization, except in certain circumstances expressly permitted by the Privacy Rule. The Privacy Rule reflects basic privacy principles for ensuring the protection of personal health information, as summarized in table 3. The Privacy Rule generally requires that a covered entity make reasonable efforts to use, disclose, or request only the minimum necessary PHI to accomplish the intended purpose. Further, the Privacy Rule establishes methods for de-identifying PHI. Under the rule, once identifiers are removed from a data set, it is no longer considered individually identifiable health information and the HIPAA protections no longer apply. De-identification provides a mechanism for reducing the amount of PHI used and disclosed. The Privacy Rule establishes two ways in which PHI can be de-identified. The Safe Harbor Method requires the removal of 18 unique types of identifiers from a data set coupled with no actual knowledge that the remaining data could be used to reidentify an individual, either alone or in combination with other information. The expert determination method requires a qualified statistician or other appropriate expert, using generally accepted statistical and scientific principles, to determine that the risk is very small that an individual could be identified from the information when used alone or in combination with other reasonably available information. In February 2003, to implement HIPAA security requirements for protecting PHI, HHS issued the HIPAA Security Rule. To ensure that reasonable safeguards are in place to protect electronic PHI, including Medicare beneficiaries’ health information, from unauthorized access or disclosure, the Security Rule specifies a series of administrative, technical, and physical safeguards for covered entities to implement to ensure the confidentiality, integrity, and availability of electronic PHI. Table 4 summarizes these security safeguards. The Security Rule, which applies only to PHI in electronic form, states that covered entities have the flexibility to use any security measures that allow them to reasonably and appropriately implement specified standards. Specifically, the rule states that in deciding what security measures are appropriate, the covered entity must take into account elements such as its size, complexity, technical infrastructure, cost of security measures, and the probability and criticality of potential risks to its PHI. The HITECH Act set additional requirements for the Secretary of HHS and expanded and strengthened certain privacy and security requirements mandated under HIPAA and the HIPAA rules. Specifically, to implement provisions of the HITECH Act, the Secretary was required to (1) issue breach notification regulations to require covered entities and business associates under HIPAA to provide notification to affected individuals and the Secretary concerning the unauthorized use and disclosure of unsecured PHI; (2) establish enforcement provisions for imposing an increased tiered structure for civil money penalties for violations of the Privacy and Security Rules; and (3) extend certain Privacy and Security Rule requirements to business associates of covered entities. Such required activities are intended to strengthen protections for PHI, including Medicare beneficiaries’ prescription drug use information. To implement these provisions of the act, OCR issued two interim final rules—the Breach Notification for Unsecured Protected Health Information Rule, known as the “Breach Notification Rule,” and the HITECH Act Enforcement Rule—and has developed a draft rule intended to, among other things, extend the applicability of certain requirements of the Privacy and Security Rules to business associates. OCR issued the Breach Notification for Unsecured Protected Health Information Rule in August 2009. This rule contains detailed requirements for HIPAA-covered entities and business associates to notify affected individuals and the Secretary following the discovery of a breach of unsecured PHI. In addition, in October 2009, OCR issued the HITECH Enforcement Rule, which amends the HIPAA rules to incorporate HITECH Act provisions establishing categories of violations based on increasing levels of culpability and correspondingly increased tier ranges of civil money penalty amounts. In addition, in July 2010, OCR issued a notice of proposed rulemaking to modify the HIPAA Privacy, Security, and Enforcement Rules to implement other provisions of the HITECH Act. According to the OCR website, the proposed rule is intended to, among other things, make modifications to extend the applicability of certain Privacy and Security Rule requirements to the business associates of covered entities, strengthen limitations on the use or disclosure of PHI for marketing and fundraising and prohibit the sale of PHI, and expand individuals’ rights to access their information and obtain restrictions on certain disclosures of protected health information to health plans. According to OCR officials, the proposed rule is currently under review by the Office of Management and Budget (OMB), and OCR officials have not determined an estimated time frame for its issuance. The HITECH Act also requires HHS to educate members of the public about how their PHI, which may include Medicare beneficiaries’ prescription drug use information, may be used. In addition, the HITECH Act requires HHS to provide guidance for covered entities on implementing HIPAA requirements for de-identifying data—that is, taking steps to ensure the data cannot be linked to a specific individual. Specifically, the act requires HHS to provide information to educate individuals about the potential uses of PHI, the effects of such uses, and the rights of individuals with respect to such uses. In addition—to clarify the de-identification methods established in the HIPAA Privacy Rule—the HITECH Act required OCR to produce guidance by February 2010 on how best to implement the HIPAA Privacy Rule requirements for the de- identification of protected health information. OCR has undertaken an array of efforts since the rules were issued, as well as to implement the HITECH Act’s requirements to promote awareness of the general uses of PHI and the privacy and security protections afforded to the identifiable information. For example, the office has made various types of information resources publicly available. Through its website, the office provides a central hub of resources related to HIPAA regulations, ranging from guidance to consumers on their rights and protections under the HIPAA rules to compliance guidance to covered entities. More specifically, the office has developed resources to guide covered entities and business associates in implementing the provisions of the Privacy and Security Rules, which include, among other things, examples of business associate contract provisions for sharing PHI, answers to commonly asked questions, summaries of the HIPAA rules, and information on regional privacy officers designated to offer guidance and education assistance to entities and individuals on rights and responsibilities related to the Privacy and Security Rules. Table 5 below provides a brief overview of OCR’s guidance and education outreach activities in regard to their target audience, purpose, and guidance materials. In another effort to promote awareness, OCR–—in conjunction with the Office of the National Coordinator for Health Information Technology— established a Privacy and Security Toolkit to provide guidance on privacy and security practices for covered entities that electronically exchange health information in a network environment. The toolkit was developed to implement the Nationwide Privacy and Security Framework for Electronic Exchange of Individually Identifiable Health Information, also known as the Privacy and Security Framework, and includes tools to facilitate the implementation of these practices to protect PHI. Guidance included with the toolkit includes, among other things, security guidelines to assist small health care practices as they become more reliant on health information technology and facts and template examples for developing notices for informing consumers about a company’s privacy and security policies in a web-based environment. Although OCR has initiated these efforts to fulfill its responsibilities to promote awareness of allowable uses and provide guidance for complying with required protections under the HITECH Act, it has yet to publish HITECH Act guidance on implementing HIPAA de-identification methods, which was to be issued by February 2010. OCR officials stated that they have developed a draft of the de-identification guidance, but have not set an estimated issuance date. According to the officials, the draft guidance was developed based on the office’s solicitation of best practices and guidelines from multiple venues and forums, including a workshop panel discussion with industry experts in March 2010 that included discussions on best practices and risks associated with de- identifying PHI. The officials stated that guidance will explain and answer questions about de-identification methods as well as clarify guidelines for conducting the expert determination method of de-identification to reduce entities’ reliance on the Safe Harbor method. The issuance of such implementation guidance could provide covered entities—including those that rely on de-identified prescription drug use information for purposes other than directly providing clinical care—with guidelines and leading practices for properly de-identifying PHI in accordance with Privacy Rule requirements. According to OCR officials, competing priorities for resources and internal reviews have delayed the issuance of the guidance. Officials stated that the draft is currently under government wide review. Although officials stated that the guidance will be issued upon completion of the review, no estimated time frame has been set. Until this guidance is issued, increased risk exists that covered entities are not properly implementing the standards set by the HIPAA Privacy Rule and that identifiers are not properly removed from PHI. Federal laws authorize HHS to take steps to ensure that covered entities comply with HIPAA privacy and security requirements targeted toward protecting patient data, including Medicare beneficiaries’ prescription drug use information. Specifically, HHS has authority to enforce compliance with the Privacy and Security Rules in response to, among other things, (1) complaints reporting potential privacy and security violations and (2) data breach notifications submitted by covered entities. Furthermore, the HITECH Act increased HHS’s oversight responsibilities by requiring the department to perform periodic audits to ensure covered entities and business associates are complying with the Privacy and Security Rules and breach notification standards. OCR has developed and implemented an enforcement process that is focused on conducting investigations in response to actions that potentially violate the Privacy and Security Rules. According to OCR officials, the office opens investigations in response to submitted complaints and data breach notifications, as well as conducts compliance reviews based on other reports of potential violations of which the department becomes aware. If necessary, it then requires covered entities to make changes to their privacy and security practices. OCR receives thousands of complaints and breach notifications each year. Officials stated that these complaints and notifications are reviewed to determine if they are eligible for enforcement and require an OCR investigation. According to information provided by OCR, from 2006 to 2010 the office has received on average about 8,000 Privacy and Security Rule complaints each year. OCR officials reported that as of February 2012, the office conducted investigations of approximately 24,000 complaints alleging compliance violations of the Privacy or Security Rule, resulting in corrective actions by covered entities in 66 percent of the cases. Corrective actions have included training or sanctioning employees, revising policies and procedures, and mitigating any alleged harm. According to OCR’s annual report to Congress on HIPAA Privacy and Security Rule compliance, in instances where an investigation resulted in a determination that a violation of the Privacy or Security Rule occurred, the office first attempted to resolve the case informally by obtaining voluntary compliance through corrective action. Compliance issues investigated most often include impermissible uses and disclosures of PHI and lack of safeguards for or patient access to PHI. As of May 2012, OCR investigations have resulted in the issuance of a resolution agreement in eight cases. According to OCR officials, a resolution agreement is a formal agreement between OCR and the investigated entity and is used to settle investigations with more serious outcomes. A resolution agreement is a contract signed by HHS and a covered entity in which the covered entity agrees to perform corrective actions (e.g., staff training), submit progress reports to HHS (generally for a period of 3 years), and—in some cases—pay a monetary fine. The eight resolution agreements entered into with the investigated entities all included a payment of a resolution amount, and the development or revision of policies and procedures. In six of these cases further submission of compliance reports or compliance monitoring was required for 2 to 3 years. For example, in response to complaints that several patients’ electronic PHI was viewed without permission by university health system employees, OCR initiated an investigation which revealed that unauthorized employees repeatedly looked at the electronic PHI for numerous patients. The university health system agreed to settle potential violations of the Privacy and Security Rules by committing to a corrective action plan and paying approximately $865,000. When a covered entity does not cooperate with an OCR investigation or take action to resolve a violation, the office also has the authority to impose a civil money penalty. OCR can levy civil money penalties for failure to comply with the requirements of the Privacy Rule, Security Rule, and Breach Notification Rule. For each violation, the maximum penalty amount in four separate categories is $50,000. For multiple violations of an identical provision in a calendar year, the maximum penalty in each category is $1.5 million. As of May 2012, OCR had issued one civil money penalty for noncompliance in the amount of $4.3 million. Since February 2010, pursuant to the HITECH Act, OCR has received and used the money from settlement amounts and civil money penalties for enforcement of the HIPAA rules. In June 2011, OCR initiated efforts to conduct pilot audits of 150 covered entities by the end of December 2012. The office contracted for a private firm to identify the population of covered entities from which to select audit candidates. Additionally, the office contracted with a private audit firm to develop the initial audit procedures for covered entities. These procedures—which OCR documentation asserts are to be in accordance with generally accepted government auditing standards—are composed of the requirements from the Privacy, Security and Breach Notification Rules, which include protections afforded to prescription drug use information and uses of it for purposes other than directly providing clinical care. In January 2012, OCR officials stated that the target for audits to complete was revised to 115. According to OCR documentation, during the pilot each audit is conducted based on the following steps: 1. An audit is initiated with the selected covered entity being informed by OCR of its selection and asked to provide documentation of its privacy, security, and breach notification compliance efforts to the contracted auditors. 2. Contracted auditors use the audit procedures developed to assess the compliance activities of the covered entity. According to officials and documentation provided, these procedures correspond to the requirements of the Privacy, Security, and Breach Notification Rules. In this pilot phase, every audit will include a documentation review and site visit. 3. Contracted auditors will provide the audited covered entity the draft findings within 30 days after conclusion of the field work. 4. Audited entities will have 10 days to provide the audit contractor with comments and outline corrective actions planned or taken. 5. Contracted auditors will develop a final audit report to submit to OCR within 30 days of receipt of the comments. The final report will describe how the audit was conducted, what the findings were, and what actions the covered entity is taking in response to those findings as well as describe any best practices of the entity. According to OCR officials, an initial set of 20 pilot audits was completed by March 2012. Officials stated that these initial audits resulted in the identification of both privacy and security issues at covered entities, such as potential impermissible uses and disclosures and not appropriately conducting reviews of audit logs and other reports monitoring activity on information systems. OCR officials stated that the remaining 95 pilot audits, 25 of which were initiated in April 2012, will be completed by the end of December 2012. However, OCR has yet to establish plans for (1) continuing the audit program once the audit pilot finishes in December 2012 and (2) auditing business associates for privacy and security compliance. According to OCR officials, the dedicated Recovery Act funding for the office’s audit effort will expire at the end of December 2012 and officials stated that they have not yet finalized a decision on the future of the program, including the manner in which an audit process will need to be designed to address compliance by business associates. OCR officials stated that the office plans to award a contract in 2012 for a review of the pilot program, including a sample of audits completed during the pilot. OCR officials anticipate that this review will help determine how the office can fully implement an audit function. Implementing a sustained audit program could allow OCR to help covered entities and business associates identify and mitigate risks and vulnerabilities that may not be identified through OCR’s current reactive processes. Furthermore, inclusion of business associates in such a program is important because, according to OCR data, more than 20 percent of data breaches affecting over 500 individuals that were reported to OCR involved business associates. Without a plan for deploying a sustained audit capability on an ongoing basis, OCR will lack the ability to ensure that covered entities and business associates are complying with HIPAA regulations, including properly de-identifying PHI when data on prescription drug use are used for purposes other than directly providing clinical care. Through its issuance of regulations, outreach, and enforcement activities, HHS has established a framework for protecting the privacy and security of Medicare beneficiaries’ prescription drug use information when used for purposes other than directly providing clinical care. It has also promoted public awareness on the uses and disclosures of PHI through its education and outreach activities. Further, OCR has established and implemented a process to enforce provisions of the HIPAA Privacy and Security Rules through investigations. However, it has not issued required implementation guidance to assist entities in de-identifying PHI. By not issuing the guidance, increased risk exists that covered entities are not properly implementing the standards set by the HIPAA Privacy Rule and that PHI is not properly stripped of all identifiers that would identify an individual. In addition, OCR has not fully established a capability to proactively monitor covered entities’ compliance through the use of periodic audits as required by the HITECH Act. Specifically, OCR has yet to establish plans for a sustained audit capability upon completion of its pilot program at the end calendar year 2012 and has yet to determine how to include auditing business associates. Without a plan for deploying a sustained audit capability on an ongoing basis, OCR will have limited assurance that covered entities and business associates are complying with HIPAA regulations, including whether Medicare beneficiaries’ prescription drug use information, when used for purposes other than directly providing clinical care, is being appropriately safeguarded from compromise. To improve the department’s guidance and oversight efforts for ensuring the privacy and security of protected health information, including Medicare beneficiaries’ prescription drug use information, we recommend that the Secretary of HHS direct the Director of the Office for Civil Rights to take the following two actions: Issue guidance on properly implementing the HIPAA Privacy Rule requirements for the de-identification of protected health information.  Establish plans for conducting periodic audits to ensure covered entities and business associates are complying with the HIPAA Privacy and Security Rules and breach notification standards. In written comments on a draft of the report, the HHS Assistant Secretary for Legislation agreed with our two recommendations, but provided qualifying comments for both. HHS’s comments are reprinted in appendix III. Regarding our recommendation that OCR issue guidance on properly implementing the HIPAA Privacy Rule requirements for the de- identification of protected health information, the Assistant Secretary stated that while the department agrees that issuing the guidance will be helpful to covered entities, the department does not agree that without the guidance, covered entities will have limited assurance that they are complying with the HIPAA Privacy Rule de-identification standards. The Assistant Secretary noted that covered entities have been operating under these existing de-identification standards for almost 10 years and that OCR has not found that the standards have been the subject of significant or frequent compliance issues by covered entities. The Assistant Secretary noted that OCR’s purpose in issuing the de- identification guidance was to provide covered entities with the current options and approaches available for de-identifying health information. We agree that the existing agency information on the de-identification standards provide a level of assurance that covered entities have the parameters and requirements needed to properly remove identifiers from PHI and have clarified this in our report. However, the HITECH Act requires HHS to issue de-identification implementation guidance that addresses how covered entities should implement the de-identification standards. OCR officials stated that the planned guidance will explain and answer questions about de-identification methods as well as clarify guidelines for conducting the expert determination method of de- identification to reduce entities’ reliance on the Safe Harbor method. Such information could assist covered entities in determining how to properly implement the de-identification methods. Until such implementation guidance is issued, increased risk exists that covered entities are not properly adhering to the standards set by the HIPAA Privacy Rule and that PHI is not properly stripped of all identifiers that would identify an individual. Regarding our recommendation that OCR establish plans for conducting periodic audits to ensure covered entities and business associates are complying with the HIPAA Privacy and Security Rules and breach notification standards, the Assistant Secretary stated the department did not agree with our report’s conclusion that without such a plan, OCR will lack the ability to ensure that covered entities and business associates are complying with the HIPAA rules. Specifically, he stated that our conclusion did not adequately take into account the considerable impact of the thousands of complaint investigations, compliance reviews, and other enforcement activities OCR conducts annually to ensure covered entities are complying with the rules. He noted that although the audit function is a critical compliance tool for identifying vulnerabilities, the importance of the audit function should not be understood to diminish the effectiveness of OCR’s other enforcement activities for bringing about and enforcing compliance with the HIPAA rules. As our report highlighted, OCR has developed and implemented an enforcement process that is focused on responding to actions that potentially violate the Privacy and Security Rules. OCR conducts this reactive process through processing complaints and conducting thousands of investigations each year. An audit program is an important addition to OCR’s compliance program as it is a tool to identify vulnerabilities before they cause breaches and other incidents. Without the addition of a proactive process, such as an audit capability, OCR will have limited assurance that covered entities are complying with HIPAA regulations. HHS also provided technical comments on the report draft, which we addressed in the final report as appropriate. We will send copies of this report to other interested congressional committees and the Secretary of Health and Human Services. The report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6244 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Our objective was to determine the extent to which the Department of Health and Human Services (HHS) has established a framework to ensure the privacy and security of Medicare beneficiaries’ protected health information (PHI) when data on prescription drug use are used for purposes other than their direct clinical care. To address our objective, we identified HHS’s and its Office for Civil Rights’ (OCR) responsibilities for protecting the privacy and security of PHI by reviewing and analyzing the Health Insurance Portability and Accountability Act (HIPAA), including the HIPAA Privacy and Security Rules; the Health Information Technology for Economic and Clinical Health (HITECH) Act; and applicable privacy best practices, such as the Fair Information Practices. To obtain information on OCR efforts in implementing HIPAA’s and the HITECH Act’s requirements, we reviewed and analyzed documentation related to the office’s public outreach and guidance efforts, enforcement practices, and regulations for covered entity and business associate compliance provided by the office and through the department’s website and compared those documents to the office’s statutory requirements. To obtain information on the office’s enforcement through complaint and breach notice investigations, we interviewed officials, reviewed agency- provided and public information, and analyzed agency documentation. We conducted interviews with OCR officials to discuss the department’s approaches and future plans for addressing the protection and enforcement requirements of the HIPAA Privacy and Security Rules that applied to covered entities and business associates. We also analyzed plans and documentation provided by OCR officials that described enforcement and compliance activities for developing an audit mechanism and compared them with requirements for the audit program established in the HITECH Act. To describe the uses of prescription drug use data for purposes other than directly providing clinical care, we interviewed representatives from several covered entities, business associates, and medical associations, and reviewed the HIPAA Privacy Rule and academic publications. We conducted this performance audit at the Department of Health and Human Services in Washington, D.C., from August 2011 through June 2012, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Description The provision, coordination, or management of health care and related services among health care providers or by a health care provider with a third party, consultation between health care providers regarding a patient, or the referral of a patient from one health care provider to another. The various activities of health care providers to obtain payment or be reimbursed for their services and of a health plan to obtain premiums, to fulfill their coverage responsibilities and provide benefits under the plan, and to obtain or provide reimbursement for the provision of health care. Certain administrative, financial, legal, and quality improvement activities of a covered entity, as defined in the Privacy Rule, that are necessary to run its business and to support the core functions of treatment and payment. Example A hospital may use protected health information about an individual to provide health care to the individual and may consult with other health care providers about the individual’s treatment. A hospital may send a patient’s health care instructions to a nursing home to which the patient is transferred. A hospital emergency department may give a patient’s payment information to an ambulance service provider that transported the patient to the hospital in order for the ambulance provider to bill for its service. With certain exceptions, to make a communication about a product or service that encourages recipients of the communication to purchase or use the product or service. Marketing includes an arrangement between a covered entity and any other entity, whereby the covered entity discloses PHI to the other entity in exchange for direct or indirect remuneration, for the other entity or its affiliate to make a communication about a product or service that encourages recipients of the communication to purchase or use the product or service. With limited exceptions, such as for face to face communications, the Privacy Rule requires an individual’s written authorization before a use or disclosure of his or her PHI can be made for marketing. Covered entities may disclose protected health information, without authorization, to public health authorities who are legally authorized to receive such reports for the purpose of preventing or controlling disease, injury, or disability. Conducting quality assessment and improvement activities, and case management and care coordination. Business management and general administrative activities, including those related to implementing and complying with the Privacy Rule. Needing an individual’s authorization: A health plan sells a list of its members to a company that sells blood glucose monitors, which intends to send the plan’s members brochures on the benefits of purchasing and using the monitors. Not needing an individual’s authorization: An insurance agent sells a health insurance policy in person to a customer and proceeds to also market a casualty and life insurance policy as well. A systematic investigation, including research development, testing, and evaluation, designed to develop or contribute to generalizable knowledge. To use or disclose protected health information without authorization by the research participant, a covered entity must obtain either: (1) institutional review board or privacy board waiver of authorization; (2) representations for a preparatory to research activity; (3) representations that the research is on the protected health information of decedents; or (4) a data use agreement with recipient where only a limited data sets is shared. The social services department of a local government might have legal authority to receive reports of child abuse or neglect, in which case the Privacy Rule would permit a covered entity to report such cases to that authority without obtaining individual authorization. Approval of a waiver of authorization by an Institutional Review Board or Privacy Board for research, such as for certain records research, when the Board has determined that the use or disclosure of protected health information involves no more than a minimal risk to the privacy of individuals, and the research could not practicably be conducted without the waiver and without access to the protected health information. In addition to the contact above, John de Ferrari, Assistant Director; Nick Marinos, Assistant Director; Sher`rie Bacon; Marisol Cruz; Wilfred Holloway; Lee McCracken; Monica Perez-Nelson; Matthew Snyder; Daniel Swartz; and Jeffrey Woodward made key contributions to this report.

Prescribing medications and filling those prescriptions increasingly relies on the electronic collection of individuals’ health information and its exchange among health care providers, pharmacies, and other parties. While this can enhance efficiency and accuracy, it also raises privacy and security concerns. Federal law establishes the authority for the Secretary of HHS to develop standards for protecting individuals’ health information (which includes Medicare beneficiaries) and to ensure that covered entities (such as health care providers and pharmacies) and their business associates comply with these requirements. The Medicare Improvements for Patients and Providers Act of 2008 required GAO to report on prescription drug use data protections. GAO’s specific objective for this review was to determine the extent to which HHS has established a framework to ensure the privacy and security of Medicare beneficiaries’ protected health information when data on prescription drug use are used for purposes other than direct clinical care. To do this, GAO reviewed HHS policies and other related documentation and interviewed agency officials. While the Department of Health and Human Services (HHS) has established a framework for protecting the privacy and security of Medicare beneficiaries’ prescription drug use information when used for purposes other than direct clinical care through its issuance of regulations, outreach, and enforcement activities, it has not issued all required guidance or fully implemented required oversight capabilities. HHS has issued regulations including the Health Insurance Portability and Accountability Act (HIPAA) Privacy and Security Rules to safeguard protected health information from unauthorized use and disclosure. Through its Office for Civil Rights (OCR), HHS has undertaken a variety of outreach and educational efforts to inform members of the public and covered entities about the uses of protected health information. Specifically, OCR has made available on its website guidance and other materials informing the public about the uses to which their personal information may be put and the protections afforded to that information by federal laws. It has also made available guidance to covered entities and their business associates that is intended to promote compliance with the HIPAA Privacy and Security Rules. However, HHS has not issued required implementation guidance to assist entities in de-identifying personal health information including when it is used for purposes other than directly providing clinical care to an individual. This means ensuring that data cannot be linked to a particular individual, either by removing certain unique identifiers or by applying a statistical method to ensure that the risk is very small that an individual could be identified. According to OCR officials, the completion of the guidance, required by statute to be issued by February 2010, was delayed due to competing priorities for resources and internal reviews. Until the guidance is issued, increased risk exists that covered entities are not properly implementing the standards set forth by federal regulations for de-identifying protected health information. Additionally, in enforcing compliance with the HIPAA Privacy and Security Rules, OCR has established an investigations process for responding to reported violations of the rules. Specifically, the office annually receives thousands of complaints from individuals and notices of data breaches from covered entities, and initiates investigations as appropriate. If it finds that a violation has occurred, the office can require covered entities to take corrective action and pay fines and penalties. HHS was also required by law to implement periodic compliance audits of covered entities’ compliance with HHS privacy and security requirements; however, while it has initiated a pilot program for conducting such audits, it does not have plans for establishing a sustained audit capability. According to OCR officials, the office has completed 20 audits and plans to complete 95 more by the end of December 2012, but it has not established plans for continuing the audit program after the completion of the pilots or for auditing covered entities’ business associates. Without a plan for establishing an ongoing audit capability, OCR will have limited assurance that covered entities and business associates are complying with requirements for protecting the privacy and security of individuals’ personal health information. GAO recommends that HHS issue de-identification guidance and establish a plan for a sustained audit capability. HHS generally agreed with both recommendations but disagreed with GAO’s assessment of the impacts of the missing guidance and lack of an audit capability. In finalizing its report, GAO qualified these statements as appropriate.

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The main mission of the MHSS, which spends more than $15 billion a year, is medical readiness. This mission requires the MHSS to (1) provide medical support to active-duty military personnel in preparation for and during combat and (2) maintain the health of the active-duty force during peacetime. The Army, Navy, and Air Force all maintain uniformed health care providers to fill their MHSS medical readiness needs. To the extent that military space, staff, and other resources are available, the MHSS may also support DOD’s mission to care for nonactive-duty beneficiaries (dependents of active-duty members, retired members and their dependents, and survivors of deceased members). Whenever nonactive-duty beneficiaries’ need for health care exceeds the MHSS’ resources available to them, DOD purchases services for them from the civilian health care sector. The role of psychiatrists and clinical psychologists in meeting the MHSS medical readiness mission is to provide mental health care that helps military active-duty personnel perform their duties before, during, and after combat or some other military operation. Both psychiatrists and clinical psychologists, whether in the military or civilian sector, provide a variety of mental health services, some of which are similar. Both can diagnose mental conditions and treat these conditions with psychotherapy. A degree in medicine is required to practice psychiatry, however, so psychiatrists may treat mental disorders medically, that is, with medication. Because medical training is not required to practice clinical psychology, psychologists are not qualified to prescribe medication. To practice medicine, psychiatrists complete 4 years of medical school and a 1-year clinical internship during which they are trained to evaluate and treat all types of organic conditions and to perform general surgery. After this, they complete a 3-year psychiatric residency during which they learn to evaluate and treat mental conditions and the organic conditions associated with them. Because psychiatrists practice medicine, they can diagnose organic as well as mental conditions and treat each with medication. They consider a full range of possible organic causes for abnormal behavior when diagnosing a condition. Therefore, they can distinguish between mental conditions with an organic cause, such as schizophrenia and bipolar disorder, and organic conditions, such as diabetes and thyroid disease, which have symptoms that mimic a mental disorder. Organic mental disorders are best treated through a combination of medication and psychotherapy, according to DOD officials. Clinical psychologists, on the other hand, practice psychology, not medicine. Typically, they complete 6 years of graduate school leading to a doctoral degree and 1 to 2 years of postdoctoral clinical experience. Clinical psychologists are trained in theories of human development and behavior, so their general approach to diagnosing and treating mental illness is psychosocial rather than medical. They are trained to diagnose and treat all mental conditions and rely on the behavior a patient displays to diagnose these conditions. The MHSS created the PDP to increase the scope of practice of clinical psychologists in the military so they could treat their patients with psychotropic medication when needed. DOD established this project in response to a conference report dated September 28, 1988, which accompanied the fiscal year 1989 DOD Appropriations Act (P.L. 100-463). The report specified that, “given the importance of addressing ‘battle fatigue,’ the conferees agreed that the Department should establish a demonstration pilot training program in which military psychologists may be trained and authorized to issue appropriate psychotropic medications under certain circumstances.” The Army’s Office of the Surgeon General was tasked with designing and implementing the PDP. A blue ribbon panel was formed by the Army Surgeon General in February 1990 to determine the best method for implementing the PDP. After considering various models, the panel endorsed a training model that included course work at the Uniformed Services University for the Health Sciences (USUHS). In February 1991, the Chairmen of the Senate and House Subcommittees on Defense of the respective Committees on Appropriations then recommended that DOD develop a 2-year training model for the PDP in accordance with the panel’s recommendations. DOD later formed a committee to develop a suitable training program to provide clinical psychologists with the knowledge required for safely and effectively using a limited list or formulary of psychotropic medication. This committee recommended a special 3-year postdoctoral fellowship program for the PDP with (1) 2 years of course work at USUHS, followed by (2) 1 year of clinical experience at Walter Reed Army Medical Center. This training began in August 1991 with four participants. For subsequent classes, however, the PDP consisted of 2 years of training—1 year of classroom and 1 year of clinical training. Classroom training included courses at USUHS in subjects such as anatomy, pharmacology, and physiology. PDP participants’ clinical experience took place on inpatient wards and outpatient clinics at Walter Reed Army Medical Center in Washington, D.C., or the Malcolm Grow Medical Center at Andrews Air Force Base in Maryland. There, participants were trained to take medical histories and incorporate them into treatment plans and to prescribe medication for patients with certain types of mental disorders. After their clinical year, participants received a certificate of “Fellowship in Psychopharmacology for Psychologists” and became known as “prescribing psychologists.” Once PDP participants graduated from training, they completed 1 year of supervised or proctored practice; their respective services assigned participants to military medical facilities for this 1 year of practice. These facilities authorized participants to prescribe a specified formulary of psychotropic drugs. Although the medical education received under the PDP qualified clinical psychologists to treat mental conditions with medication, it was less extensive than psychiatrists’ medical training. Therefore, the MHSS limits prescribing psychologists’ scope of practice. They may only treat patients between the ages of 18 and 65 who have mental conditions without medical complications as determined by their supervisors. ACNP helped develop and evaluate the PDP. ACNP is a professional association of about 600 scientists from disciplines such as behavioral pharmacology, neurology, pharmacology, psychiatry, and psychology. ACNP’s principal functions are research and education. It conducted several assessments of the PDP under contract to the Army and made a number of recommendations on the project’s goals and implementation. One of them was for DOD to establish a PDP Advisory Council to help develop criteria and procedures on implementing the PDP. DOD established this council in 1994. The American Psychiatric Association, American Psychological Association, and literature on this topic have noted the possible advantages or disadvantages of allowing psychologists in the civilian sector to prescribe medication. One article has suggested that training psychologists to prescribe psychotropic medication could be particularly beneficial if they were permitted to practice this skill in clinical settings such as nursing homes, mental institutions, or medically underserved areas. Some have suggested that using prescribing psychologists could reduce the cost of care and maintain the continuity of patient care by eliminating the need to switch patients from psychologists to psychiatrists when drug therapy is indicated. On the other hand, because prescribing psychologists would receive only partial training in medicine, some are concerned about the quality of care these psychologists would be able to provide. No state licensing authority allows psychologists to prescribe medication. A few states are considering legislation, however, that would allow those already licensed by the state’s psychologist licensing board to be certified to prescribe medication after completing certain courses in medicine and gaining clinical experience. Under legislation introduced in Hawaii in 1997, psychologists seeking authority to prescribe would have to pass a standard examination. Legislation proposed in Missouri would require the development of a specified formulary of drugs for certified prescribing psychologists. None of the services needs additional mental health providers capable of prescribing medication to meet either current or upcoming medical readiness requirements, according to our review of DOD’s health care needs. Each service has more than enough psychiatrists, as well as clinical psychologists, to care for its anticipated wartime psychiatric caseload. Given this surplus, spending resources to provide psychologists with additional skill does not seem justified. Each of the three services has a model and procedures to determine the number of specific types of health care providers needed to support its MHSS medical readiness mission. These are based on the types and number of casualties anticipated under a wartime scenario. About one out of eight casualties would involve combat stress, according to an Army official.Caring for combat stress requires skill in (1) diagnosing combat stress, including the ability to distinguish it from neurological or other psychological disorders with like signs and symptoms, and (2) treating a range of severity levels of combat stress. Psychologists have many but not all of the skills necessary to treat combat stress and are therefore included, along with psychiatrists, in the services’ staffing of those who treat anticipated wartime casualties. Psychologists cannot be substituted for psychiatrists, however. Even if trained to prescribe drugs, psychologists are not as equipped as psychiatrists to distinguish between actual combat stress and certain neurological disorders that appear to be combat stress. Psychiatrists are also better able to treat more severe or complicated combat stress cases. The services have separate requirements for psychiatrists and clinical psychologists. None of the services has a separate readiness requirement for prescribing psychologists. Table 1 shows the number of MHSS psychiatrists each service has determined it needs and the number assigned or on board for fiscal years 1995 through 1998. Table 2 shows the number of clinical psychologists each service has determined it needs and the number assigned for fiscal years 1995 through 1998. As these tables show, the MHSS has at least as many uniformed psychiatrists and clinical psychologists as it needs to meet its current and upcoming readiness requirements. Our discussions with psychiatry consultants to the Surgeons General of the three services confirm the picture these numbers portray, and testimony of DOD officials at congressional hearings is consistent with the views expressed by these consultants. At a March 1995 Senate Armed Services Committee hearing, the Assistant Secretary of Defense for Health Affairs stated that on the basis of DOD staffing guidelines, the MHSS has no shortage of active-duty physicians in general. The Navy Surgeon General also testified at this hearing that the Navy has no shortage of psychiatrists. In addition, an official from the DOD Office of Health Affairs said that DOD has a surplus of psychiatrists. Although training psychologists to prescribe medication enables them to perform functions they do not normally perform, it does not give them all the skills needed to enable them to substitute for psychiatrists. Furthermore, the MHSS’ current staffing level of psychiatrists and psychologists is more than enough to meet its readiness requirements for caring for psychiatric cases without adding to some psychologists’ capabilities. Therefore, the MHSS seems to have no current or upcoming need for psychologists who may prescribe drugs. Although DOD met the mandate to establish a demonstration project to train military psychologists to prescribe psychotropic medication for mental illness, the PDP implementation faced several problems. Some of these problems have been resolved. The problems include the lack of a clearly defined purpose for prescribing psychologists in the MHSS, difficulty recruiting the desired number of participants per class, unspecified participant selection criteria, repeated changes in the classroom curriculum, delays in granting prescribing privileges, and unresolved issues involving supervision. The lack of precedent and experience with authorizing psychologists to prescribe medication, according to some officials at locations where PDP participants are stationed, is partly to blame for some of these problems. These include delays in granting prescribing privileges and disagreements over the extent of supervision. The PDP did not clearly define the role of prescribing psychologists in the MHSS. The ACNP’s PDP evaluation panel noted in 1992 that the project’s goal “to train psychologists to issue appropriate medication under certain circumstances” was “rich with ambiguities.” The project was structured and revised periodically without specifying the (1) prescribing psychologists’ duties and responsibilities, (2) types of clinical settings or facilities their skills would be best suited for, (3) types of psychotropic medication psychologists would be qualified to prescribe, and (4) level of supervision they would require. In September 1995, after the project had operated for 4 years, the ACNP panel suggested that DOD define clearly how PDP graduates could be used; this did not take place. DOD had difficulty recruiting PDP participants throughout the project. The recruiting goal, which was not met, was six psychologists for each PDP class. Since the project started in 1991, 13 psychologists have participated. Seven have completed it. Three have dropped out, and three are expected to finish their clinical experience in June 1997 (see table 3). Those who dropped out did so for various reasons: One left the military. Another enrolled in the medical school at USUHS. The third left because of dissatisfaction with the program. Because the PDP did not attract enough military psychologists, the program was opened to civilian clinical psychologists willing to enter the military. Two of the five PDP participants who began the program in 1994 were civilians who joined the military to participate in the PDP. Finally, only two psychologists entered the PDP in 1995. The MHSS established no formal candidate selection criteria for the PDP. Four classes of candidates had entered the PDP before prerequisites for participation were first addressed in February 1995. At that time, the PDP Advisory Council recommended that a candidate for the PDP (1) be on active duty, in good standing as a psychologist, and have an active state license to practice clinical psychology; (2) have a minimum of 2 years of active-duty experience as a clinical psychologist in one of the uniformed services; (3) agree to meet the service’s payback obligations for postdoctoral training; and (4) volunteer for the program. The duration, content, and sequencing of PDP training continued to change after the project began. Originally, PDP training was intended to last for 2 years and consist of both course work and clinical experience during each year. An additional year of clinical experience was added for the first class after it began the program, however, because the participants were not receiving enough clinical experience. Subsequent classes received 2 years of training as originally planned: the first dedicated exclusively to course work at USUHS, the second, to clinical practice. In addition, the curriculum content and sequencing of the courses changed after the project began. Courses such as neuroscience and psychopharmacology were added, while others were dropped. In 1995, the ACNP panel noted that the curriculum for those who started the PDP in 1994 was “markedly different” from the curriculum for participants who started the PDP in 1991. The panel said at that time that the curriculum needed to be thought through more thoroughly, using the final scope of practice and formulary as a starting point. The panel also noted that assessing the adequacy of the curriculum was difficult because it changed frequently. The panel saw a need for a well-organized, structured approach to the design of courses as well as the selection of participants. It recommended at that time that unless the MHSS addressed these concerns satisfactorily, the project should end. The first psychologists who completed the PDP faced delays of up to 14 months in getting prescribing privileges at the facilities where they were assigned possibly due to the facilities’ lack of experience with this type of provider. Two recent graduates, however, received privileges within 2 months of arriving at their facilities. In each of these cases, PDP officials visited the facilities where these psychologists had been assigned to explain the project and training and provide information about the graduates to facility officials. Facility officials cited these visits as helpful in resolving their concerns about psychologists’ prescribing privileges. The MHSS has not decided who should supervise prescribing psychologists. In 1994, the MHSS decided that after prescribing psychologists had completed their clinical year, they would spend the next year practicing under a psychiatrist’s supervision. The MHSS originally anticipated that these psychologists would ultimately function independently. All of the PDP graduates, however, continue to practice under the supervision of a psychiatrist, and whether they will ever prescribe independently is unclear. The PDP Advisory Council’s February 1995 scope of practice statement, which has been used as guidance for allowing prescribing privileges for some PDP graduates, states that prescribing psychologists should prescribe psychotropic medication only under the direct supervision of a physician. According to the Advisory Council that developed this statement, PDP graduates’ prescribing practice should be closely supervised. These psychologists should then gradually be permitted to practice under less supervision as they demonstrate their competence. Even if the MHSS had a need for additional mental health care providers to prescribe medication, the cost of meeting this need by training clinical psychologists to prescribe drugs is substantial. Furthermore, although the PDP produced additional providers who can prescribe and some facilities have reported positive experiences with them, determining the PDP’s cost-effectiveness is impossible at this time. The total cost of the PDP will be about $6.1 million through the completion of the proctored year for those currently in the program—or about $610,000 per psychologist who completes the program (see table 4). On the basis of our previous estimates of the cost of a USUHS medical education, we estimate that the cost of the classroom training for PDP participants provided by USUHS was about $110,028 per participant per year. Most of this amount consisted of faculty cost and costs for operating and maintaining USUHS. The remainder included the cost of research, development, testing and evaluation, military construction, and other miscellaneous costs. Our estimate of total cost for PDP training includes the cost of 12 classroom years of training for 10 PDP graduates as well as 3 years of training for three psychologists who dropped out of the program. Our estimates of psychologists’ salaries while participating in the PDP are based the assumption that those entering the project would receive a salary of $56,071 during their first year in the PDP, $57,571 during their second year, and $58,985 during their third year. Student salaries totaled $844,065 during the classroom training portion of the PDP, according to our estimate. This included the salaries of 11 participants for 1 year of classroom training each, 3 of whom ultimately dropped out of the PDP, and 2 participants for 2 years each. Because PDP participants treated patients during their clinical and proctored years, we reduced our salary estimates for these years by a productivity factor representing the time they spent treating patients. We used a productivity factor of 50 percent for the clinical year and 100 percent for the proctored year. On the basis of these productivity factors, total participant salary costs for the clinical portion of the PDP were $333,154, according to our estimates. This accounts for one participant who dropped out approximately halfway through the clinical year and another who received an additional year of clinical training. To estimate faculty and supervisor salaries for the PDP for the clinical and proctored years, we assumed that one faculty member per psychologist would devote 40 percent of his or her time per clinical year of training. Likewise, we assumed that during the proctored year, one supervisor would spend 20 percent of his or her time supervising each prescribing psychologist. On the basis of these assumptions, the total cost of lost faculty productivity due to training the 10 graduates for 11.5 years of clinical training was $475,810, according to our estimate; the total cost of lost supervisor productivity was $206,874 for 10 participants for 10 proctored years of practice. The lost productivity cost is based in each case on an annual salary of $103,437. Total PDP overhead cost was $2.58 million, according to our estimate.This included the cost of the evaluation contracts ($1.75 million) and personnel support costs ($830,000) for a PDP Director and a Training Director for fiscal years 1992 (when the PDP began) through 1998, when those currently in training are expected to complete their proctored year. Also included in overhead costs are smaller amounts for invited lecturers, travel and per diem expenses, supplies, and other miscellaneous expenses during this time. If the PDP had attracted a total of 24 participants and all of them had graduated, the cost would have been about $365,000 per prescribing psychologist. In addition, the cost per graduate would have been about $94,000 less than this if the project had progressed beyond the developmental stage and external evaluations could have been discontinued. After operating for 7 years, however, the project was only able to attract about half the number of participants considered optimal and had not progressed beyond the stage for which external evaluations were needed. The PDP increased the number of MHSS mental health care providers who may prescribe drugs to treat certain mental conditions. This may reduce psychiatrists’ workloads. Psychiatrists, psychologists, and primary care physicians, however, have different opinions on the effect of allowing psychologists to prescribe drugs on the quality of mental health care and collaboration among these providers. As a result of the PDP, seven psychologists are prescribing medication at DOD military facilities, and three more are expected to complete clinical training in the summer of 1997 and receive prescribing privileges some time after that. The first three participants are seeing mainly patients who require medication, and one of these temporarily filled a vacancy created by the departure of a psychiatrist. Having prescribing psychologists on staff has certain benefits to facilities where they are assigned. One of these facilities had been experiencing unusually heavy psychiatrist workloads because it did not have enough psychiatrists to fill all its psychiatry positions. In the interim, this facility specifically requested a prescribing psychologist to fulfill some of the responsibilities of a psychiatrist, reducing the psychiatry workload. Another prescribing psychologist temporarily saw the patients of a psychiatrist who transferred to another facility until the facility brought in another psychiatrist. VRI obtained perceptions of the PDP by surveying MHSS psychiatrists, primary care physicians, and psychologists about the possible effects of allowing psychologists to prescribe medication. The most frequent responses to the survey’s open-ended questions about the potential benefit of this practice were that it would (1) increase the number of mental health care providers in the MHSS and (2) reduce psychiatrists’ workloads. The most frequently noted limitation to allowing psychologists to prescribe medication was their perceived lack of knowledge about medicine, physiology, and adverse drug interactions and effects. Survey results also indicated that psychiatrists, psychologists, and primary care physicians differed about whether adding prescribing psychologists to the MHSS was beneficial. Most psychologists responded that training psychologists to prescribe would improve the quality of mental health care in the military. Conversely, most psychiatrists believed quality of care would decline. Furthermore, psychiatrists thought this would undermine their working relationships with MHSS psychologists; most primary care physicians responded that this would improve their collaboration with psychologists. Most psychologists agreed that the authority to prescribe would enhance their collaboration with MHSS primary care physicians. But as far as their collaboration with MHSS psychiatrists was concerned, about half the psychologists believed this would improve such collaboration; the other half thought it would interfere with it. The cost-effectiveness of having MHSS psychologists prescribe psychotropic medication is unclear at this time. Determining the cost-effectiveness of this effort would require information on the (1) proportion of the time remaining in the military that prescribing psychologists would have to perform functions that psychiatrists would normally perform and (2) extent to which having psychologists prescribe medication would result in fewer psychiatrists in the MHSS. The results of analyses designed to predict the relative cost-effectiveness of training and employing psychologists to prescribe compared with other providers with this authority differ depending on the cost estimates used. VRI’s analysis concluded that the PDP would prove cost-effective under certain circumstances. Additional analyses using different cost estimates, however, suggest that the PDP would not be cost-effective under these same circumstances. VRI found that the annual life cycle cost of a prescribing psychologist was potentially lower than that of a psychiatrist-psychologist combination, which is typically required to treat an MHSS patient with a mental condition requiring medication. As table 5 indicates, VRI’s analysis accounted for acquisition costs (the cost of recruiting people into the military), training costs, basic and special pay and benefits (such as housing allowances), health care costs, risk management expenses (for potential malpractice claims), and retirement costs. It assumed various pay levels for different types of providers at different stages in their military careers as well as for different career lengths. It also assumed that PDP enrollees would enter the project after 6 years as DOD clinical psychologists. VRI estimated the annual life cycle cost of prescribing psychologists given two scenarios, a start-up case scenario and an optimal case scenario. To predict the conditions under which the PDP would be cost-effective, VRI compared the annual life cycle cost of a prescribing psychologist under the start-up scenario with the life cycle cost of what it refers to as the “base” scenario. It used the start-up scenario rather than the optimal scenario because the former accounts for the nonrecurring, fixed (or start-up) costs actually associated with developing and implementing the PDP. The base scenario is the annual life cycle cost of the current psychiatrist-psychologist combination required to treat MHSS mental health care patients who need medication. Given the difference in annual life cycle costs between the base and the start-up scenarios, VRI predicted that the PDP would be more cost-effective than the base scenario if PDP participants in the start-up period functioned as prescribing psychologists, rather than traditional clinical psychologists, for more than 92.6 percent of their time remaining in the military. For this estimate, VRI assumed that (1) each PDP class would have three psychologists, (2) prescribing psychologists would be supervised for the remainder of their military service, (3) supervisory costs after the proctored year would amount to 5 percent of a physician’s annual salary per prescribing psychologist per year, and (4) prescribing psychologists would remain in the military an average of 10.2 years after completing the PDP. The validity of VRI’s predictions about the circumstances under which the PDP would be cost-effective depends on how realistic VRI’s cost estimates are as well as the other assumptions it used to estimate the annual life cycle cost of MHSS psychiatrists, psychologists, and prescribing psychologists. Some of VRI’s estimates were based on scant MHSS experience in training and employing psychologists to prescribe. Information about the PDP’s overhead cost that we collected after VRI completed its work, for example, indicated that overhead cost was lower than originally thought. Also, VRI’s estimate of the cost of training at USUHS was lower than our estimate of the cost of this training. For a more realistic prediction of the circumstances under which the PDP would be cost-effective, we asked VRI to redo its analysis, replacing its estimate of $2.89 million for total overhead cost during the start-up period with an updated estimate of $2.58 million. We also asked VRI to substitute the $39,969 it used per participant per year for PDP classroom training and related overhead with $110,028, our estimate of the per student per year cost of USUHS training, which includes training overhead. See table 6 for the results of this analysis. On the basis of our overhead and training cost estimates, PDP graduates under the start-up scenario could not be cost-effective because they would have to function as prescribing psychologists more than 101.85 percent of their time remaining in the military. This prediction is based on the same assumptions that VRI made about PDP class size, prescribing psychologists’ supervision, supervisory costs, and prescribing psychologists’ remaining time in the military. In DOD’s mental health care system, the main function of prescribing psychologists is to care for patients with certain types of mental conditions that require certain psychotropic medications. According to DOD’s needs assessments, the MHSS has more psychiatrists to care for these patients than needed to meet medical readiness requirements. Therefore, the MHSS has no current or upcoming need for clinical psychologists who may prescribe medication. In addition, the cost of producing 10 prescribing psychologists was substantial. Regardless of the cost, spending resources to produce more providers than the MHSS needs to meet its medical readiness requirement is hard to justify. The PDP has demonstrated that training psychologists to prescribe drugs, which increased the number of MHSS providers with this skill, reduced psychiatrists’ workloads in some cases. A potential benefit of the PDP, therefore, is the savings associated with prescribing psychologists delivering some of the services that psychologists in conjunction with psychiatrists have traditionally provided. These savings result because a prescribing psychologist can deliver this care with lower personnel-related costs than the combination of a psychologist and a psychiatrist. To realize these savings, however, DOD must (1) use a prescribing psychologist to treat patients who normally would have been treated by a psychiatrist and a psychologist and (2) replace higher priced providers in the MHSS with prescribing psychologists. Otherwise, the PDP cannot save DOD money. Even if the 10 prescribing psychologists from the PDP do, in certain situations, function as psychiatrists, the PDP is still not guaranteed to save money. Although prescribing psychologists cannot totally replace psychiatrists, DOD does not account for the introduction of prescribing psychologists in the MHSS when determining its readiness needs for psychiatrists. Therefore, it is uncertain whether DOD will reduce its readiness requirement for psychiatrists in response to shifting some of a psychiatrist’s functions to a prescribing psychologist. Concerning the PDP’s implementation, DOD has demonstrated that it can train clinical psychologists to prescribe psychotropic medication, and these psychologists have shown that they can provide this service in the MHSS. The implementation faced several problems, however, that persisted for the PDP’s duration. Given DOD’s readiness requirements, the PDP’s substantial cost and questionable benefits, and the project’s persistent implementation difficulties, we see no reason to reinstate this demonstration project. In the future, should prescribing psychologists be needed to meet DOD’s medical readiness requirements, the Congress should require DOD to (1) clearly demonstrate that the use of those MHSS psychologists who have been trained to prescribe has resulted in savings, (2) clearly define a prescribing psychologist’s role and scope of practice in the MHSS compared with other psychologists and psychiatrists, (3) design a curriculum appropriate to this role and scope of practice, and (4) determine the need for and the level of supervision that prescribing psychologists require. In comments received March 26, 1997, in response to a draft of this report, the Assistant Deputy Assistant Secretary of Defense (Clinical Affairs) stated that, on the basis of the methodology employed in this study, DOD has no objections to its results and recommendations. Department officials did provide a few technical corrections to the report. We modified the report as appropriate. Copies of this report will also be sent to other interested congressional committees and the Secretary of Defense. Copies will also be made available to others upon request. This report was prepared under the direction of Stephen P. Backhus, Director, Veterans’ Affairs and Military Health Care Issues, who may be reached at (202) 512-7101 if you or your staff have any questions or need additional assistance. Other major contributors to this report include Clarita Mrena, Assistant Director; William Stanco, Senior Evaluator; and Deena El-Attar and Gregory Whitney, Evaluators. DOD. To accomplish the first objective, VRI compared the annual life cycle cost of various types of MHSS mental health care providers with the annual life cycle cost of a prescribing psychologist. To address the remaining two objectives, VRI conducted what it referred to as a feasibility analysis of the PDP. VRI issued a report on this work on May 17, 1996. To determine the relative cost-effectiveness of training and employing prescribing psychologists relative to other DOD health care providers, VRI compared its estimate of DOD’s average annual life cycle cost of a prescribing psychologist with its estimate of this cost for clinical psychologists, psychiatrists, physicians specializing in internal medicine, and physicians specializing in family practice. It calculated these costs on the basis of three scenarios: the “base” case scenario, which is the status quo, a combination of psychologists and psychiatrists, with no prescribing psychologists in the MHSS; the “start-up” case scenario for prescribing psychologists, which had all the same elements of the base scenario but accounted for the introduction of prescribing psychologists into the MHSS; and the “optimal” case scenario for prescribing psychologists, which represented a modification of the start-up scenario. Costs in the start-up scenario included the nonrecurring, fixed costs associated with the PDP development and initial implementation as well as other costs for the PDP that VRI also believed would diminish or disappear in the long run. The optimal scenario represents the PDP in a long-term, steady state, during which no recurring costs associated with start-up and optimal class size would accrue. In this scenario, VRI set the cost of supplies and training to levels that indicate long-term efficiency. The following are the main steps in VRI’s cost-effectiveness analysis: 1. Calculate life cycle costs for active-duty military psychiatrists, family practitioners, internists, and clinical psychologists; then calculate the cost per full-time equivalent (FTE) for each of these by dividing their respective life cycle cost by their respective expected length of service (length of service minus unproductive time while in training). 2. Calculate life cycle costs for prescribing psychologists using actual and anticipated costs for a PDP sized at six and at three psychologists per class; and then, under both the start-up and base scenarios, calculate the cost per FTE for prescribing psychologists assuming that they (1) serve as clinical psychologists before entering the PDP and (2) after which they prescribe psychotropic medication. 3. Calculate the cost per FTE for the combination of clinical psychologists and psychiatrists that could be replaced by a prescribing psychologist. 4. Compare the annual life cycle cost per FTE of prescribing psychologists under start-up and optimal scenarios with the cost per FTE of the psychologist-psychiatrist combination. VRI’s estimates of the annual life cycle cost per FTE of various types of providers accounted for the cost of acquiring each type of provider, training costs, “force” costs, and retirement costs associated with each. Acquisition cost is DOD’s cost of recruiting someone into the military. Training costs include the cost of providing DOD-sponsored training to military health care providers. Force costs cover basic pay and allowances, special pay, miscellaneous expenses, and health care benefits of health care providers during their active-duty careers. Finally, retirement costs include the cost of retirement pay and retiree health care benefits. VRI’s overall estimates of the annual life cycle cost per FTE for different health care providers were based on a number of cost estimates and assumptions about these four cost categories that varied somewhat by provider and scenario. Following are the major assumptions VRI made when calculating life cycle cost for prescribing psychologists: For cost savings to be realized, the introduction of prescribing psychologists into the MHSS reduced FTEs for psychiatrists or other physicians. PDP participants had at least 6 years of experience as clinical psychologists when they entered the PDP. The PDP lasted 3 years—1 year for classroom training, 1 year for clinical experience, and 1 year for proctored practice. Each PDP class had three or six psychologists. PDP participants required 40 percent of a faculty member’s time during their clinical year of training and 20 percent of a faculty member’s time during their proctored year, which took time from faculty members’ patient care. After completing the PDP, graduates were able to “safely and effectively” prescribe medication and were assigned to “utilize their new prescription skills along with their clinical psychology skills to treat patients that otherwise would have had to be treated by physicians for their mental health care.” PDP participants continued to practice as prescribing psychologists for the rest of their military career. Prescribing psychologists required supervision amounting to 5 percent of a psychiatrist’s time for the rest of their military career. PDP graduates posed no more of a malpractice risk to DOD than any other mental health providers delivering the same treatment to the same types of patients. PDP graduates did not receive special pay otherwise paid to psychiatrists and other physicians in the military. Pension rates were based on an average service time for military pensioners of 22.5 years as determined by a DOD actuarial study. The objectives of VRI’s feasibility analysis were to assess the barriers to employing prescribing psychologists in the DOD health care system and how prescribing psychologists would be used in the DOD health care system. To address the first objective, VRI conducted two surveys. It conducted telephone interviews of about 400 DOD health care providers, including psychiatrists, primary care physicians, psychologists, and social workers to obtain their views on the PDP. This survey measured their awareness of the PDP, attitudes toward allowing psychologists to prescribe drugs, participant training, and ultimate ability of psychologists to prescribe medication. VRI also surveyed DOD medical beneficiaries to determine their awareness of the relative scope of practice of psychiatrists and psychologists and the PDP and to measure their attitudes toward allowing psychologists to prescribe drugs. To address its second objective, VRI reviewed DOD medical regulations, records of the PDP Advisory Council, and military health care utilization data and interviewed PDP graduates and officials familiar with the PDP. VRI acknowledged that its conclusions about the use of prescribing psychologists were “conjectures” because of DOD’s lack of experience with prescribing psychologists. The objectives of our evaluation were to assess the need for prescribing psychologists in the Military Health Services System (MHSS), provide information on the implementation of the PDP, and provide information on the PDP’s cost and benefits. To address the first objective, we used the need for MHSS psychiatrists as a proxy for the need for prescribing psychologists because psychiatrists are the only mental health care providers with full prescribing authority for which the military determines a readiness need. To assess the need for additional MHSS psychiatrists, we reviewed the Army, Navy, and Air Force methods for determining the number they need to fulfill their medical readiness mission and the results of their determinations. We compared the number of psychiatrists each branch of the service determined it needed, both now and in the future, with the number each currently has. To collect information on the PDP’s implementation, we reviewed many documents, annual reports, and assessments of the project. These included periodic evaluations conducted by the American College of Neuropsychopharmacology under contract to DOD and others done by the Army Surgeon General’s blue ribbon panels as well as the Army’s annual reports on the PDP. We based our estimate of the PDP’s cost on (1) information on cost in the Army’s annual reports on the PDP, (2) our estimates of the cost of training provided by the Uniformed Services University of the Health Sciences (USUHS), and (3) estimates of military salaries and benefits and the productivity of PDP participants and their supervisors found in Vector Research, Inc.’s (VRI) cost-effectiveness analysis of the PDP. This cost was calculated in constant 1996 dollars. To identify the qualitative benefits of the PDP, we interviewed all PDP participants who completed the PDP and others at the facilities where they were practicing and representatives of the American Psychiatric Association and the American Psychological Association. We reviewed articles that addressed the advantages and disadvantages of allowing clinical psychologists to prescribe medication. We also examined the results of a VRI survey of DOD health care providers that collected information on providers’ perceptions of PDP’s benefits. To determine what cost savings or quantitative benefit, if any, might be realized by enabling clinical psychologists to prescribe medication, we reviewed VRI’s cost-effectiveness analysis of the program done under contract to DOD. We compared the results of this analysis with those of a subsequent analysis VRI did at our request using different assumptions. In this subsequent analysis, VRI replaced its original assumptions on the number of participants and level of supervision with information we had collected about actual program experience. It also replaced its USUHS training cost estimates with our estimates noted above. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a legislative requirement, GAO reviewed the Military Health Services System's (MHSS) Psychopharmacology Demonstration Project (PDP), focusing on the: (1) need for prescribing psychologists in the MHSS; (2) implementation of the PDP; and (3) PDP's costs and benefits. GAO noted that: (1) the MHSS has more psychiatrists than it needs to meet its current and upcoming readiness requirements, according to GAO's analysis of the Department of Defense's (DOD) health care needs; (2) therefore, the MHSS needs no prescribing psychologists or any other additional mental health care providers authorized to prescribe psychotropic medication; (3) moreover, DOD does not even account for prescribing psychologists when determining its medical readiness needs; (4) although DOD met its goal to train psychologists to prescribe drugs, it faced many difficulties in implementing the PDP; (5) not all of these were resolved; (6) for example, the MHSS never had a clear vision of the prescribing psychologist's role, did not meet recruitment goals, and repeatedly changed the curriculum; (7) consequently, the American College of Neuropsychopharmacology recommended in 1995 that unless these issues were addressed, the PDP should end; (8) the total cost of the PDP, from start-up through the date the last participants will complete the program, is about $6.1 million or about $610,000 per prescribing psychologist, according to GAO's estimate; (9) ultimately, the PDP will have added 10 mental health care providers who can prescribe drugs to an MHSS that already has a surplus of psychiatrists; (10) opinions differ on the effect of adding these prescribing psychologists to the MHSS concerning such issues as quality of care and collaboration between psychologists and physicians; (11) without a clear purpose or role for prescribing psychologists and given the uncertainty about the extent to which they would replace higher cost providers, GAO cannot conclude that the benefits gained from training prescribing psychologists warrant the costs of the PDP; and (12) training psychologists to prescribe medication is not adequately justified because the MHSS has no demonstrated need for them, the cost is substantial, and the benefits are uncertain.

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JWST is envisioned to be a large deployable, infrared-optimized space telescope and the scientific successor to the aging Hubble Space Telescope. JWST is being designed for a 5-year mission to find the first stars and trace the evolution of galaxies from their beginning to their current formation, and is intended to operate in an orbit approximately 1.5 million kilometers—or 1 million miles—from the Earth. With a 6.5-meter primary mirror, JWST is expected to operate at about 100 times the sensitivity of the Hubble Space Telescope. JWST’s science instruments are to observe very faint infrared sources and as such are required to operate at extremely cold temperatures. To help keep these instruments cold, a multi-layered tennis-court-sized sunshield is being developed to protect the mirrors and instruments from the sun’s heat. The sunshield and primary mirror are designed to fold and stow for launch and fit within the launch vehicle. When complete, the observatory segment of JWST is to include several elements (Optical Telescope Element (OTE), Integrated Science Instrument Module (ISIM), and spacecraft) and major subsystems (sunshield and cryocooler). The JWST project is divided into three major segments: the observatory segment, the ground segment, and the launch segment. The hardware configuration created when the Optical Telescope Element and the Integrated Science Instrument Module are integrated, referred to as OTIS, is not considered an element by NASA, but we categorize it as such for ease of discussion. Additionally, JWST is dependent on software to deploy and control various components of the telescope as well as collect and transmit data back to Earth. The elements, major subsystems, and software are being developed through a mixture of NASA, contractor, and international partner efforts. See figure 1 below for an interactive graphic that depicts the elements and major subsystems of JWST. For more information on JWST’s organizational structure, see appendix III. Given JWST’s complexity, integration and test activities are comprised of five separate periods—two of which have already started—over the course of almost 7 years to build the observatory. During the test periods, the project works to mitigate risks to an acceptable level prior to launch. According to project officials, while some risks may be eliminated entirely through various mitigation strategies, others will be accepted as residual risks that remain upon launch. See figure 2 below for the overall planned integration and test flow for JWST that includes the remaining schedule reserve—or extra time built into the schedule to address any issues found. For the majority of the work remaining, the JWST project will rely on three contractors: Northrop Grumman, Harris (formerly Exelis), and the Space Telescope Science Institute (STScI). Northrop Grumman plays the largest role, developing the sunshield, the OTE, the spacecraft, and a cooling subsystem for the Mid-Infrared Instrument (MIRI). Northrop Grumman performs most of this work under a prime contract with NASA, but its work on the MIRI cooler is performed under a separate subcontract with the Jet Propulsion Laboratory (JPL). Harris is manufacturing the test equipment, equipping the test chamber, and assisting in the testing of the optics of JWST. Finally, STScI will collect and evaluate research proposals from the scientific community and will receive and store the scientific data collected, both of which are services that they currently provide for the Hubble Space Telescope. Additionally, STScI is responsible for developing the ground system that manages and controls the telescope’s observations on behalf of NASA. The MIRI instrument, one of the four instruments within ISIM, requires a dedicated, interdependent two-stage cooler subsystem designed to cool the infrared light detector to about 6.7 Kelvin (K), just above absolute zero. This cooler is referred to as a cryocooler and works by moving helium gas through about 10 meters (approximately 33 feet) of refrigerant lines located on the sun-facing surface of the JWST observatory to the colder, shaded side where the ISIM is located. According to NASA officials, a cryocooler of this configuration has never been developed or flown in space before. See figure 3 below for an illustration of the MIRI cryocooler on JWST and the varying temperatures needed in different areas of the telescope. Complex development efforts like JWST face myriad risks and unforeseen technical challenges which oftentimes can become apparent during integration and testing. To accommodate these risks and unknowns, projects reserve extra time in their schedules—which is referred to as schedule reserve—and extra money in their budgets— which is referred to as cost reserve. Schedule reserve is allocated to specific activities, elements, and major subsystems in the event there are delays or to address unforeseen risks. Each JWST element and major subsystem has been allocated schedule reserve. When an element or major subsystem exhausts schedule reserve, it may begin to affect schedule reserve on other elements or major subsystems whose progress is dependent on prior work being finished for its activities to proceed. The element or major subsystem with the least amount of schedule reserve determines the critical path for the project. Any delay to an activity that is on the critical path will reduce schedule reserve for the whole project, and could ultimately impact the overall project schedule. Cost reserves are additional funds within the project manager’s budget that can be used to address unanticipated issues for any element or major subsystem and are used to mitigate issues during the development of a project. For example, cost reserves can be used to buy additional materials to replace a component or, if a project needs to preserve schedule reserve, reserves can be used to accelerate work by adding shifts to expedite manufacturing and save time. NASA’s Goddard Space Flight Center (Goddard)—the NASA center with responsibility for managing JWST—has issued procedural requirements that establish the levels of both cost and schedule reserves that projects must hold at project confirmation. After this point, a specified amount of schedule reserve continues to be required throughout the remainder of development. In addition to cost reserves held by the project manager, management reserves are funds held by the contractors that allow them to address cost increases throughout development. We have found that management reserves should contain 10 percent or more on the cost to complete a project and are used to address different issues. JWST has experienced significant increases to project costs and schedule delays. Prior to being approved for development, cost estimates of the project ranged from $1 billion to $3.5 billion with expected launch dates ranging from 2007 to 2011. Before 2011, early technical and management challenges, contractor performance issues, low level cost reserves, and poorly phased funding levels caused JWST to delay work after confirmation, which contributed to significant cost and schedule overruns, including launch delays. The Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies requested from NASA an independent review of JWST in June 2010. In response, NASA commissioned the Independent Comprehensive Review Panel, which issued its report in October 2010, and concluded that JWST was executing well from a technical standpoint, but that the baseline funding did not reflect the most probable cost with adequate reserves in each year of project execution, resulting in an unexecutable project. Following this review, the JWST program underwent a replan in September 2011, and Congress in November 2011 placed an $8 billion cap on the formulation and development costs for the project. On the basis of the replan, NASA rebaselined JWST with a life-cycle cost estimate of $8.835 billion that included additional money for operations and a planned launch in October 2018. The revised life-cycle cost estimate included a total of 13 months of funded schedule reserve. In the President’s fiscal year 2013 budget request, NASA reported a 66 percent joint cost and schedule confidence level—lower than the 70 percent level noted in NASA procedural requirements—for these cost and schedule baselines. A joint cost and schedule confidence level is the process NASA uses to assign a percentage to the probable success of meeting cost and schedule estimates and is part of the project’s estimating process. In December 2014, we found that the project was progressing within the 2011 replan for both cost and schedule. We reported on technical challenges with JWST elements and major subsystems that had consumed a portion of the cost and schedule reserves. We also found that the cryocooler remained an ongoing challenge and continued to use a disproportionate amount of cost reserves. Finally, we found that NASA had not conducted a cost risk analysis since the 2011 replan. A cost risk analysis determines the reliability of a program’s cost estimate by determining a program’s cost drivers and the risk of cost overruns through an analysis that links historical schedule information along with technical issues and uncertainties in schedule and cost. Since new risks had emerged, we recommended that NASA follow best practices when it updated the 2011 analysis for the Northrop Grumman contract and ensure the analysis is updated as significant risks emerge in the future. NASA partially concurred with our recommendation and stated that the JWST program and project use a range of tools to assess all major contractors’ performance and that the project initiated a cost risk analysis of Northrop Grumman’s contract incorporating best practices and would update it when required by NASA policy. The status of NASA’s analysis and our evaluation of it are discussed later in the report. The JWST project is currently on schedule with 8.75 months of schedule reserve remaining. However, all of JWST’s elements and major subsystems are within weeks of moving onto the project’s critical path, potentially reducing schedule reserve further. This is a tenuous position for the project given that it must complete five integration and test periods, three of which have not yet started. Testing can uncover problems that can be difficult or time-consuming to resolve, thereby adding schedule risk to the project and the unusual complexity of JWST further heightens these risks. To achieve mission success, the project will have to address over 100 technical risks and ensure that the project’s potential areas for mission failure are fully tested and understood before project launch in October 2018. Overall project schedule reserve, currently at 8.75 months, remains above Goddard requirements and the project’s plan—which was set above the Goddard standard at the replan in 2011 and included more reserve than required. However, as shown in figure 4 below, the use of schedule reserve on any element or major subsystem—two of which have entered integration and testing phases—may reduce the overall project schedule reserve. While some use of schedule reserve is expected, the proximity of each element and major subsystem schedule to the critical path means that the project must prioritize the mitigations when problems occur. Overall, the project has used more than 30 percent of its schedule reserve established at the time of the replan in 2011 to address technical challenges. Our prior work has shown that it is in integration and testing where problems are most likely to be found and as a result, schedules tend to slip. As we found in 2012, the project has a set amount of time allocated to the final three integration and test efforts over the next 3 years, with between 2 and 4 months for each. This time could easily be used if a significant problem occurred. For example, the OTIS integration and test period—the first major integration involving OTE and ISIM—planned to start in 2016 currently has 3 months of schedule reserve allocated at the end of testing. The final event in the OTIS integration and test effort is a cryovacuum test that takes approximately 3 months to complete. If an issue occurred that required stopping and repeating the cryovacuum test, this reserve could easily be exhausted. Additionally, as the project moves further into integration and testing, events become more serial so flexibility will be diminished. Issues uncovered in integration and testing also tend to be more expensive to mitigate, due to increased schedule pressure. To prevent the use of additional schedule reserve, the project and its contractor for OTIS testing are taking proactive steps to reduce risk before testing needs to commence by ensuring the availability and readiness of test equipment and the cryogenic chamber to be used to test the optics of JWST. For example, the project’s contractor that is to test the optics has conducted two of three optical ground support equipment tests on a replica of the OTE with 2 of 18 primary mirror segments installed. According to the project, the first test met its intended objectives and provided valuable insight into the performance of the ground support equipment and preparation of the cryogenic chamber. The second test was completed in October 2015, and project officials are currently analyzing the results. The third test is to build upon these findings to provide further confidence for the eventual OTIS testing. Additionally, the contractor performed several risk mitigation activities, including additional testing of the large cryogenic chamber that will be used for OTIS testing, which revealed several issues, including a leak in the cryogenic chamber that would have had major impacts if not discovered and repaired before OTIS testing began. The project has used schedule reserve in 2015 to address various technical problems that have arisen. More specifically, the project experienced several problems with ISIM and OTE, elements in the two of five integration and test phases that have begun. For example, the ISIM heat straps—flexible straps that are to conduct energy and heat away from the instruments—did not perform as expected in testing. An investigation revealed design issues with the parts as delivered from the supplier. As a result, the heat straps were redesigned and reinstalled, which required the use of schedule reserve. Additionally, as a result of these and other issues, the beginning of the third cryovacuum test was delayed by 3 months. ISIM currently holds 1.75 months in schedule reserve—down from 4.5 months as we found last year—from its overall schedule reserve of 8.75 months to address any issues that may arise during the third cryovacuum test and before OTIS testing begins. Additionally, the OTE element used about 2 months of schedule reserve this past year due to workmanship issues related to the 76 cryogenic harnesses that connect to JWST’s mirrors. According to program and contractor officials, the majority of these harnesses were damaged due to use of inappropriate tooling by the supplier. The damage was not discovered until some of the harnesses were installed on the OTE. The harnesses were removed for inspection with most requiring repairs or replacement. According to contractor officials, initially, the harnesses would have been installed at Northrop Grumman’s facility in Redondo Beach, California, but due to the workmanship issues, and in an effort to preserve as much schedule as possible, all but two of the harnesses are being installed at Goddard after the OTE was transferred there to begin the integration of the mirrors with the backplane. Various spacecraft challenges during the past year have used about 3 months of schedule reserve. For example, Northrop Grumman planned for certain integration activities to be conducted concurrently. However, according to project officials, due to safety and access to the spacecraft bus, the work had to be completed sequentially instead which took longer than expected. Additionally, a propellant tank required redesign and rework to meet its requirements. Spacecraft bus structure integration has been completed and the bus assembly recently completed various fit checks and acoustics and dynamics testing in preparation for the spacecraft integration and testing phase to begin in 2016. Schedule reserve for the sunshield was reduced to 9.25 months—two weeks from the critical path—due to various manufacturing challenges, and additional reserves will likely be needed in the near future. For example, an anomaly with the membrane retention devices—which need to operate correctly to ensure that the sunshield can unfold properly— during qualification testing required a redesign of the parts. According to contractor officials, when the devices were released, the contact between the metal surfaces moving adjacent to one another resulted in a small amount of debris being generated. Project officials expressed concern that the debris posed a risk of damaging other parts of the telescope. A new design has since been tested and proven to no longer pose the same risk. Additionally, coordinating the testing of the five individual layers of the sunshield created some delays. The five layers of the sunshield are currently in various stages of assembly, with two layers having been delivered to Northrop Grumman from the supplier in April 2015 and November 2015, respectively. In addition, in October 2015, the project reported that a piece of flight hardware for the sunshield’s mid boom assembly was irreparably damaged during vacuum sealing in preparation for shipping. The effect of the accident on the schedule has not yet been determined as project and prime contractor officials are currently determining the path forward. The cryocooler continued to experience technical challenges in 2015 that used schedule reserve and delayed its delivery. Although it has now been delivered—approximately 18 months later than planned—the cryocooler remains a schedule risk as it begins testing. Northrop Grumman delivered the compressor assembly—the third and final cryocooler component to be delivered after the cold head assembly and electronics assembly—to JPL in July 2015. Over the last several years, the project has accommodated a series of cryocooler schedule slips by reordering and compressing JPL’s test schedule and resequencing the spacecraft bus integration schedule. For example, several tests that were initially planned to be conducted on flight hardware will now be conducted on the spare hardware later into JWST’s integration and testing phase and closer to launch. Additionally, in May 2015, the project used 3 weeks of reserve and removed 3 weeks of lower priority and redundant items from the planned 40 weeks of acceptance and end-to-end testing. The project took these actions to accommodate a further delay in the delivery of the compressor assembly. According to contractor officials, the delay was primarily caused by the contractor not scheduling enough time to complete the bake out—a process whereby moisture is removed by heating the compressor and pumping helium through it. Table 1 below shows the tests removed from the acceptance and end-to-end testing. According to JPL officials, the thermal tests removed were from those that would have tested the cryocooler compressor assembly with the electronics assembly. A program official stated that the risk of eliminating these tests has been reduced now that the compressor and electronics assembly have been tested together for the first time. NASA and JPL assessed the removal of the electromagnetic interference and electromagnetic compatibility testing as low risk, and a program official stated that additional parallel activities and testing of the spare electronics to further mitigate the risk have been added. However, various integration and test experts we spoke with noted that eliminating testing is a sign that the project may be taking on additional risk because discovery of issues may be pushed to higher levels of testing or to later in the testing phase, where problems are more costly and time consuming to address. To accommodate any delays to testing or problems that may be found, JPL currently maintains 12 weeks of reserve for acceptance and end-to- end testing of the cryocooler. According to JPL officials, a key driver in deciding to eliminate testing instead of using additional schedule reserve was to retain as much as possible in the event that a test has to be stopped and restarted—which would require approximately 5 weeks—in addition to the time it takes to mitigate a problem. At the completion of the acceptance and end-to-end testing programs, the cryocooler is needed for spacecraft integration and testing—when the spacecraft and sunshield are integrated—no later than August 2, 2016. Spacecraft integration and test is followed by the final observatory level integration and test— completing the telescope—which is expected to begin in September 2017. The cryocooler’s testing flow and schedule reserve leading to its integration with the spacecraft is depicted in figure 5 below. Because the development and delivery of the cryocooler by Northrop Grumman took significantly longer than expected and to maintain the 12 weeks of reserve, JPL must complete acceptance and end-to-end testing in a more schedule-compressed environment. However, challenges have persisted in bringing the cryocooler flight model to testing and completing development of the spare model which could be needed if the flight model is not available in time to be integrated into the observatory for launch. For example, despite having an extra 18 months to prepare for the cryocooler testing due to the delay in the delivery of the compressor assembly, the project noted concerns with JPL’s readiness to accept the flight hardware. Specifically, a procedure error led to an interruption of the ongoing testing of the electronics assembly and fit checks of the flight cooler tower assembly and flight refrigerant line deployable assembly were delayed because the procedures were late in being completed. JWST is one of the most technologically complex projects NASA has undertaken. The project incorporates nine critical technologies— technologies that are required for the project to successfully meet requirements—whereas we found the average technology development project at NASA incorporates an average of 2.3 critical technologies. JWST also incorporates 15 pre-existing technologies that are being leveraged from previous development efforts. Future testing on JWST has to reduce a significant amount of risk before the October 2018 launch. The project identifies and maintains a list of risks—currently with 102 items—that need to be tested and mitigated to an acceptable level in the next 3 years. According to the project, approximately 25 of these risks are not likely to be closed until the conclusion of the observatory integration and test phase—just prior to project launch. This is the point where the project has determined that no further mitigations are feasible and that these risks have been tested per a plan to reduce the risk, when possible, to an acceptable level. In some cases, it may take years to resolve a particular risk. For example, the project continues to track a risk related to the release mechanisms that hold the spacecraft and the OTE together for launch. Once in space, they are to activate and release to allow the OTE to separate from the spacecraft. If the mechanisms do not operate correctly, mission failure will occur. This risk was identified in January 2014 at the spacecraft critical design review. During testing, these devices were causing excessive shock when performing their releasing function. After redesign, the project is continuing to work on resolving the underlying problem and qualifying the new design. Additionally, while testing the redesigned mechanism, a new concern arose that it could release early which would cause mission failure. According to a program official, the redesigned mechanism is not needed for spacecraft integration and test until summer of 2016 and therefore these issues do not pose a significant schedule concern at this time. As integration and testing moves forward, the project will need to be able to resolve problems in a timely manner to stay on schedule. A backlog of unresolved problems and risks may indicate there may not be enough schedule left before launch to complete all necessary work. The project keeps track of these problems via problem reports and problem failure reports. Thus, ensuring that problem reports and problem failure reports are resolved in a timely manner is key to successfully launching the project on time. Project officials reported that they do not track problem report and problem failure report closure rates over time; instead, they monitor the reports to ensure that they are closed before subsequent test events and receive monthly briefings from the contractors on the status of their progress. According to project officials responsible for the ISIM and OTIS development and testing, while there are numerous problem reports open at any given time, they are comfortable with the number of open reports at this stage of the project. Northrop Grumman officials reported that development of the OTE, sunshield, and spacecraft are on track with respect to problem and failure reports, which they refer to as nonconformance reports. Additionally, experts we spoke with told us that addressing requests for action (RFAs) from project reviews is important because RFAs are written to identify potential risks to the project. Since the spacecraft critical design review in January 2014, the project has closed 14 RFAs from that review while one related to the release mechanism noted above remains open. The project tracks and reports open RFAs to senior management at NASA, and we will continue to examine the open RFA and additional RFAs that result from future reviews to monitor their timely closure. The extent of JWST’s deployments—which are necessary because JWST must be stowed for launch to fit in the launch vehicle—means the telescope could fail to operate as planned in an extensive number of ways. According to project officials, there are over 100 different ways that a failure could occur, referred to as single point failure modes, across hundreds of individual items in the observatory. Each of these could result in a loss of minimum mission objectives, and thus needs to be fully tested and understood. Nearly half of the single point failure modes involve the deployment of the sunshield. The approval of single point failures requires written justification from the project including sound engineering judgement, supporting risk analysis, and implementation of measures to mitigate the risk to acceptable levels. The project’s mission systems engineers have developed justifications and mitigation strategies for its single point failures, and project officials expect these to be summarized and submitted to the agency prior to launch. According to project officials, this approach is consistent with other high-priority NASA missions, which require the most stringent design and development approach that NASA takes to ensure the highest level of reliability and longevity on orbit. The JWST project continued to meet its cost commitments throughout fiscal year 2015 despite cryocooler delays that used a disproportionate amount of cost reserves. However, the project required larger than planned workforce levels to complete new and existing work, which poses a cost threat in future years if levels do not decrease. To help manage the project and account for new risks since the 2011 replan, JWST project officials conducted a cost risk analysis of the Northrop Grumman contract. We found that while the cost risk analysis substantially met best practices, these officials do not plan to periodically update it. Instead, the project is using risk-adjusted analyses to update and inform its cost position. However, we found that this method is a simplified version of a cost-risk analysis that does not contain the same rigor or allow the project to prioritize risks. Furthermore, we found anomalies in the contractor- provided data rendering the results of the analyses unreliable. Finally, we also found the project lacks an independent surveillance mechanism for the data to ensure anomalies are corrected by the contractor before being incorporated into larger analyses. As a result, the project is relying partially on unreliable information to inform its cost and schedule decision-making. Project officials managed JWST within its allocated budget for the fourth consecutive year since the 2011 replan. Additionally, the project’s fiscal year 2016 budget request to Congress is consistent with its cost commitment. According to preliminary estimates, at the end of fiscal year 2015, the project spent $68 million dollars more than planned at the beginning of the fiscal year, carrying over less money into fiscal year 2016 than originally planned. As in past years, the project used a portion of its cost reserves to address technical challenges that included funding activities to address significant delays with the cryocooler. The project also used program-level cost reserves to pay for new work that included conducting additional thermal verification tests and risk reduction activities, such as an analysis to better understand how JWST will likely interact with its launch vehicle—the Ariane 5. The cryocooler used a significant share of the project’s fiscal year 2015 cost reserves—more than 50 percent—to fund the workforce for this effort and address technical issues. This is the fourth year in a row that the cryocooler used a substantive portion of the project’s cost reserves to further fund the subcontractor’s schedule delays in delivering its components. The project estimates that the overall cryocooler development cost will be nearly 250 percent higher than baselined at the 2011 replan. The Northrop Grumman cryocooler team forecasts that a larger workforce is needed until at least February 2016 when the spare compressor assembly is currently scheduled to be delivered. JPL will maintain the majority of its workforce through the conclusion of spare cryocooler testing. After testing concludes, its workforce is projected to decrease by about 50 percent. Project cost reserves will likely continue to be needed to fund cryocooler development and testing costs until fiscal year 2017 when JPL testing of the spare compressor assembly is scheduled to conclude. While the project remains on cost, contractor work is costing more to complete because a larger workforce than planned was needed for components beyond the cryocooler, including Northrop Grumman for the sunshield, spacecraft, and OTE, and Harris for OTIS testing and preparation. This need derives from work taking longer than planned to complete and additional work requested by NASA. For example, Northrop Grumman’s workforce projections for fiscal year 2015 predicted a peak in the workforce in November 2014. However, the actual workforce peaked in February 2015 and continued to remain above the projected peak until August 2015. While workforce numbers have declined somewhat since February, these increases largely remained in place through the end of the fiscal year. In its role as prime contractor, Northrop Grumman’s workforce stayed within its budget in fiscal year 2015. From January through July of 2015, its workforce was exactly at its funding threshold in order to conduct new work and address technical issues for its body of work. In addition, larger workforces contributed to additional contractor cost for two other development efforts—OTIS testing and the cryocooler—requiring the use of additional project cost reserves. Looking forward, the primary threat to JWST meeting its long-term cost commitment is the prime contractor, which must continue to control its costs and decrease its workforce. For the past 20 months, Northrop Grumman’s actual workforce exceeded its projections. Figure 6 below illustrates the difference between the workforce levels that Northrop Grumman projected at the beginning of fiscal years 2014 and 2015 and its actual workforce levels for those periods. Based on its projections at the beginning of the fiscal year, Northrop Grumman exceeded its total fiscal year 2014 workforce monthly projections by about 12 percent, and exceeded its projections for fiscal year 2015 by about 20 percent. On average, in fiscal year 2015, Northrop Grumman was 121 FTEs above its projections each month, and at the end of fiscal year 2015, it exceeded its monthly projection for September 2015 by 235 FTEs. While actuals have remained above projections since the workforce levels peaked in February 2015, Northrop Grumman currently projects that its workforce will decline throughout fiscal year 2016, with the exception of August 2016, when additional work is projected to be needed for integration and testing, among other areas. However, this was the projection for both fiscal years 2014 and 2015 and has yet to happen. For example, while Northrop Grumman expected to be ramping down by the end of fiscal year 2014, its projections at the start of fiscal year 2015 were approximately 55 percent higher than where workforce levels were projected for the end of fiscal year 2014. The primary drivers that have increased the cost and size of the workforce under the prime contract have been the development of the sunshield and spacecraft and additional work NASA has requested. Over 60 percent of the cost increases are attributed to addressing technical concerns such as sunshield alignment and verification work, mechanical design integration, and spacecraft mass reduction. Northrop Grumman has covered additional costs pertaining to technical issues through its management reserves, and has not needed project cost reserves in fiscal years 2014 and 2015. The remaining cost increases are attributable to new contract scope which has been funded by the JWST program. Some of this new scope included additional spacecraft simulators, as well as new thermal risk reduction testing to verify the final design changes made to the core of the telescope–the region between all the observatory elements. Approximately 15 percent of work remains on Northrop Grumman’s contract and its management reserves exceed the recommended minimum amount that should be held at the contractor level—10 percent or more of the cost of work remaining on the project. Significant decreases in the workforce are planned to occur in fiscal year 2017 when final hardware delivery to observatory integration and test is scheduled to take place. To incentivize the contractor to lower its workforce, project officials evaluate workforce management as part of NASA’s appraisal of Northrop Grumman’s performance in its award fee determinations. The project also communicates frequently with the contractor including phone calls, face to face meetings twice a month, and quarterly in-person management meetings to discuss workforce planning, among other subjects. The project has communicated the need to reduce the workforce size, but since Northrop Grumman has operated within its budget in fiscal years 2014 and 2015, the award fee it has received has not been reduced as a result of workforce size issues. The subcontractor for OTIS testing, Harris, needed additional funding to cover cost overruns and additional work. Project cost reserves were utilized to pay for this work to maintain schedule through a contract change in January 2015. Over 55 percent of the increase was made to address cost overruns that resulted from increasing workforce levels to maintain schedule. The rest of the contract increase covered new scope. As a result, Harris is anticipating more work than originally planned for fiscal years 2016 and 2017. Despite the contract increases, Harris’s management reserves are 2.5 percent as of August 2015—significantly below the 10 percent cost of work remaining that is considered to be healthy. With over 25 percent of work remaining on its contract, this low level of reserves means that any additional overruns will likely need to be covered by project-held reserves. We found that NASA’s 2014 cost risk analysis on Northrop Grumman’s remaining work substantially met best practices. In December 2014, we recommended that project officials update the 2011 JWST cost risk analysis utilizing best practices, and to update it periodically as significant risks emerge. NASA partially concurred with our recommendation stating that the program and project use a range of tools to assess the performance of the project and conducted a one-time update to the cost risk analysis in 2014. We found that NASA’s updated cost risk analysis substantially met best practices. For example, it incorporated subject matter expert input to model cost and schedule uncertainties from the prime contractor’s threats and opportunities list—both of which are components of the best practice of modeling a probability distribution for each cost element’s uncertainty based on data availability, reliability and variability. See appendix I for a list of best practices that we used to evaluate cost risk and uncertainty. In addition, NASA included correlation between elements to account for different cost elements being affected by the same external factors—another best practice. However, the cost risk analysis also had some weaknesses as a result of not fully following best practices. For the first best practice noted above on modeling probability distribution, NASA relied on the contractor’s risk data without conducting corroborating interviews with contractor personnel to obtain insight into threats and opportunities not listed in contractor data. For the same best practice, the detailed schedule that reflected all of the work that needed to be done by Northrop Grumman that was used for the cost risk analysis had some activity sequencing logic issues. For example, we found instances where activities listed were not sequentially linked to one another. As a result, this called into question the calculation of the critical path during simulations as well as the ability of the schedule to dynamically respond to changes, which it must do thousands of times during the risk simulations. Moreover, the JWST project does not plan to periodically update its cost risk analysis even as additional risks have emerged. JWST officials stated that the cost risk analysis was a time intensive process to complete and that the program and project use various tools consistent with best practices to assess all major contractors’ performance. Nonetheless, best practices call for conducting periodic updates to a cost risk analysis as a project progresses even if it is not experiencing problems. Updating the cost risk analysis is also part of the best practice of implementing a risk management plan with the contractor which calls for identifying and analyzing risk, planning for risk mitigation, and continually tracking risks. An accurate cost risk analysis is particularly vital to JWST because about 70 percent of the project cost reserves have been used to address concerns that were not anticipated as threats by the project’s budget system. Failure to update the cost risk analysis as we recommended in 2014 limits stakeholder confidence that the cost risk analysis prepared in 2014 accurately reflects the project’s current financial status. Given this uncertainty, it is important for the project to have reliable information for the risks that are known to inform decision making. One of the tools that the project has started to use in place of updating the cost risk analysis is a monthly risk-adjusted analysis to provide insight into potential future cost growth. The monthly risk-adjusted analyses are based on contractor EVM data that incorporate known threats to provide an estimate at completion (EAC) that is updated monthly by NASA for each contractor. The results of these analyses may then be compared to the contractors’ estimates and project cost reserves to provide insight into the project’s ability to cover future increases. Monthly risk-adjusted analyses demonstrate a commitment by NASA to manage and project future costs. However, we found that the risk-adjusted analyses do not serve as an adequate substitute for an updated cost risk analysis because they are a simplified version of a cost risk analysis that does not allow the project to prioritize risks or assign confidence levels to meet key milestones in the schedule consistent with best practices for cost risk analyses. Additionally, based on our analysis of contractor EVM data over 17 months, we found that some of the data used to conduct the analyses were unreliable. First, we found that both Northrop Grumman and Harris were reporting optimistic EACs at the time of our analysis that did not align with their historical EVM performance and fell outside the low end of our independent EAC range. Second, we found various anomalies in contractor EVM data for both the Northrop Grumman and Harris work that they had not identified throughout the 17-month period we examined. The anomalies included unexplained entries for negative values of work performed (meaning that work was unaccomplished or taken away rather than accomplished during the reporting period), work tasks performed but not scheduled, or actual costs incurred with no work performed. For Northrop Grumman, many were relatively small in value ranging from a few thousand to tens of thousands of dollars. These anomalies are problematic because they distort the EVM data, which affect the projection of realistic EACs. We found that these anomalies occurred consistently within the data over a 17-month period, which brings into question the reliability of the risk-adjusted EAC analysis built upon this information. NASA did not provide explanations into the anomalies for either contractor. While the contractors were able to provide explanations for the anomalies upon request, their explanations or corrections were not always documented within EVM records. Some of the reasons the contractors cited that were not in the EVM records included tasks completed later than planned, schedule recovered on behind schedule tasks, and replanning of customer-driven tasks. Finally, like the cost-risk analysis in 2014, the risk-adjusted EAC analysis does not include interviews with contractor officials to gain insight into risks which may not be present in the contractors’ threats and opportunities list. Without updating the cost risk analysis, reconciling and documenting data anomalies, and utilizing reliable data for the risk-adjusted EAC, the JWST project does not have a reliable method to assess its cost reserve status going forward. This means that some of the cost information the project officials use to inform their decision making may indicate they are in good shape when the reality might be otherwise, and as result, project management may not have a solid basis for decision making. In discussions with the contractors, we found that the project also lacks an independent surveillance mechanism, such as the Defense Contract Management Agency, to monitor contractors’ EVM data—provided to the project each month from two of the contractors. Surveillance entails reviewing a contractor’s EVM system with the purpose of focusing on how well a contractor is using its EVM system to manage cost, schedule, and technical performance. However, the lack of surveillance and the data anomalies in EVM data are problems we previously identified across NASA’s portfolio of major spaceflight projects. We found in November 2012 that 4 of NASA’s 10 major spaceflight projects we reviewed had established formal independent surveillance reviews. For the 6 projects that did not have formal independent surveillance in place, we found that each provided evidence that they instituted monthly EVM data reviews, which according to project officials, helped them to continually monitor cost and schedule performance. However, we found that the rigor of both the formal and informal surveillance reviews was questionable given the numerous EVM data anomalies we found in the monthly EVM data. As a result, we recommended that NASA improve the reliability of project EVM data by requiring projects to implement a formal surveillance program that ensured anomalies in contractor-delivered and in-house monthly earned value management reports were identified and explained, and report periodically to the center and mission directorate’s leadership on relevant trends in the number of unexplained anomalies. Citing resource constraints, NASA partially concurred with the recommendation and commented that it did not plan to implement a formal surveillance program, but agreed that the reliability and utility of the EVM data needed to be improved and noted several steps it planned to take to do so. We continue to believe that implementing this recommendation would be beneficial and prevent anomalies in EVM data from occurring that we have identified on the JWST project. Implementing surveillance of EVM contractor data is a best practice listed in the NASA Earned Value Management Implementation Handbook and GAO’s Cost Estimating and Assessment Guide. With adequate surveillance in place, the anomalies we found in the EVM data could have been identified earlier and corrective action could have been directed to the contractors to explain the anomalies in the data. Without implementing proper surveillance, the project may be utilizing unreliable EVM data in its analyses to inform its cost and schedule decision making. NASA has taken steps to provide independent oversight of the JWST project. Independent oversight of the JWST project has played and will likely continue to play an important role leading up to JWST’s launch in October 2018. Before the 2011 replan, two groups examined JWST to address underlying concerns with schedule and cost and made recommendations that NASA implemented. On an ongoing basis until launch, the Standing Review Board and the Independent Verification & Validation (IV&V) facility are to continue to oversee progress on hardware and software development, identify concerns, and assist the project to identify solutions to reduce risk and improve JWST’s likelihood of success. Various groups internal and external to NASA have conducted reviews, provided insights, and identified schedule efficiencies to inform and enhance the project’s approach to managing the development of JWST. Prior to the 2011 replan and because of concerns raised at the JWST mission critical design review held in the spring of 2010, the Test Assessment Team was formed to address those concerns. Convened by the Astrophysics division of the NASA Science Mission Directorate, the team included nine members and three NASA consultants with considerable experience in systems engineering, instrument development, system verification, modeling and testing, and other areas focused on reviewing plans for the ISIM and OTIS cryogenic testing. The team was primarily tasked to determine whether (1) the test plans in place at that time were sufficient to test the relevant observatory functions, (2) the key optical and thermal objectives were clearly identified, (3) the test plans themselves were properly scoped and prioritized, (4) any duplicative or unnecessary tests existed in the plans, and (5) the plans were overly ambitious or optimistic regarding hardware performance and analysis capabilities. Their insights and recommendations have helped to decrease programmatic cost and future growth as well as to find schedule efficiencies. For example, they recommended OTIS testing duration be reduced from 167 to 90 days while still verifying critical functions of the telescope. Also prior to the 2011 replan, the Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies asked that NASA set up a panel to review the JWST project because of concerns about cost growth and schedule delays. In response, NASA convened the Independent Comprehensive Review Panel to provide an independent, integrated perspective and response with the goal of providing recommendations that would lead to a successful launch while minimizing cost. At the conclusion of its work in October 2010, the panel made 22 recommendations to NASA to increase oversight, improve communications, and assist with risk management and mitigation, among other recommendations. NASA implemented all of these recommendations. Both of these reports have informed our ongoing reviews of the JWST project as we have incorporated many of the concerns on cost estimates and cost reserves into our methodology and reporting on the health and status of JWST as it moves forward. Another aspect of independent oversight that is a key element of NASA’s strategic framework for managing space flight projects are Standing Review Boards which consist of technical experts who do not actively work on a specific project or program. The mission of the boards is to provide NASA senior management with objective information to ensure there is appropriate program and project management oversight to increase the likelihood of mission success. The boards help to determine the adequacy of programs’ (1) management approach, (2) technical approach, (3) integrated cost and schedule estimates and funding strategy, and (4) risk management, among others. NASA’s Independent Program Assessment Office and various NASA centers organize these boards and coordinate their involvement at different reviews. The boards are involved at various agency-level reviews with some members participating in lower-level reviews at NASA’s different centers, in monthly reviews held by the projects and program, or in special reviews on a specific topic or set of issues. Standing Review Boards may also make non-binding recommendations after life-cycle reviews, but do not have programmatic or technical authority over the programs or projects. The Standing Review Board Handbook describes three types of boards that may be formed to provide independent oversight of programs or projects. See table 2 below for the three types of Standing Review Boards. NASA’s Standing Review Board Handbook states that a civil servant consensus with no expert support is the preferred structure within NASA because experience demonstrates that a consensus board leads to a more meaningful discussion of the review findings and recommendations, especially where dissenting opinions are discussed. A non-consensus mixed board provides only the perspective of the chairman. In 2015, 1 of 33 active Standing Review Boards was a civil service consensus board with no expert support, 15 were civil service consensus with consultant support, and 17 were non-consensus mixed boards. Although NASA guidance prefers civil servant consensus boards, NASA officials told us that they have found it challenging to staff boards exclusively with civil servants for a number of reasons including availability of staff, finding a person with the appropriate skill set, and independence reasons, among others. JWST has had a number of changes occur on the boards overseeing the project for different reasons. JWST has had a Standing Review Board since 2006 when a special review was conducted. During that review and from 2008 to 2014, the board was a non-consensus board led by an outside expert chosen by NASA senior officials. The experts were civil servants as well as non-civil-servant experts. In May 2014, the chairman retired, a new chair was appointed the same year, and NASA senior officials changed the board to a consensus board with consultants. Independent Program Assessment Office officials told us that board types can change for numerous reasons, including when a project or program enters a different phase of development that may require different technical skills or if all of the convening authorities request it. As a result of the retirement of the chairman, most of the 2008-2014 Standing Review Board members who were not civil servants but who had overseen JWST for more than 6 years were replaced and 2 civil servants were carried over to the new board. Consultant support was added for schedule analysis and in one technical area to support launch vehicle integration because NASA has never launched a mission on an Ariane 5 rocket as it plans to do for JWST. Before retiring in 2015, the previous Standing Review Board chairman expressed the importance of having representation from JPL as a member of the board to provide experience working on unmanned spacecraft projects—but a JPL member could not be added since JPL employees are not civil servants and can only be consultants to the board. With the appointment of a new chairman in October 2015, there have been additional membership changes to the board including the addition of a JPL consultant. NASA’s IV&V facility—which independently examines software development—reviews mission critical software for most NASA programs and projects to achieve the highest levels of safety and cost-effectiveness by ensuring that developed software will perform as required. Experts at the facility work to uncover high-risk errors early in the development life cycle of software for many NASA programs and projects. IV&V is a process whereby organizations can reduce the risks inherent in system development and acquisition efforts by having a knowledgeable party who is independent of the developer to determine whether the system or product meets the users’ needs and fulfills its intended purpose. IV&V applies software engineering best practices to risk elements on safety critical and mission-critical software throughout the development life cycle. We have found IV&V to be a leading practice for federal agencies in managing their complex, large-scale, or high-risk acquisition of programs. Software development is a challenge we have found on many different acquisitions—some space-related—in government programs that has led to schedule delays and cost growth. Examples include the F-35 Joint Strike Fighter, the Aegis Modernized Weapon System, NASA’s Stratospheric Observatory for Infrared Astronomy, and Geostationary Weather Satellite development, among others. The goal of IV&V is to examine the three following questions regarding software: Will the system do what it is supposed to do? Will the system not do what it is not supposed to do? Will the system perform as expected under adverse conditions? IV&V is required to examine software on all projects with a life cycle cost over $1 billion, other projects over $250 million with a higher risk classification, or those specifically selected by the NASA Chief, Safety and Mission Assurance. Once selected, a portfolio-based risk assessment is developed to identify top-level mission capabilities and a risk based assessment process identifies the most important system capabilities and the software components that play the most important role in the mission. IV&V officials noted that due to limited resources, they examine mission and safety critical software and they do not have the funding to examine all programs or projects across NASA’s portfolio. Generally, IV&V officials stated that they believe JWST’s software development is going well, but the testing that lies ahead—when the different components are integrated—will be a challenge. For example, IV&V officials noted that JWST’s software build is the largest they have reviewed for a science mission, but not the largest they have reviewed across NASA as some Human Exploration Operations are larger. They said that most of JWST’s software required to position and deploy the telescope will be examined by IV&V. However, they noted that JWST’s integration is more challenging, primarily due to the number of software developers involved. While most science programs or projects have two to four software developers, JWST has eight. JWST’s software development has been examined by IV&V since fiscal year 2004 and, according to officials, will likely continue to be examined until after launch when operations begin. IV&V officials said they do not examine the software for the launch vehicle. While IV&V’s function requires independence from programs and projects, there have been recent changes in funding that have reduced its financial independence to some extent. Organizationally, the IV&V Facility remains independent by reporting to the Office of the Director of Goddard and the Office of Safety and Mission Assurance at NASA Headquarters— not to the programs or projects it examines. However, financially, starting in 2015, an IV&V financial management official said that 75 percent of the IV&V’s funding came from NASA Headquarters via the Agency Management Operations fund and the remaining 25 percent was divided amongst the various mission directorates. This changed from the past 10 years, when 100 percent of the IV&V Facility’s budget came from the Agency Management Operations to ensure the independence of the IV&V office. We have previously found that financial independence requires that the funding for IV&V be controlled by an organization separate from the development organization. This ensures that the effort will not be curtailed by having its funding diverted to other program needs, and that financial pressures cannot be used to influence the effort. As a user of IV&V’s expertise, JWST, via the use of program cost reserves, contributed a small portion of funding to the software IV&V facility to help fund their budget in fiscal year 2015. While this financial situation was new in fiscal year 2015, we will continue to monitor how NASA deals with funding the IV&V facility in the future to protect its independence. The JWST project has made progress building, integrating, and testing significant portions of JWST in the past year within the commitments made at the time of the 2011 replan for both schedule and cost. With the third major integration and test period starting in 2016, resolving technical challenges in a timely manner, and ensuring the OTIS test goes smoothly are key to continued progress within the project’s schedule commitment. Additionally, reducing the size of Northrop Grumman’s workforce and controlling costs within the fiscal year 2016 budget will be key metrics to monitor to demonstrate the project can meet requirements within its cost commitment. In the past, the project has benefited from independent expertise, information, and recommendations to improve the management of the project. Moving forward, the project may benefit from having more reliable data provided from its contractors to ensure that its EACs, which take into account risks and threats, are better able to inform its cost status. While the contractors were able to explain the anomalies, most had not been previously identified or documented. NASA used the data for its analyses, which subsequently raised questions about the reliability of those analyses. Making management decisions using unreliable data can result in bad decision making and can misinform the project on its long-term financial position which may have significant consequences if not corrected. We recommended in our December 2014 report that NASA conduct a cost risk analysis and follow best practices, which include updating it as risks change during the life of the program. Because the project is not going to conduct another cost risk analysis, putting independent surveillance in place to improve the accuracy of its risk- adjusted analysis—despite its weaknesses relative to the information a cost risk analysis provides—will provide better information to inform its decision making. In November 2012, we recommended that NASA improve the reliability of project EVM data by requiring its major spaceflight projects to implement a formal surveillance program that ensured anomalies in contractor-delivered data and in-house monthly EVM reports were identified and explained. NASA partially concurred with this recommendation but has not taken steps to require surveillance on projects like JWST. However, we continue to believe that improving the surveillance on projects will help reduce data anomalies from occurring like the ones we identified on JWST, resulting in better information and analyses to inform project decision making. To resolve contractor data reliability issues and ensure that the project obtains reliable data to inform its analyses and overall cost position, we recommend that the NASA Administrator direct JWST project officials to require the contractors to identify, explain, and document all anomalies in contractor-delivered monthly earned value management reports. We provided a draft of this report to NASA for comment. In written comments, NASA agreed with our recommendation. These comments are reprinted in appendix IV. NASA also provided technical comments, which have been addressed in the report, as appropriate. We are sending copies of the report to NASA’s Administrator and interested congressional committees. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Our objectives were to assess (1) the extent to which technical challenges have impacted the James Webb Space Telescope (JWST) project’s ability to meet its schedule commitments, (2) the current cost status of the JWST project and the primary challenges that may influence the project’s ability to meet its future cost commitments, and (3) the extent to which independent oversight provides insight about project risks to management. To assess the extent to which technical challenges have impacted the JWST project’s ability to meet its schedule commitments, we reviewed project and contractor schedule documentation, and held interviews with program, project, and contractor officials on the progress made and challenges faced building the different components of the telescope. We examined and analyzed monthly JWST project status reports to management to monitor schedule reserve levels and usage and potential risks and technical challenges that may impact the project’s schedule, and to gain insights on the project’s progress since our last report in December 2014. Further, we attended flight program reviews at the National Aeronautics and Space Administration (NASA) headquarters on a quarterly basis where the current status of the program was briefed to NASA headquarters officials outside of the project. We examined selected individual risks for elements and major subsystems from monthly risk registers prepared by the project to understand the likelihood of occurrence and impacts to the schedule based on steps the project is taking to mitigate the risks. We examined previous and current test schedules and plans to understand the sequence, what risks will be mitigated, which risks will continue, and any reductions to planned testing. Furthermore, we interviewed experts within and outside of NASA to identify criteria, best practices, and metrics that may be used to assess the project’s progress in reducing risk or provide insight into the health of the project. Finally, we interviewed project officials at Goddard, contractor officials from the Harris Corporation, the Jet Propulsion Laboratory, the Space Telescope Science Institute, and different divisions of Northrop Grumman Aerospace Systems concerning technological challenges that have had an impact on schedule, and the project’s and contractor’s plans to address these challenges. To assess the current cost status of the JWST project and the primary challenges that may influence the project’s ability to meet its future cost commitments, we reviewed and analyzed program, project, contractor, and subcontractor data and documentation and held interviews with officials from these organizations. We reviewed JWST project status reports on cost issues to determine the risks that could impact cost. We analyzed contractor and subcontractor’s workforce plans against workforce actuals to determine whether contractors’ are meeting their workforce plans. We monitored and analyzed the status of program, and project cost reserves in current and future fiscal years to determine the project’s financial posture. We evaluated the cost risk analysis conducted by NASA of the remaining Northrop Grumman work to determine the extent to which all applicable best practices from GAO’s Cost Estimating and Assessment Guide were used to build the analysis. Those best practices included the following: A probability distribution modeled each cost element’s uncertainty based on data availability, reliability, and variability. The correlation between cost elements was accounted for to capture risk. A Monte Carlo simulation model was used to develop a distribution of total possible costs and an S curve showing alternative cost estimate probabilities. The probability associated with the point estimate was identified. Contingency reserves were recommended for achieving the desired confidence level. The risk-adjusted cost estimate was allocated, phased, and converted to then year dollars for budgeting, and high-risk elements were identified to mitigate risks. A risk management plan was implemented jointly with the contractor to identify and analyze risk, plan for risk mitigation, and continually track risks. We examined and analyzed earned value management (EVM) data from two of the project’s contractors to identify trends in performance, whether tasks were completed as planned, and likely estimates at completion. We also conducted analysis to ensure the reliability of the data over a 17- month period. In addition, we examined and analyzed risk-adjusted analyses from NASA to determine what information they provide to the project, the risks incorporated, their reliability, and how the project is utilizing this information. We also discussed our assessment of the project’s data and analysis with program and project officials to obtain their input. To assess the extent to which independent oversight provides insight about project risks to management, we reviewed documentation and data from NASA relevant groups, the program, the project, and the Standing Review Board and held interviews with experts as well as officials from independent oversight entities. We analyzed NASA policy and guidance documents to understand the elements for setting up and managing a Standing Review Board. We also reviewed the Test Assessment Team and Independent Comprehensive Review Panel team reports to determine how independent oversight has provided insight to JWST in the past. We interviewed officials at NASA’s Independent Program Assessment Office, as well as past and current Standing Review Board members, to understand how Standing Review Boards are created, members are selected, and how structural and personnel changes are made over the life of NASA programs and projects, including JWST. We also interviewed and reviewed documentation and analysis provided by NASA’s Independent Verification and Validation group working on JWST’s software development to determine the extent to which this group is providing oversight of JWST software development, to determine the health of software development on JWST, and determine what kinds of problems remain. We did not independently review JWST’s software development. Our work was performed primarily at NASA headquarters in Washington, D.C.; Goddard Space Flight Center in Greenbelt, Maryland; the Independent Verification and Validation facility in Fairmont, West Virginia; and by video teleconference with officials from the Independent Program Assessment Office at Langley Research Center, Hampton, Virginia. We also visited the Jet Propulsion Laboratory in Pasadena, California; Northrop Grumman Aerospace Systems in Redondo Beach, California; and the Space Telescope Science Institute in Baltimore, Maryland. We conducted this performance audit from February 2015 to December 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix III: Organizational Chart for the James Webb Space Telescope (JWST) Program The Jet Propulsion Laboratory is the contractor for the development of the cryocooler, but has subcontracted most of the work to a different division of Northrop Grumman than the one that is responsible for OTE, spacecraft, and sunshield development. Cristina Chaplain, (202) 512-4841 or [email protected]. In addition to the contact named above, Shelby S. Oakley, Acting Director; Arthur Gallegos, Assistant Director; Jay Tallon; Assistant Director; Karen Richey, Assistant Director; Jason Lee, Assistant Director; Brian Bothwell; Patrick Breiding; Aaron Gluck; Laura Greifner; Michael Kaeser; Katherine Lenane; Silvia Porres; Carrie Rogers; Sylvia Schatz; and Ozzy Trevino made key contributions to this report.

JWST is one of NASA's most complex and expensive projects, at an anticipated cost of $8.8 billion. With significant integration and testing scheduled in the 3 remaining years until the planned launch date, the JWST project will need to continue to address many challenges and identify problems, many likely to be revealed during its rigorous testing to come. The continued success of JWST hinges on NASA's ability to anticipate, identify, and respond to these challenges in a timely and cost-effective manner to meet its commitments. Conference Report 112-284 included a provision for GAO to assess the project annually and report on its progress. This is the fourth such report. This report assesses (1) the extent to which JWST is meeting its schedule commitments and (2) the current cost status of the project, among other issues. To conduct this work, GAO reviewed monthly JWST reports, reviewed relevant policies, conducted independent analysis of NASA and contractor data, and interviewed NASA and contractor officials. The National Aeronautics and Space Administration's (NASA) James Webb Space Telescope (JWST) project is meeting its schedule commitments, but it will soon face some of its most challenging integration and testing. JWST currently has almost 9 months of schedule reserve—down more than 2 months since GAO's last report in December 2014—but still above its schedule plan and the Goddard Space Flight Center requirement. However, as GAO also found in December 2014, all JWST elements and major subsystems continue to remain within weeks of becoming the critical path—the schedule with the least amount of schedule reserve—for the overall project. Given their proximity to the critical path, the use of additional reserve on any element or major subsystem may reduce the overall project schedule reserve. Before the planned launch in October 2018, the project must complete five major integration and test events, three of which have not yet begun. Integration and testing is when problems are often identified and schedules tend to slip. At the same time, the project must also address over 100 technical risks and ensure that potential areas for mission failure are fully tested and understood. JWST continues to meet its cost commitments, but unreliable contractor performance data may pose a risk to project management. To help manage the project and account for new risks, project officials conducted a cost risk analysis of the prime contract. A cost risk analysis uses information about cost drivers, technical issues, and schedule to determine the reliability of a program's cost estimates. GAO found that while NASA's cost risk analysis substantially met best practices for cost estimating, officials do not plan to periodically update it. Instead, the project is using a risk-adjusted analysis to update and inform its cost position, but this analysis is a simplified version of a cost risk analysis—and not a replacement—and is based on contractor-provided performance data that contains anomalies that render the data unreliable. Further, the project does not have an independent surveillance mechanism, such as the Defense Contract Management Agency, to help ensure data anomalies are corrected by the contractor before being incorporated into larger cost analyses, as GAO recommended in 2012. As a result, the project is relying partially on unreliable information to inform its decision making and overall cost status. GAO recommends that the JWST project require contractors to identify, explain, and document anomalies in contractor-delivered monthly earned value management reports. GAO continues to believe that its 2012 recommendation to implement formal surveillance to help improve the reliability of contractor-provided data has merit and should be implemented. NASA concurred with the recommendation made in this report.

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Experts agree that chemical facilities are among the most attractive targets for terrorists intent on causing massive damage. Despite the risk these facilities pose, no one has yet comprehensively assessed security at the nation’s chemical facilities. EPA regulates about 15,000 facilities under the 1990 amendments to the Clean Air Act because they produce, use, or store more than certain threshold amounts of specific chemicals that would pose the greatest risk to human health and the environment if they were accidentally released into the air. These facilities must take a number of steps, including preparing a risk management plan (RMP), to prevent and prepare for an accidental release and, therefore, are referred to as RMP facilities. These facilities fall within a variety of industries and produce, use, or store a variety of products, including basic chemicals; specialty chemicals, such as solvents; life science chemicals, such as pharmaceuticals and pesticides; and consumer products, such as cosmetics. Some of these facilities are part of critical infrastructure sectors other than the chemical sector. For example, about 2,000 of these facilities are community water systems that are part of the water infrastructure sector. In addition, other facilities that house hazardous chemicals that are listed under the RMP regulations are not subject to RMP requirements because the quantities stored or used are below threshold amounts. Through the RMP program, EPA has gained extensive expertise with chemical facilities and processes that could be useful in helping DHS assess security issues. Federal requirements currently address security at some U.S. chemical facilities. For example, a small number of chemical facilities must comply with the Maritime Transportation Security Act of 2002 and its implementing regulations, which require maritime facility owners and operators to conduct assessments, develop security plans, and implement security measures. In addition, certain community water systems—while not specifically considered chemical facilities but which use and store large volumes of chemicals—are required by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 to conduct and submit a vulnerability assessment to EPA and prepare an emergency response plan that incorporates the results of the assessment. According to EPA, 1,928 drinking water facilities that are also subject to EPA’s RMP program must comply with this act. Some states and localities have also created security requirements at chemical facilities. In addition, the federal government imposes safety and emergency response requirements on chemical facilities that may incidentally reduce the likelihood and consequences of terrorist attacks. For example, Section 112(r) of the Clean Air Act includes a general duty clause directing owners and operators of facilities to identify hazards, design and maintain a safe facility to prevent releases, and minimize the consequences of any accidental releases that occur. Under Section 112(r), RMP facilities must also implement a program to prevent accidental releases that includes safety precautions and maintenance, and monitoring and training measures, and they must have an emergency response plan. The Department of Labor’s Occupational Safety and Health Administration’s process safety management standard also requires facilities to conduct analyses of their chemical processes which must address hazards of the process, engineering and administrative controls applicable to the hazards, facilities siting, and evaluation of the possible health and safety effects of failures of controls on employees. DHS is developing a plan for protecting the chemical sector that will establish a framework for reducing the overall vulnerability of the sector in partnership with the industry and state and local authorities. At the time of our review, DHS did not provide a specific date for completion of the Chemical Sector-Specific Plan. DHS completed a draft of the plan in July 2004 and has been working to revise it to accommodate changes to DHS’s risk management strategy and comments from stakeholders. DHS officials told us that the final plan—which they now expect to complete and release in the fall of 2006—will reflect the basic principles and content described in the draft plan. On the basis of our review of the draft plan and discussions with DHS officials, the final plan will, among other things, (1) present background information on the sector; (2) describe the process DHS will use to develop an inventory of chemical sector assets; (3) describe DHS’s efforts to identify and assess chemical facilities’ vulnerabilities and plans to prioritize these efforts on the basis of the vulnerability assessments; (4) outline the protective programs that will be created to prevent, deter, mitigate, and recover from attacks on chemical facilities, and describe how DHS will work with private sector and government entities to implement these programs; (5) explain the performance metrics DHS will use to measure the effectiveness of DHS and industry security efforts; and (6) outline the department’s challenges in coordinating the efforts of the chemical sector. DHS has also initiated actions to identify the chemical sector’s critical assets, prioritize facilities, develop and implement protective programs, exchange information with the private sector, and coordinate efforts with EPA and other federal agencies. DHS is focusing its efforts for the chemical sector by identifying high-priority facilities. As a starting point, DHS has adapted EPA’s RMP database of facilities with more than threshold amounts of certain chemicals to develop an interim inventory of 3,400 chemical facilities that pose the greatest hazard to human life and health in the event of a terrorist attack. These are facilities where a worst- case scenario release potentially could affect over 1,000 people. According to DHS, 272 of these facilities could potentially affect more than 50,000 people. DHS is also developing a new risk assessment methodology to compare and prioritize all critical infrastructure assets according to their level of threat, their vulnerability to attack, and the consequences of an attack on the facility. According to DHS, Risk Analysis Management for Critical Asset Protection (RAMCAP) will provide a common methodology, terminology, and framework for homeland security risk analysis and decision making that is intended to allow consistent risk management across all sectors. The RAMCAP process entails chemical facility owners/operators voluntarily completing a screening tool to identify the consequences of an attack. On the basis of the results of the screening tool, DHS will identify facilities of highest concern and ask them to voluntarily complete a security vulnerability assessment. Finally, DHS has implemented a number of programs to assist the private sector and local communities in reducing vulnerabilities. For example, DHS works with local law enforcement officials and facility owners through the Buffer Zone Protection Program to improve the security of the area surrounding a facility. To assess and identify vulnerabilities at chemical facilities, DHS deploys teams of experts from both government and industry to conduct a site assistance visit. DHS had conducted 38 site assistance visits at chemical facilities as of June 15, 2005, and planned to conduct additional visits in fiscal year 2006 on the basis of need. DHS has also installed cameras at some high-consequence facilities, providing local law enforcement authorities with the ability to conduct remote surveillance and allowing state homeland security offices and DHS to monitor the facilities. In addition, DHS distributes threat information to the industry through various means and coordinates sector activities with the Chemical Sector Coordinating Council, an industry-led working group formed voluntarily by trade associations that acts as a liaison for the chemical sector. DHS also coordinates with EPA and other federal agencies through a government coordinating council. EPA officials believe that the agency could further assist DHS by providing analytical support in identifying high-risk facilities that should be targeted in DHS’ chemical sector efforts, among other activities. With few federal security requirements, industry associations have been active in promoting security among member companies. Some industry associations, including the American Chemistry Council (ACC), the Synthetic Organic Chemical Manufacturers Association, and the National Association of Chemical Distributors, require member companies to assess their facilities’ vulnerabilities and make security enhancements, requiring as a condition of membership that they conduct security activities and verify that these actions have been taken. ACC, representing 135 chemical manufacturing companies with approximately 2,000 facilities, has led the industry’s efforts to improve security at their facilities. ACC requires its members to adhere to a set of security management principles that include performing physical security vulnerability assessments using an approved methodology, developing plans to mitigate vulnerabilities, taking actions to implement the plans, and having an independent party such as insurance representatives or local law enforcement officials verify that the facilities implemented the identified physical security enhancements. These reviewers do not verify that a vulnerability assessment was conducted appropriately or that actions taken by a facility adequately address security risks. However, ACC requires member companies to periodically conduct independent third-party audits that include an assessment of their security programs and processes and their implementation of corrective actions. In addition, ACC members must take steps to secure cyber assets, such as computer systems that control chemical facility operations, and the distribution chain from suppliers to customers, including transportation. Other industry associations have encouraged their members to address security by a variety of means. Most of the 16 associations we spoke to have developed security guidelines and best practices. For example, the International Institute of Ammonia Refrigeration, representing facilities such as food storage warehouses, developed site security guidelines tailored to ammonia refrigeration facilities and provides information about security resources to members. Several industry associations have also developed vulnerability assessment methodologies to assist their member companies in evaluating security needs. For example, the National Petrochemical and Refiners Association, in partnership with the American Petroleum Institute, developed a vulnerability assessment methodology tailored to refiners and petrochemical facilities. Despite industry associations’ efforts to encourage or require members to voluntarily address security, the extent of participation in the industry’s voluntary initiatives is unclear. Chemical industry officials told us they face a number of challenges in preparing facilities against a terrorist attack. Most of the chemical associations we contacted stated that the cost of security improvements is a challenge for some chemical companies. For example, ACC reports that its members have spent an estimated $2 billion on security improvements since September 11, 2001. Representatives of the American Forest & Paper Association and the National Paint and Coatings Association told us that small companies, in particular, may struggle with the cost of security improvements or the cost of complying with any potential government security programs because they may lack the resources larger companies have to devote to security. Industry stakeholders also cited the need for guidance on what level of security is adequate. While DHS has issued guidance to state Homeland Security Offices and the Chemical Sector Coordinating Council on vulnerabilities and protective measures that are common to most chemical facilities, several stakeholders expressed a desire for guidance on specific security improvements. For example, representatives of the National Petrochemical and Refiners Association stated that one reason the association holds workshops and best practices sessions is to meet the challenge of determining the types of security measures that constitute a reasonable amount of security. In addition, industry officials told us that the lack of threat information makes it difficult for companies to know how to protect facilities. A few industry officials also mentioned limited guidance on conducting vulnerability assessments and difficulty in conducting employee background checks as challenges. One industry association stated that it would like its members to receive guidance from DHS on how to conduct vulnerability assessments. Another association expressed frustration because none of the current vulnerability assessment tools address issues specific to their member facilities, which package and distribute chemicals, and it would like DHS to help develop or approve a methodology for this type of facility. Finally, a number of stakeholders we contacted told us that emergency response preparedness is a challenge for chemical companies. An official with an industry-affiliated research center asserted that emergency responders and communities in the United States are prepared to respond to a toxic release. However, other stakeholders we spoke with stated that many facilities have conducted security vulnerability assessments but may not have done enough emergency response planning and outreach to the responders and communities that would be involved in a release. A 2004 survey by a chemical workers union of workers at 189 RMP facilities found that only 38 percent of respondents indicated that their companies’ actions in preparing to respond to a terrorist attack were effective, and 28 percent reported that no employees at their facilities had received training about responding to a terrorist attack since September 11, 2001. While environmental laws require emergency response planning for accidental chemical releases, several stakeholders told us facilities need to consider very different scenarios with consequences on different orders of magnitude when planning the emergency response for a terrorist incident. Existing laws give DHS limited authority to address chemical sector security, but DHS currently lacks specific authority to require all high-risk facilities to assess their vulnerabilities and take corrective actions, where needed. A number of existing laws outline DHS’s responsibilities for coordinating with the private sector and obtaining information on and protecting critical infrastructure, but these laws provide DHS with only limited authority to address security concerns at U.S. chemical facilities. For example, under the Homeland Security Act, the Secretary of DHS is responsible for coordinating homeland security issues with the private sector to ensure adequate planning, equipment, training, and exercise activities. Furthermore, the Act gives DHS’s Under Secretary for Information Analysis and Infrastructure Protection (IAIP) responsibilities related to protecting critical infrastructure, including accessing, receiving, analyzing, and integrating information from federal, state, and local governments and private sector entities to identify, detect, and assess the nature and scope of terrorist threats to the United States; carrying out comprehensive assessments of the vulnerabilities of the nation’s key resources and critical infrastructure; developing a comprehensive national plan for securing the nation’s key resources and critical infrastructure; and recommending the necessary measures to protect these key resources and critical infrastructure. DHS does not currently have the authority to require all chemical facilities to conduct vulnerability assessments or to enter chemical facilities without their permission to assess security or to require and enforce security improvements. There is also no legislation requiring chemical facilities to provide information about their security and vulnerabilities. Furthermore, except with respect to certain chemical facilities covered under federal security requirements for other critical infrastructures, existing laws do not give DHS the right to enter a chemical facility to assess its vulnerability to a terrorist attack or the authority to require and enforce the implementation of any needed security improvements at these facilities. The Homeland Security Act, with some limited exceptions, does not provide any new regulatory authority to DHS and only transferred the existing regulatory authority of any agency, program, or function transferred to DHS, thereby limiting actions DHS might otherwise be able to take under the Homeland Security Act. Therefore, DHS has relied solely on the voluntary participation of the private sector to address facility security. As a result, DHS cannot ensure that all high-risk facilities are assessing their vulnerability to terrorist attacks and taking corrective action, where necessary. DHS has concluded that its existing patchwork of authorities does not permit it to regulate the chemical industry effectively, and that the Congress should enact federal requirements for chemical facilities. Echoing public statements by the Secretary of Homeland Security and the Administrator of EPA in 2002 that voluntary efforts alone are not sufficient to assure the public of the industry’s preparedness, in June 2005, both DHS and EPA called for legislation to give the federal government greater authority over chemical facility security. Similarly, we concluded in 2003, and continue to believe, that additional federal legislation is needed because of the significant risks posed by thousands of chemical facilities across the country to millions of Americans and because the extent of security preparedness at these facilities is unknown. In testimony before the Congress in June 2005, the Acting Undersecretary for IAIP stated that any proposed regulatory structure (1) must recognize that not all facilities within the chemical sector present the same level of risk, and that the most scrutiny should be focused on those facilities that, if attacked, could endanger the greatest number of lives, have the greatest impact on the economy, or present other significant risks; (2) should be based on reasonable, clear, equitable, and measurable performance standards; and (3) should recognize the progress that responsible companies have made to date. He also stated that the performance standards should be enforceable and based on the types and severity of potential risks posed by terrorists, and that facilities should have the flexibility to select among appropriate site-specific security measures that will effectively address those risks. In addition, he said that DHS would need the ability to audit vulnerability assessment activities and a mechanism to ensure compliance with requirements. While many stakeholders—including representatives from industry, research centers, and government—agreed on the need for additional legislation that would place federal security requirements on chemical facilities, they expressed divergent views on whether such legislation should require the use of inherently safer technologies. Implementing inherently safer technologies could potentially lessen the consequences of an attack by reducing the chemical risks present at facilities. The Department of Justice, in introducing a methodology to assess chemical facilities’ vulnerabilities, recognized that reducing the quantity of hazardous material may make facilities less attractive to terrorist attack and reduce the severity of an attack. Furthermore, DHS’s July 2004 draft Chemical Sector-Specific Plan states that inherently safer chemistry and engineering practices can prevent or delay a terrorist incident, noting that it is important to make sure that facility owners/operators consider alternate ways to reduce risk, such as using inherently safer design, implementing just-in-time manufacturing, or replacing high-risk chemicals with safer alternatives. However, DHS told us that the use of inherently safer technologies tends to shift risks rather than eliminate risks, often with unintended consequences. Some previous chemical security legislative proposals have included a requirement that facility security plans include safer design and maintenance actions, or that facility security plans include “consideration” of alternative approaches regarding safer design. Representatives from three environmental groups told us that facilities have defined security too narrowly, without focusing on reducing facility risks through safer technologies. Noting that no existing laws require facilities to analyze inherently safer options, these representatives believe legislation should require such an analysis and give DHS or EPA the authority to require the implementation of technologies if high-risk facilities are not doing so. Process safety experts at one research organization recognized that reducing facility hazards and the potential consequences of chemical releases makes facilities less vulnerable to attack. However, these experts also explained that inherently safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. For example, reducing the amount of chemicals stored at a facility may increase reliance on rail or truck shipments of chemicals. However, the substitution of chemicals such as liquid bleach for chlorine gas at drinking water facilities reduces overall risks. These experts support legislative provisions requiring analysis or consideration of technology options but do not support giving the federal government the authority to require specific technology changes because of the complexity of these decisions. Representatives of two research centers affiliated with the industry told us that while facilities should look at inherently safer technologies when assessing their vulnerability to terrorist attack, safer technologies are not a substitute for security. Industry associations and company officials were strongly opposed to any requirements to use inherently safer technologies. The majority of the industry officials we contacted opposed an inherently safer technologies requirement, with many stating that inherently safer technologies involve a safety issue that is unrelated to facility security. Industry officials voiced concerns about the federal government’s second-guessing complex safety decisions made by facility process safety engineers. Representatives from four associations and two companies told us that, in many cases, it is not feasible to substitute safer chemicals or change to safer processes. Certain hazardous chemicals may be essential to necessary chemical processes, while changing chemical processes may require new chemicals that carry different risks. In July 2005 testimony before the Congress, a Synthetic Organic Chemical Manufacturers Association representative explained that while inherently safer technologies are intended to reduce the overall risks at a facility, they could do so only if a chemical hazard was not displaced to another time or location or did not magnify another hazard. Furthermore, process safety experts and representatives from associations and companies report that some safer alternatives are extremely expensive. For example, reducing facility chemical inventories by moving to on-site manufacturing when chemicals are needed can cost millions of dollars, according to a stakeholder. One company also voiced opposition even to a legislative requirement that facilities “consider” safer options. The official explained that the company opposed such a provision—even if legislation does not explicitly give the government the authority to require implementation of safer technologies—because it might leave companies liable for an accident that might have been prevented by a technology option that was considered but not implemented. Despite voluntary efforts by industry associations and a number of DHS programs to assist companies in protecting their chemical facilities, the extent of security preparedness at U.S. chemical facilities remains largely unknown. DHS does not currently have the authority to require the chemical industry to take actions to improve their security. On this basis, DHS has concluded—as we did in 2003 and again in January 2006—that its existing authorities do not allow it to effectively regulate chemical sector security. Since 2002, both DHS and EPA have called for legislation creating security requirements at chemical facilities, and legislation has been introduced without success in every Congress since September 11, 2001. By granting DHS the authority to require high-risk chemical facilities to take security actions, policy makers can better ensure the preparedness of the chemical sector. Furthermore, implementing inherently safer technologies potentially could lessen the consequences of a terrorist attack by reducing the chemical risks present at facilities, thereby making facilities less attractive targets. However, substituting safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. Also, in many cases, it may not be feasible to substitute safer chemicals or change to safer processes. Therefore, given the possible security and safety benefits as well as the potential costs to some companies of substituting safer technologies, a collaborative study employing DHS’s security expertise and EPA’s chemical expertise could help policy makers determine the appropriate role of safer technologies in facility security efforts. For further information about this statement, please contact John B. Stephenson at (202) 512-3841. Karen Keegan, Omari Norman, Joanna Owusu, Vincent P. Price, and Leigh White made key contributions to this statement. Since 2001, the Congress has considered a number of legislative proposals that would give the federal government a greater role in ensuring the protection of the nation’s chemical facilities. These legislative proposals would have granted DHS or EPA, or one of these agencies in consultation with the other, the authority to require chemical facilities to conduct vulnerability assessments and implement security measures to address their vulnerabilities. In the 109th Congress, five bills have been introduced but have not yet been acted upon: H.R. 1562, H.R. 2237, S. 2145, H.R. 4999, and S. 2486. High-priority facilities would be required to submit vulnerability assessments and security plans to DHS; other chemical sources would be required to self-certify completion of assessments and plans and provide DHS copies upon request. High-priority facilities would be required to submit vulnerability assessments and to certify that they have prepared prevention, preparedness, and response plans to EPA. Designated chemical sources would be required to submit vulnerability assessments, security plans, and emergency response plans to DHS. The assessment and security plan would be required to address security performance standards established by DHS for each risk-based tier. Chemical sources would be required to self-certify completion of assessments and plans. DHS, in consultation with EPA, would identify high-priority categories of facilities; DHS would receive and review assessments and plans. EPA, in consultation with DHS and state and local agencies, would identify high-priority categories of facilities; EPA would receive assessments and certifications. DHS would designate facilities as chemical sources and assign each chemical source to a risk-based tier. DHS would receive and review assessments, plans and certifications. EPA would have no role. DHS would, when and where it deems appropriate, conduct or require the conduct of vulnerability assessments and other activities to ensure and evaluate compliance; DHS could disapprove a vulnerability assessment or site security plan; following written notification and consultation with the owner or operator, DHS could issue a compliance order. Not later than 3 years after the deadline for submission of vulnerability assessments and response plans, EPA, in consultation with DHS, would review and certify compliance of each assessment and plan; following consultation with DHS, and 30 days after providing notification to the facility and providing advice and technical assistance to bring the assessment or plan into compliance and address threats, EPA could issue a compliance order. DHS would review and approve or disapprove all vulnerability assessments, security plans, and emergency response plans for facilities in higher risk tiers within one year, and within five years for all other facilities. DHS would be required to disapprove of any vulnerability assessment, site security plan, or emergency response plan not in compliance with the vulnerability assessment, site security plan, and emergency response plan requirements. For higher risk facilities, if DHS disapproves the assessment or plans, the Secretary could issue an order to a chemical source to cease operation. For other facilities, the Secretary could issue an order to a chemical source to cease operation, but only after a process of written notification, consultation and time for compliance. Would provide for court awarded civil penalties up to $50,000 per day for failure to comply with an order, site security plan, or other recognized procedures, protocols, or standards, and administrative penalties up to $250,000 for failure to comply with an order. Would provide for court awarded civil penalties up to $25,000 per day, criminal penalties, and administrative penalties (if the total civil penalties do not exceed $125,000) for failure to comply with an order. Would provide for court awarded civil penalties up to $50,000 per day, and administrative penalties of not more than $25,000 per day (not to exceed $1 million per year) for failure to comply with a DHS order or directive issued under the act. Also calls for criminal penalties of up to $50,000 in fines per day, imprisonment for not more than two years, or both for knowingly violating an order or failing to comply with a site security plan. Response plans would be required to include a description of safer design and maintenance options considered and reasons those options were not implemented; EPA would be required to establish a clearinghouse for information on inherently safer technologies and would be authorized to provide grants to assist chemical facilities demonstrating financial hardship in implementing inherently safer technologies. None. Would exempt information obtained from disclosure under the Freedom of Information Act (FOIA) or otherwise, or from disclosure under state or local laws; information would also not be subject to discovery or admitted into evidence in any federal or state civil judicial or administrative procedure other than in civil compliance action brought by DHS. Calls for DHS, in consultation with others, to establish confidentiality protocols. Would exempt information obtained from disclosure under FOIA; calls for EPA, in consultation with DHS, to establish information protection protocols. Would exempt information obtained from disclosure under FOIA, or from disclosure under state or local laws. Certifications submitted by the chemical sources, orders for failure to comply, and certificates of compliance and other orders would generally be made available to the public. Calls for DHS, in consultation with the Director of the Office of Management and Budget and appropriate federal law enforcement officials, to create confidentiality protocols for the maintenance and use of records; would establish penalties for the unlawful disclosure of protected information. Upon petition, DHS would be required to endorse other industry, state, or federal protocols or standards that the Secretary of DHS determines to be substantially equivalent. None. Would allow the Secretary to determine that vulnerability assessments, security plans, and emergency response plans prepared under alternative security programs meet the act’s requirements and to permit submissions or modifications to the assessments or plans. Would grant DHS right of entry; would exempt facilities that are subject to MTSA (port facilities) or the Bioterrorism Act (community water systems). Except with respect to protection of information, would not affect requirements imposed under state law. Would grant EPA right of entry; would authorize EPA to provide grants for training of first responders and employees at chemical facilities; would not affect requirements imposed under state law. Would grant DHS right of entry; would exempt facilities that are subject to MTSA from certain area security requirements but these facilities would otherwise comply with the act’s requirements. Would preserve the right of States to adopt chemical security requirements that are more stringent than the Federal standard, as long as the State standard does not conflict with the Federal standard. S. 2486, introduced on March 30, 2006, would impose a general duty on chemical facility owners and operators, in the same manner as the duty under the Clean Air Act’s Section 112(r), to identify hazards that may result from a criminal release, ensure the design, operation, and maintenance of safe facilities by taking such actions as are necessary to prevent criminal releases, and eliminate or significantly reduce the consequences of any criminal release that does occur. S. 2486 also directs DHS to work with EPA, as well as state and local agencies, to identify not fewer than 3,000 high priority chemical facilities. These facilities would be required to take adequate actions (including the design, operation, and maintenance of safe facilities), to detect, prevent, or eliminate or significantly reduce the consequences of criminal releases and to submit a report to DHS that includes a vulnerability assessment; a hazards assessment; a prevention, preparedness, and response plan; statements as to how the response plan meets regulatory requirements and general duty requirements; and a discussion of the consideration of the elements of design, operation, and maintenance of safe facilities. “Design, operation, and maintenance of safe facilities” is defined as practices of preventing or reducing the possibility of a release through use of inherently safer technologies, among other things. DHS would certify compliance and DHS and EPA would establish a program to conduct inspections of facilities. The bill also provides for civil penalties, administrative penalties, and criminal penalties (including imprisonment for up to 2 years for first violations and up to 4 years for subsequent violations), for owners or operators of high priority facilities who fail to comply with an order. Also in the 109th Congress, the conference committee for H.R. 2360, making appropriations for DHS for fiscal year 2006, directed DHS to submit a report to the Senate and House Committees on Appropriations by February 10, 2006, describing (1) the resources needed to implement mandatory security requirements for the chemical sector and to create a system for auditing and ensuring compliance with the security standards and (2) the security requirements and any reasons why the requirements should differ from those already in place for chemical facilities that operate in a port zone; complete vulnerability assessments of the highest risk U.S. chemical facilities by December 2006, giving preference to facilities that, if attacked, pose the greatest threat to human life and the economy; and complete a national security strategy for the chemical sector by February 10, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Terrorist attacks on U.S. chemical facilities could damage public health and the economy. The Department of Homeland Security (DHS) coordinates federal efforts to protect these facilities from attacks. GAO was asked to provide a statement for the record based on its report Homeland Security: DHS Is Taking Steps to Enhance Security at Chemical Facilities, but Additional Authority Is Needed ( GAO-06-150 , January 27, 2006), GAO reviewed (1) DHS's actions to develop a strategy to protect chemical plants, assist with the industry's security efforts, and coordinate with other federal agencies, (2) industry security initiatives, (3) DHS's authorities and the need for additional security legislation, and (4) stakeholders' views on any requirements to use safer technologies. DHS is developing a Chemical Sector-Specific Plan, which is intended to, among other things, describe DHS's ongoing efforts and future plans to coordinate with federal, state, and local agencies and the private sector; identify chemical facilities to include in the sector, assess their vulnerabilities, and prioritize them; and develop programs to prevent, deter, mitigate, and recover from attacks on chemical facilities. DHS officials told GAO that they now expect to complete and release the plan in the fall of 2006. In addition, DHS has taken a number of actions to protect the chemical sector from terrorist attacks. DHS identified 3,400 facilities that, if attacked, could pose the greatest hazard to human life and health and has initiated programs to assist the industry and local communities in protecting chemical plants. DHS also coordinates with the Chemical Sector Coordinating Council, an industry-led group that acts as a liaison for the chemical sector, and with EPA and other federal agencies. The chemical industry is voluntarily addressing plant security, but faces challenges. Some industry associations require member companies to assess plants' vulnerabilities, develop and implement mitigation plans, and have a third party verify that security measures were implemented. Other associations have developed guidelines and other tools to encourage their members to address security. Industry officials said that high costs and limited guidance on how much security is adequate create challenges in preparing facilities against terrorism. Because existing laws provide DHS with only limited authority to address security at chemical facilities, it has relied primarily on the industry's voluntary security efforts. However, the extent to which companies are addressing security is unclear. DHS does not have the authority to require chemical facilities to assess their vulnerabilities and implement security measures. Therefore, DHS cannot ensure that facilities are taking these actions. DHS has stated that its existing authorities do not permit it to effectively regulate the chemical industry, and that the Congress should enact federal requirements for chemical facilities. Many stakeholders agreed--as GAO concluded in 2003 and again in January 2006--that additional legislation placing federal security requirements on chemical facilities is needed. Stakeholders had mixed views on whether any chemical security legislation should require plants to substitute safer chemicals and processes, which could lessen the potential consequences of an attack, but could be costly or infeasible for some plants. DHS has stated that safer practices may make facilities less attractive to terrorist attack, but may shift risks rather than eliminate them. Environmental groups told GAO that they favored including or considering inherently safer technologies in any federal requirements, but most industry officials GAO contacted opposed a requirement to use safer technologies because they may shift risks or be prohibitively expensive.

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The major requirements for the protection of personal privacy by federal agencies are specified in two laws, the Privacy Act of 1974 and the E-Government Act of 2002. The Federal Information Security Management Act of 2002 (FISMA) also addresses the protection of personal information in the context of securing federal agency information and information systems. The Privacy Act places limitations on agencies’ collection, disclosure, and use of personal information maintained in systems of records. The act describes a “record” as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines “system of records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public by a “system-of-records notice”: that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended “routine” uses of data, and procedures that individuals can use to review and correct personal information. Among other provisions, the act also requires agencies to define and limit themselves to specific predefined purposes. For example, the act requires that to the greatest extent practicable, personal information should be collected directly from the subject individual when it may affect an individual’s rights or benefits under a federal program. The provisions of the Privacy Act are largely based on a set of principles for protecting the privacy and security of personal information, known as the Fair Information Practices, which were first proposed in 1973 by a U.S. government advisory committee; these principles were intended to address what the committee termed a poor level of protection afforded to privacy under contemporary law. Since that time, the Fair Information Practices have been widely adopted as a standard benchmark for evaluating the adequacy of privacy protections. Attachment 2 contains a summary of the widely used version of the Fair Information Practices adopted by the Organization for Economic Cooperation and Development in 1980. The E-Government Act of 2002 strives to enhance protection for personal information in government information systems and information collections by requiring that agencies conduct privacy impact assessments (PIA). A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system. More specifically, according to Office of Management and Budget (OMB) guidance, a PIA is to (1) ensure that handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form, or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. To the extent that PIAs are made publicly available, they provide explanations to the public about such things as the information that will be collected, why it is being collected, how it is to be used, and how the system and data will be maintained and protected. FISMA also addresses the protection of personal information. It defines federal requirements for securing information and information systems that support federal agency operations and assets; it requires agencies to develop agencywide information security programs that extend to contractors and other providers of federal data and systems. Under FISMA, information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction, including controls necessary to preserve authorized restrictions on access and disclosure to protect personal privacy. To oversee its implementation of privacy protections, DHS has established a Chief Privacy Officer, as directed by the Homeland Security Act of 2002. According to the act, the Chief Privacy Officer is responsible for, among other things, “assuring that the use of technologies sustain, and do not erode privacy protections relating to the use, collection, and disclosure of personal information,” and “assuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the Privacy Act of 1974.” As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. Our reviews of DHS programs have identified cases where these challenges were not fully met, including data mining, airline passenger prescreening, use of data from commercial sources, use of personal identification technologies (especially RFID), and development of an information sharing environment. I will now discuss each of these subjects in greater detail. Many concerns have been raised about the potential for data mining programs to compromise personal privacy. In our May 2004 report on federal data mining efforts, we defined data mining as the application of database technology and techniques—such as statistical analysis and modeling—to uncover hidden patterns and subtle relationships in data and to infer rules that allow for the prediction of future results. As we noted in our report, mining government and private databases containing personal information raises a range of privacy concerns. In the government, data mining was initially used to detect financial fraud and abuse. However, its use has greatly expanded. Among other purposes, data mining has been used increasingly as a tool to help detect terrorist threats through the collection and analysis of public and private sector data. Through data mining, agencies can quickly and efficiently obtain information on individuals or groups from large databases containing personal information aggregated from public and private records. Information can be developed about a specific individual or a group of individuals whose behavior or characteristics fit a specific pattern. For example, terrorists can be tracked through travel and immigration records, and potential terrorist-related activities, including money transfers and communications, can be pinpointed. The ease with which organizations can use automated systems to gather and analyze large amounts of previously isolated information raises concerns about the impact on personal privacy. As a July 2006 report by the DHS Privacy Office points out, “privacy and civil liberties issues potentially arise in every phase of the data mining process.” Potential privacy risks include improper access or disclosure of personal information, erroneous associations of individuals with undesirable activities, misidentification of individuals with similar names, and misuse of data that were collected for other purposes. Our recent report notes that early attention to privacy in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement) could reduce risks that personal information could be misused. ADVISE is a data mining tool under development intended to help DHS analyze large amounts of information. It is designed to allow an analyst to search for patterns in data—such as relationships among people, organizations, and events—and to produce visual representations of these patterns, referred to as semantic graphs. The intended benefit of the ADVISE tool is to help detect threatening activities by facilitating the analysis of large amounts of data. Although the tool is being considered for several different applications within DHS, none of them are yet operational. DHS is currently in the process of testing the tool’s effectiveness. DHS did not conduct a PIA as it developed the ADVISE tool, as required by the E-Government Act of 2002. A PIA, if it had been completed, would identify specific privacy risks and help officials determine what controls were needed to mitigate those risks. DHS officials believed that ADVISE did not need to undergo such an assessment because the tool itself did not contain personal data. However, the intended uses of the tool included personal data, and the E-Government Act and related guidance emphasize the need to assess privacy risks early in system development. Further, if an assessment were conducted and privacy risks identified, a number of controls could be built into the tool to mitigate those risks. Because privacy had not been assessed and mitigating controls had not been implemented, the department faced the risk that systems based on ADVISE that also contained personal information could require costly and potentially duplicative retrofitting to add the needed controls. We made recommendations to DHS to conduct a PIA of the ADVISE tool and implement privacy controls, as needed, to mitigate any identified risks. In its comments, DHS stated that it is currently developing a “Privacy Technology Implementation Guide” to be used to conduct a PIA. Broadly considered, data mining is a tool that has the potential to provide valuable assistance to analysts and investigators as they pursue the war on terror. However, it has been challenging for DHS to thoroughly consider and address privacy concerns early enough in its attempts to develop data mining tools and applications. As the department moves forward with ADVISE and other data mining activities, close attention to privacy will remain a critical concern. An example of the importance of ongoing attention to privacy can be taken from TSA’s development of passenger prescreening programs. TSA is responsible for securing all modes of transportation while facilitating commerce and the freedom of movement for the traveling public. Passenger prescreening is one program among many that TSA uses to secure the domestic aviation sector. The process of prescreening passengers—that is, determining whether airline passengers might pose a security risk before they reach the passenger-screening checkpoint—is used to focus security efforts on those passengers that represent the greatest potential threat. In accordance with a requirement set forth in the Aviation and Transportation Security Act, TSA has been working since 2003 to develop a computer-assisted passenger prescreening system to be used to evaluate passengers before they board an aircraft on domestic flights. An early version of that system, known as the Computer-Assisted Passenger Prescreening System II, was canceled in 2004 based in part on concerns about privacy and other issues expressed by us and others. In its place, TSA announced a new passenger prescreening program, called Secure Flight, that would be narrower in scope and designed to avoid problems that had been raised about the previous program. Aspects of the new Secure Flight system underwent development and testing in 2005. In July 2005, we reported on privacy problems associated with testing of Secure Flight. In 2004, TSA had issued privacy notices in the Federal Register that included descriptions of how personal information drawn from commercial sources would be used during planned upcoming tests. However, these notices did not fully inform the public about the procedures that TSA and its contractors would follow for collecting, using, and storing commercial data. In addition, the scope of the data used during commercial data testing was not fully disclosed. Specifically, a contractor, acting on behalf of the agency, collected more than 100 million commercial data records containing personal information such as name, date of birth, and telephone number without informing the public. As a result, the public did not receive the full protections of the Privacy Act. In its comments on our findings, DHS stated that it recognized the merits of the issues we raised, and that TSA had acted immediately to address them. The privacy problems faced in developing Secure Flight arose not because it was prohibitively difficult to protect privacy while prescreening airline passengers, but because TSA had not reassessed privacy risks when key programmatic changes were made and taken appropriate steps to mitigate them. Recently, TSA officials stated that as they work to restructure the Secure Flight program, they plan a more privacy-enhanced program by addressing concerns identified by us and others. For example, officials stated that the program no longer plans to use commercial data. Officials also stated that they have added privacy experts to the system development teams to address privacy issues as they arise. It is encouraging that TSA is now including privacy experts within its development teams, with the express goal of continuously monitoring privacy concerns. We will continue to assess TSA’s efforts to manage system privacy protections as part of our ongoing review of the program. A major task confronting federal agencies, especially those engaged in antiterrorism tasks, is to ensure that information obtained from resellers is being appropriately used and protected. In fiscal year 2005, DHS reported planning to spend about $9 million on acquiring personal information from information resellers. The information was acquired chiefly for law enforcement purposes, such as developing leads on subjects in criminal investigations, and for detecting fraud in immigration benefit applications (part of enforcing the immigration laws). For example, the agency’s largest investigative component, U.S. Immigration and Customs Enforcement—the largest user of personal information from resellers—collects data such as address and vehicle information for criminal investigations and background security checks. DHS also reported using information resellers in its counterterrorism efforts. For example, as already discussed, TSA used data obtained from information resellers as part of a test associated with the development of Secure Flight. In our report on the acquisition of personal information from resellers by agencies such as DHS, we noted that the agencies’ practices for handling this information did not always reflect the Fair Information Practices. For example, system-of-records notices issued by these agencies did not always state that agency systems could incorporate information from data resellers, a practice inconsistent with the principle that the purpose for a collection of personal data should be disclosed beforehand and its use limited to that purpose. Furthermore, accountability was not ensured, as the agencies did not generally monitor usage of personal information from resellers; instead, they relied on end users to be responsible for their own behavior. Contributing to the uneven application of the Fair Information Practices was a lack of agency policies, including at DHS, that specifically address these uses. Reliance on information from resellers is an emerging use of personal data for which the government has been challenged to develop appropriate guidance. We recommended that DHS and other agencies develop specific policies, reflecting the Fair Information Practices, for the collection, maintenance, and use of personal information obtained from resellers. According to the DHS Privacy Office, while a policy governing the department’s use of commercial data is being drafted, the document has not yet been issued. Until the department issues clear guidance on this use, it faces the risk that appropriate privacy protections may not be in place consistently across its programs and applications. RFID is an automated data-capture technology that can be used to electronically identify, track, and store information contained on a tag. The tag can be attached to or embedded in the object to be identified, such as a product, case, or pallet. RFID technology provides identification and tracking capabilities by using wireless communication to transmit data. In May 2005, we reported that major initiatives at federal agencies that use or propose to use the technology included physical access controls and tracking assets, documents, or materials. For example, DHS was using RFID to track and identify assets, weapons, and baggage on flights. The Department of Defense was also using it to track shipments. In our May 2005 report we identified several privacy issues related to both commercial and federal use of RFID technology. Among these privacy issues is the potential for the technology to be used inappropriately for tracking an individual’s movements, habits, tastes, or predilections. Tracking is real-time or near-real-time surveillance in which a person’s movements are followed through RFID scanning.) Public surveys have identified a distinct unease with the potential ability of the federal government to monitor individuals’ movements and transactions. Like tracking, profiling— the reconstruction of a person’s movements or transactions over a specific period of time, usually to ascertain something about the individual’s habits, tastes, or predilections—could also be undertaken through the use of RFID technology. Once a particular individual is identified through an RFID tag, personally identifiable information can be retrieved from any number of sources and then aggregated to develop a profile of the individual. Both tracking and profiling can compromise an individual’s privacy. Concerns also have been raised that organizations could develop secondary uses for the information gleaned through RFID technology; this has been referred to as mission or function “creep.” The history of the Social Security number, for example, gives ample evidence of how an identifier developed for one specific use has become a mainstay of identification for many other purposes, governmental and nongovernmental. Secondary uses of the Social Security number have been a matter not of technical controls but rather of changing policy and administrative priorities. DHS uses and has made plans to use RFID technology to track individuals in several border security programs. This has been met with concern from the DHS Data Privacy and Integrity Advisory Committee, which reiterated our concerns that employing the technology for human identification poses privacy risks, including notice problems and potential for secondary use. One program that planned to make use of RFID was the US-VISIT program, a multibillion dollar program that collects, maintains, and shares information on selected foreign nationals who enter and exit the United States at over 300 ports of entry around the country. The incorporation of RFID into the program arose from the agency’s requirement for a less costly alternative to biometric verification of visitors exiting the country. We recently testified that US-VISIT RFID tests revealed numerous performance and reliability problems. For example, the readers placed to detect identifying tags failed to do so for a majority of the RFID tags. Faced with these test results, the Secretary of Homeland Security recently stated that the agency would cancel the use of RFID for US-VISIT. However, despite having rejected RFID for US-VISIT, the department has endorsed the technology for another border control initiative, the proposed PASSport (People Access Security Service) system identification card, which is part of the Western Hemisphere Travel Initiative. The RFID-enabled PASSport card would serve as an alternative to a traditional passport for use by U.S. citizens who cross the land borders and travel by sea between the United States, Canada, Mexico, the Caribbean, or Bermuda. The department’s varying approaches to the use of RFID for human identification suggests the need for a departmentwide policy that fully addresses privacy concerns. Unless DHS issues comprehensive guidance to direct the development and implementation of new technologies such as RFID, it faces the risk that appropriate privacy protections may not be implemented consistently across its programs and applications. According to the DHS Privacy Office, it is considering developing guidance to address the use of specific technologies, including RFID. The challenges that DHS faces in protecting privacy extend beyond the need to consider and address privacy issues while developing its own programs and systems. The department also interacts with many other intelligence and law enforcement entities, both within and outside the federal government, and potentially shares information with them all. As with its own programs and systems, it will be important for DHS to ensure that privacy has been thoroughly considered and guidelines clearly established as it participates in the emerging information sharing environment. As directed by the Intelligence Reform and Terrorism Prevention Act of 2004, the administration has taken steps, beginning in 2005, to establish an information sharing environment to facilitate the sharing of terrorism information. The direction to establish an information sharing environment was driven by the recognition that before the attacks of September 11, 2001, federal agencies had been unable to effectively share information about suspected terrorists and their activities. In addressing this problem, the National Commission on Terrorist Attacks Upon the United States (9/11 Commission) recommended that the sharing and uses of information be guided by a set of practical policy guidelines that would simultaneously empower and constrain officials, closely circumscribing what types of information they would be permitted to share as well as the types they would need to protect. Exchanging terrorism-related information continues to be a significant challenge for federal, state, and local governments—one that we recognize is not easily addressed. Accordingly, since January 2005, we have designated information sharing for homeland security a high-risk area. In developing guidelines for the information sharing environment, there has been general agreement that privacy considerations must be addressed. The Intelligence Reform Act called for the issuance of guidelines to protect privacy and civil liberties in the development and use of the information sharing environment, and the President reiterated that requirement in an October 2005 directive to federal departments and agencies. Based on the President’s directive, a committee within the Office of the Director of National Intelligence was established to develop such guidelines, and they were approved by the President in November 2006. According to its annual report for 2004–2006, the DHS Privacy Office has played a role in developing these guidelines. However, the guidelines as issued provide only a high-level framework for addressing privacy protection and do not include all of the Fair Information Practices. The 9-page document includes statements of principles, such as “purpose specification,” “data quality,” “data security,” and “accountability, enforcement, and audit” that align with certain elements of the Fair Information Practices, but it provides little or no guidance on how these principles are to be implemented and does not address another key practice—limiting the collection of personal information. For example, as the policy director of the Center for Democracy and Technology has pointed out, a number of principles mentioned in the guidelines do not include any specificity on how they should be carried out. The guidelines call for agencies to “take appropriate steps” when merging information about an individual from two or more sources to ensure that the information is about the same individual, but they give no indication of what steps would be adequate to achieve this goal. For example, no guidance is provided on gauging the reliability of sources or determining the minimum amount of information needed to determine that different sources are referring to the same individual. Likewise, the guidelines direct agencies to implement adequate review and audit mechanisms to ensure compliance with the guidelines but, again, do not specify the nature of these mechanisms, which could include, for example, the use of electronic audit logs that cannot be changed by individuals. Finally, the guidelines also direct agencies to put in place internal procedures to address complaints from persons regarding protected information about them that is under the agency’s control. No further guidance is provided about the essential elements of a complaint process or what sort of remedies to provide. According to the DHS Privacy Office, individual agencies, including DHS, are to develop specific guidelines that implement the high- level framework embodied in the governmentwide guidelines. However, no overall DHS guidance on the protection of privacy within the context of the information sharing environment has yet been developed. According to the Privacy Office, an effort is currently being initiated to develop such guidance. While DHS is only one participant in the governmentwide information sharing environment, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Until it adopts specific implementation guidelines, the department will face the risk that its information sharing activities may not protect privacy adequately. In summary, DHS faces continuing challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. We have made recommendations previously regarding ADVISE, Secure Flight, and use of information resellers, and officials have taken action or told us they are taking action to address our recommendations. Implementation of these recommendations is critical to ensuring that privacy protections are in place throughout key DHS programs and activities. Likewise, issuing guidance for participation in the information sharing environment will also be critical to ensure implementation of consistent, appropriate protections across the department. Mr. Chairman, this concludes my testimony today. I would be happy to answer any questions you or other members of the subcommittee may have. If you have any questions concerning this testimony, please contact Linda Koontz, Director, Information Management, at (202) 512-6240, or [email protected]. Other individuals who made key contributions include Barbara Collier, Susan Czachor, John de Ferrari, Timothy Eagle, David Plocher, and Jamie Pressman. Data Mining: Early Attention to Privacy in Developing a Key DHS Program Could Reduce Risks. GAO-07-293. Washington, D.C.: February 28, 2007. Aviation Security: Progress Made in Systematic Planning to Guide Key Investment Decisions, but More Work Remains. GAO- 07-448T. Washington, D.C.: February 13, 2007. Border Security: US-VISIT Program Faces Strategic, Operational, and Technological Challenges at Land Ports of Entry. GAO-07-248. Washington, D.C.: December 6, 2006. Personal Information: Key Federal Privacy Laws Do Not Require Information Resellers to Safeguard All Sensitive Data. GAO-06-674. Washington, D.C.: June 26, 2006. Veterans Affairs: Leadership Needed to Address Information Security Weaknesses and Privacy Issues. GAO-06-866T. Washington, D.C.: June 14, 2006. Privacy: Preventing and Responding to Improper Disclosures of Personal Information. GAO-06-833T. Washington, D.C.: June 8, 2006. Privacy: Key Challenges Facing Federal Agencies. GAO-06-777T. Washington, D.C.: May 17, 2006. Personal Information: Agencies and Resellers Vary in Providing Privacy Protections. GAO-06-609T. Washington, D.C.: April 4, 2006. Personal Information: Agency and Reseller Adherence to Key Privacy Principles. GAO-06-421. Washington, D.C.: April 4, 2006. Information Sharing: The Federal Government Needs to Establish Policies and Processes for Sharing Terrorism-Related and Sensitive but Unclassified Information. GAO-06-385. Washington, D.C.: March 17, 2006. Data Mining: Agencies Have Taken Key Steps to Protect Privacy in Selected Efforts, but Significant Compliance Issues Remain. GAO- 05-866. Washington, D.C.: August 15, 2005. Aviation Security: Transportation Security Administration Did Not Fully Disclose Uses of Personal Information during Secure Flight Program Testing in Initial Privacy Notices, but Has Recently Taken Steps to More Fully Inform the Public. GAO-05- 864R. Washington, D.C.: July 22, 2005. Identity Theft: Some Outreach Efforts to Promote Awareness of New Consumer Rights are Under Way. GAO-05-710. Washington, D.C.: June 30, 2005. Information Security: Radio Frequency Identification Technology in the Federal Government. GAO-05-551. Washington, D.C.: May 27, 2005. Aviation Security: Secure Flight Development and Testing Under Way, but Risks Should Be Managed as System is Further Developed. GAO-05-356. Washington, D.C.: March 28, 2005. Social Security Numbers: Governments Could Do More to Reduce Display in Public Records and on Identity Cards. GAO-05-59. Washington, D.C.: November 9, 2004. Data Mining: Federal Efforts Cover a Wide Range of Uses, GAO-04- 548. Washington, D.C.: May 4, 2004. Aviation Security: Computer-Assisted Passenger Prescreening System Faces Significant Implementation Challenges. GAO-04-385. Washington, D.C.: February 12, 2004. Privacy Act: OMB Leadership Needed to Improve Agency Compliance. GAO-03-304. Washington, D.C.: June 30, 2003. Data Mining: Results and Challenges for Government Programs, Audits, and Investigations. GAO-03-591T. Washington, D.C.: March 25, 2003. Technology Assessment: Using Biometrics for Border Security. GAO-03-174. Washington, D.C.: November 15, 2002. Information Management: Selected Agencies’ Handling of Personal Information. GAO-02-1058. Washington, D.C.: September 30, 2002. Identity Theft: Greater Awareness and Use of Existing Data Are Needed. GAO-02-766. Washington, D.C.: June 28, 2002. Social Security Numbers: Government Benefits from SSN Use but Could Provide Better Safeguards. GAO-02-352. Washington, D.C.: May 31, 2002. The Fair Information Practices are not precise legal requirements. Rather, they provide a framework of principles for balancing the need for privacy with other public policy interests, such as national security, law enforcement, and administrative efficiency. Ways to strike that balance vary among countries and according to the type of information under consideration. The version of the Fair Information Practices shown in table 1 was issued by the Organization for Economic Cooperation and Development (OECD) in 1980 and has been widely adopted.

Advances in information technology make it easier than ever for the Department of Homeland Security (DHS) and other agencies to obtain and process information about citizens and residents in many ways and for many purposes. The demands of the war on terror also drive agencies to extract as much value as possible from the information available to them, adding to the potential for compromising privacy. Recognizing that securing the homeland and protecting the privacy rights of individuals are both important goals, the Congress has asked GAO to perform several reviews of DHS programs and their privacy implications over the past several years. For this hearing, GAO was asked to testify on key privacy challenges facing DHS. To address this issue, GAO identified and summarized issues raised in its previous reports on privacy and assessed recent governmentwide privacy guidance. As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. GAO's reviews of DHS programs have identified cases where these challenges were not fully met. For example, increased use by federal agencies of data mining--the analysis of large amounts of data to uncover hidden patterns and relationships--has been accompanied by uncertainty regarding privacy requirements and oversight of such systems. As described in a recent GAO report, DHS did not assess privacy risks in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement), as required by the E-Government Act of 2002. ADVISE is a data mining tool under development intended to help the department analyze large amounts of information. Because privacy had not been assessed and mitigating controls had not been implemented, DHS faced the risk that uses of ADVISE in systems containing personal information could require costly and potentially duplicative retrofitting at a later date to add the needed controls. GAO has also reported on privacy challenges experienced by DHS in reassessing privacy risks when key programmatic changes were made during development of a prescreening program for airline passengers. The Transportation Security Administration (TSA) has been working to develop a computer-assisted passenger prescreening system, known as Secure Flight, to be used to evaluate passengers before they board an aircraft on domestic flights. GAO reported that TSA had not fully disclosed uses of personal information during testing of Secure Flight, as required by the Privacy Act of 1974. To prevent such problems from recurring, TSA officials recently said that they have added privacy experts to Secure Flight's development teams to address privacy considerations on a continuous basis as they arise. Another challenge DHS faces is ensuring that privacy considerations are addressed in the emerging information sharing environment. The Intelligence Reform and Terrorism Prevention Act of 2004 requires the establishment of an environment to facilitate the sharing of terrorism information, as well as the issuance of privacy guidelines for operation in this environment. Recently issued privacy guidelines developed by the Office of the Director of National Intelligence provide only a high-level framework for privacy protection. While DHS is only one participant, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Accordingly, it will be important for the department to clearly establish departmental guidelines so that privacy protections are implemented properly and consistently.

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Social Security is one the largest federal programs in the United States, providing about $546 billion in benefits in 2006 to over 49 million beneficiaries. Although the majority of Social Security benefits are paid to retirees, Social Security does much more than provide retirement income. Social Security Disability Insurance (DI) pays monthly cash benefits to nearly 7 million workers who, due to a severe long-term disability, can no longer remain in the workforce. Additionally, Social Security provides benefits to over 11 million dependents, including payments to widows and widowers as well as surviving parents and children under Survivors’ Insurance (SI), plus benefits to dependent spouses and children of retired and disabled workers paid from the Old Age Insurance (or Old Age) and DI trust funds. Social Security benefits often represent a significant source of income for their recipients, providing an average of $1,051 a month (as of July 2007) to retired workers, $995 a month to widows and widowers, and $979 a month to disabled workers. Although disabled workers and dependents receive slightly lower average monthly benefits than retired workers, benefits could be particularly important to these individuals. These beneficiaries may face considerable hardships; for example, a disabling condition may make work and other activities of daily living more difficult. As a result, these beneficiaries may have financial difficulties planning and preparing for death or disability in the way one might plan for retirement. Social Security was never intended to provide an adequate income by itself, but instead serves as an income base on which to build. In fact, the Social Security program balances the goals of income adequacy with individual equity, i.e., that lower income beneficiaries should receive higher benefits relative to wages than higher income beneficiaries (adequacy), and beneficiaries with higher lifetime income receive higher benefits in accordance with their income/lifetime contributions (equity). Although Social Security had originally been envisioned to include disability and survivors’ insurance, the 1935 Social Security Act created only a retirement program. Over the next 40 years, the program expanded both the size and type of its benefits, introducing benefits for dependents and disabled workers (fig. 2). The first new type of benefits went to dependents, as the 1939 amendments offered payments to elderly dependent wives and widows, as well as dependent children. (Some husbands and widowers were allowed to receive these same benefits after 1950). Creating these benefits was not only seen as socially desirable, but also offered additional protections for workers and their families from risk and spent down surpluses created by the system. Disability Insurance, which had been recommended by the 1938 and 1948 advisory councils, was established in 1956 to provide cash benefits to permanently disabled workers over the age of 50. The DI program was later expanded to include disabled workers under the age of 50 as well. In 1961, widows benefits increased from 75 to 85 percent of their deceased spouse’s benefits, and then to 100 percent in 1972. In addition, eligibility was extended to divorced spouses as well as to the spouses and children of disabled workers. Furthermore, benefit levels for retirees, dependents, and disabled worker beneficiaries grew during this time period. However, facing solvency crises, legislative efforts to control the size of the Social Security program were made in the mid 1970s and early 1980s. In order to maintain trust fund solvency, major changes were enacted to reduce the growth of Social Security benefit levels from the mid1970s to the early 1980s. Additionally, a number of legislative changes to the DI and dependents’ programs eliminated or reduced certain benefits and tightened the eligibility standards for receiving other benefits. However, despite ongoing fiscal concerns, eligibility for a few dependents’ and disability benefits has been expanded since 1975, suggesting an interest in protecting some vulnerable populations who may rely on Social Security for a significant portion of their monthly income. Although recent reform proposals have focused on elements intended to improve solvency, there continues to be some interest in protecting some or all DI and dependents’ benefits from potential benefit reductions. Figure 3 shows how Old Age, Survivors, and Disability Insurance (OASDI) has grown financially and in terms of beneficiaries over time. Although the 1935 act did not provide for disability and dependents’ benefits, those benefits were later built upon the existing Social Security structure, and today all benefits continue to be calculated from a common formula. Dependents’ benefit levels were set as fractions of the benefits owed to the person upon whom beneficiaries depended. For example, under the 1939 legislation, a widow would receive 75 percent of her deceased husband’s benefits, and dependent children or spouses would receive 50 percent of the retired worker’s benefits. When Congress created the DI program in 1956, it provided a lower retirement age (50) for those who were permanently and totally disabled. The same benefit formula used in computing OASI benefits was adopted for disability benefits because the original DI program treated disabled workers as being forced into premature retirement. In 1960, when Congress expanded the DI program by eliminating the requirement that disabled workers had to be 50 years old, the same benefit formula applied. Because benefit types shared a common formula, automatic indexing provisions implemented in 1972 and 1977 applied across the board. The OASDI programs are tightly linked in other ways as well. These programs are financed through a common mechanism—payroll taxes; receipts from the payroll tax are deposited into the OASI and DI trust funds which, like the two programs, are separate but often combined in discussion and analysis of Social Security’s solvency and sustainability. Furthermore, beneficiaries can receive multiple types of benefits over their lifetimes, moving into, out of, and among Social Security programs at different life stages. When disabled workers reach the full retirement age (FRA), for example, they begin to receive retirement benefits from the Old Age program, in place of DI benefits; the common benefit formula keeps such individuals’ benefit levels stable. In another case, a recent widow(er) might have her (or his) retirement or spousal benefits replaced with survivors’ benefits based on the relative earnings of the deceased spouse. Because parents, children, or spouses may be eligible for dependents’ benefits through the Old Age, Survivors, and Disability Insurance programs, a person can collect several types of Social Security benefits over a lifetime, although generally not simultaneously. The many linked pieces of Social Security could make developing a single, comprehensive reform package challenging because such a package would need to take into account all of these pieces. Under current law, Old Age benefits are generally calculated through a four-step process in which a progressive yet earnings-based formula is applied to an earnings history, and then updated annually through a cost- of-living adjustment (COLA). For those who receive retirement benefits, this earnings history is generally based on the 40 years in which credited earnings were highest, with the 5 lowest-earning years dropped out (leaving the highest 35 years of indexed earnings to be included in the initial benefit calculation). Dependents’ benefit levels are determined as a given percentage of Old Age benefit levels. Eligible children and spouses can receive up to 50 percent of a worker’s benefit; widow(er)s can be given up to 100 percent; and surviving parents or children can collect up to 75 percent, subject to a family maximum. DI benefits are calculated similarly to Old Age benefits, but are generally based upon a shortened work history. (For more detail on how benefits are calculated, refer to app. II.) To be eligible for benefits, individuals must have a specified number of recent work credits under Social Security when they first become disabled. Individuals must also demonstrate the inability to engage in substantial gainful activity by reason of a physical or mental impairment that has lasted or is expected to last for twelve continuous months or to result in death. If not eligible on medical grounds, SSA must also consider age, education and past work history. In particular, medical eligibility criteria for DI are less stringent for applicants over the age of 55. Based on prior work, GAO has designated modernizing federal disability programs (including the DI program) as a high risk area because of challenges that continue today. For example, GAO found that federal disability programs remain grounded in outmoded concepts that equate medical conditions with work incapacity. While SSA has taken some actions in response to prior GAO recommendations, GAO continues to believe that SSA should continue to take a lead role in examining the fundamental causes of program problems and seek the regulatory and legislative solutions needed to modernize its programs so that they are aligned with the current state of science, medicine, technology, and labor market conditions. Moreover, SSA should continue to develop and implement strategies to better manage the programs’ accuracy, timeliness, and consistency of decision making. Social Security’s Financing Social Security is currently financed primarily on a pay-as-you-go basis, in which payroll tax contributions of current workers are used primarily to pay for current benefits. Since the mid1980s, the Social Security program has collected more in taxes than it has paid out in benefits. However, because of the retirement of the baby boomers coupled with increases in life expectancy, and decreases in the fertility rate, this situation will soon reverse itself. According to the Social Security Administration’s 2007 intermediate assumptions, annual cash surpluses are predicted to turn into ever-growing cash deficits beginning in 2017. Absent changes to the program, these deficits are projected to deplete the Social Security DI trust fund in 2026 and the OASI trust fund in 2042, leaving the combined system unable to pay full benefits by 2041. Reductions in benefits, increases in revenues, or a combination of both will likely be needed to restore long- term solvency. A number of proposals have been made to restore fiscal solvency to the program, and many include revenue enhancements, benefit reductions, or structural changes such as the introduction of individual accounts as a part of Social Security. Because many reforms to the benefit side of the equation would reduce benefits through changes in the benefit formula, they could affect DI and dependents’ benefits as well as Old Age benefits. Unless accompanied by offsets or protections, these reforms might reduce the income of disabled workers and dependents. This situation could be challenging for these beneficiaries as they may have relatively low incomes or higher health care costs and rely heavily on Social Security income. Many disabled workers and dependents may also have trouble taking on additional work and accumulating more savings and, thus, have difficulty preparing for Social Security benefit reductions. Many reform elements could have a substantial impact on the benefits of Social Security recipients, including those of disabled workers and dependents. We considered six such elements that have been included in reform proposals to improve trust fund solvency. These reform elements take a variety of forms and would change either the initial benefit calculation or the growth of individual benefits over time. Our projections indicated that most of these elements would reduce benefits from currently scheduled levels for the majority of both disabled workers and dependents. That is, most would reduce median lifetime benefits for these beneficiary types—some more substantially than others. Many of these beneficiaries would also experience a reduction in total lifetime benefits; the extent of which would depend on the reform element and individual. We considered six different reform elements that could help control costs and improve Social Security solvency by reducing benefits. Five would change how initial benefits are calculated, and one would limit the growth of an individual’s benefits over time. We considered several ways to improve solvency: Longevity indexing would lower the amount of the initial benefit in order to reflect projected increases in life expectancy. Such indexing would maintain relatively comparable levels of lifetime benefits across birth years by proportionally reducing the replacement factors in the initial benefit formula. Price indexing would maintain purchasing power while slowing the growth of initial benefits. This would be accomplished by indexing initial benefits to the growth in prices rather than wages, as wages tend to increase faster than prices. Progressive price indexing, a form of price indexing, would control costs while protecting the benefits of those beneficiaries at the lowest earnings levels (in terms of career average earnings). It would continue to index initial benefit levels to wages for those below a certain earnings threshold and employ a graduated combination of price indexing and wage indexing for those above this threshold. Increasing the number of years used in the benefit calculation would also control program costs. For example, initial benefits could be based on the highest 40, rather than 35, years of indexed earnings. This could be done either by eliminating the 5 years normally excluded from the calculation or by increasing the total number of years factored in from 40 to 45 years. In either of these cases, the initial Old Age benefit would be calculated using the highest 40 years of indexed earnings. (For more information on these reform elements and how we incorporated them into our microsimulation model, see app. I.) Raising the age at which people are eligible for full retirement benefits could change the amount and/or the timing of initial benefits. Increasing the full retirement age would improve solvency by generally increasing the number of years worked, reducing the number of years benefits are received and increasing revenue to the system through payroll taxes in the additional years worked. Further, those who retire early would have their benefits actuarially reduced. Though it would not generally affect initial benefit amounts, a change to Social Security’s cost-of-living adjustment (COLA) could also control costs and improve solvency by limiting the growth of an individual’s benefits over time. The COLA adjusts benefits to account for inflation by indexing benefits to price growth annually, using the Consumer Price Index (CPI). Setting the COLA below the CPI would limit the nominal growth of an individual’s benefits over time, and as such those who receive benefits for a prolonged period of time would see the largest reductions. According to our projections for the 1985 cohort, four of the five reform elements that we analyzed would reduce total lifetime benefits for more than three-quarters of disabled workers and dependents, relative to currently scheduled benefits. Table 1 shows the proportions of disabled workers and dependents affected by each of the reform elements. For three of the elements—reducing the COLA by one percentage point, price indexing and progressive price indexing—the percentage of disabled workers affected is very similar to the percentage of dependents affected. Moreover, for these three reform elements, more than 99 percent, or virtually all, disabled workers and dependents would see their benefits reduced. In contrast, progressive price indexing differs from other reform elements in its impact: fewer beneficiaries are affected, and the percentage of disabled workers affected varies from that of dependents. While an estimated 87 percent of dependents would experience a reduction in lifetime benefits under progressive price indexing, an estimated 77 percent of disabled workers would do so. While the COLA reduction, longevity indexing and price indexing are all designed in such a way that they affect virtually all beneficiaries, the COLA, which has a greater impact on solvency than longevity indexing, affects relatively fewer disabled workers and dependents. This is because the COLA reduction would first affect benefits one year after the initial benefit payment was made, whereas both longevity indexing and price indexing affect the initial benefit amount. Our simulations indicated that 1.11 percent of disabled workers died within the first year of receiving benefits, while only 0.35 percent of dependents did so. Most such beneficiaries would not have received a COLA. According to our simulations each of the reform elements we selected would reduce median lifetime benefits for both disabled workers and dependents relative to currently scheduled benefits (figs. 4 and 5). However, our projections also indicated that these reductions would vary by reform element. Price indexing would have the largest impact on disabled workers and dependents, reducing median lifetime benefits by more than 25 percent. Median lifetime benefits would fall from $473,960 to $343,350 for disabled workers and from $351,910 to $244,745 for dependents. Progressive price indexing, on the other hand, would create the smallest reduction in median lifetime benefits, with median lifetime benefits falling by 7 percent for disabled workers and 8 percent for dependents. Additionally, increasing the full retirement age and increasing the number of computation years would likely reduce median lifetime benefits for dependents. Since dependent benefits are linked to those of the primary worker, an increase in the full retirement age could shorten the period of time over which they both receive benefits. Alternatively, some workers may decide not to adjust their retirement plans in response to the increase in the FRA. Those who maintain their original retirement plans, retiring prior to the new FRA, will also receive reduced benefits relative to current law. (See app. II for a discussion of how benefits are adjusted for early retirement.) Thus, under both scenarios, total lifetime benefits would be reduced, and so, too, would median lifetime benefits. A similar outcome results from increasing the number of computation years by which initial benefits are calculated. By increasing the number of computation years, a worker’s earnings history is expanded to include years of possibly lower indexed earnings. As a result, total benefits for some retired workers, and therefore, their dependents, would likely be reduced, as would median lifetime benefits. Our projections suggest that, while lifetime benefits would be reduced for virtually all disabled workers and dependents, such reductions would not be uniform across individuals. Figures 6 and 7 compare beneficiaries’ total lifetime benefit reductions by each reform element, for disabled workers and dependents, respectively. If the COLA were reduced by one percentage point, our projections show that approximately 58 percent of disabled workers experienced lifetime benefit reductions of 10 percent or less, while about 42 percent of disabled workers experienced lifetime benefits reduced by 10 to 25 percent. Almost no disabled workers would see benefits fall by more than 25 percent. Certain reform elements would create reductions in total lifetime benefits for the vast majority of disabled workers and dependents. These reductions may create new hardships for certain beneficiaries, such as disabled workers, who may not be able to easily replace lost income. According to our projections, price indexing would result in the greatest benefit reductions for the largest percentage of beneficiaries, with decreases in lifetime benefits of between 25 percent and 50 percent for almost 70 percent of disabled workers and about 90 percent of dependents. Both price indexing and longevity indexing have a greater effect on initial benefit amounts the longer the reform is in place. As such, people who leave the workforce early may experience a smaller reduction in lifetime benefits than those who leave at full retirement age. For example, as shown in figures 6 and 7, longevity indexing could reduce lifetime benefits for about 86 percent of disabled workers and about 96 percent of dependents by 10 to 25 percent. Progressive price indexing may have a more moderate effect on the benefits of disabled workers and certain dependents because it is designed to protect benefit levels for low earners and gradually apply benefit reductions to beneficiaries with higher earnings. Because of shorter earnings histories, some disabled workers would be in the low end of the earnings distribution. Thus, under progressive price indexing, a greater proportion of disabled workers would be likely to have benefits adjusted by wage indexing. According to our projections, progressive price indexing would reduce total lifetime benefits by 5 percent or less for 46 percent of disabled workers and 35 percent of dependents. Various options are available to protect benefits in different ways, including accelerating the growth of an individual’s benefits, modifying current constraints on benefit levels, and exempting certain populations from reforms. Options can also target certain types of beneficiaries. We analyzed some of these protections and found they could be structured to mitigate the effects of benefit reductions for varying lengths of time. In addition, we found that specific options to protect dependent benefits could be targeted to certain vulnerable beneficiaries, such as widows and dependent children. We found a wide range of options exist for protecting disabled workers and dependents from benefit-reducing reforms. Table 2 provides a summary of the options. The protection options may be very specific in terms of whom they protect and how, or broader in scope. For example, while two protection options focus specifically on disabled adult children (DAC), others, such as partial exemptions could apply to any vulnerable population. In addition to each option having its own strengths and weaknesses, the options could interact with each other and with the various reform elements. When implementing a protection option, all of these factors could influence its impact. There are several protection options that could be applied to all disabled workers and dependents. Under a full exemption, beneficiaries would not be subject to a reform and their benefits would remain unchanged. Under a partial exemption, beneficiaries would not be subject to a reform until a certain point in time. For example, disabled workers could be exempt from benefit changes until they are converted to the Old Age program at the full retirement age. At this point, their benefit amount would be recalculated to reflect the reform in proportion to the years they spent working. In addition, a super COLA could help protect the benefits of disabled workers and dependents. A super COLA would mitigate some of the effects of a benefit-reducing reform by annually increasing benefits at a rate above the consumer price index—which is currently used to index benefits. Some protection options could cover all dependents by increasing the percentage of the worker’s benefit that the dependent receives. (See app. II for more detail on how dependent benefits are calculated.) For example, a number of proposals have called for increasing the percentage of the worker’s benefit that widow(er)s receive. Another option that could protect the benefits of a wide range of dependents would be to raise the maximum benefit that families can receive based on one worker’s earnings record. Other protection options, such as caregiver credits, could focus on protecting particular groups of dependents. Several reform proposals have, in fact, called for providing caregiver credits to individuals who spend time out of the workforce to care for their dependents or to those with reduced or low earnings while attending to care-giving responsibilities. Some proposals assign caregivers a specified level of earnings for each year the caregiver received zero or low earnings compared to prior years. Other proposals exclude zero-earning care years from the initial benefit calculation. Another option specific to a certain type of dependent would be to increase benefits for aged survivors, since they are more likely to rely on Social Security to stay out of poverty and could have fewer opportunities, such as returning to work, to respond to benefit-reducing reforms. Increasing the early retirement age could offer some protection for survivors. If the early retirement age were raised—for example, from 62 to 64—then workers who take early retirement would receive actuarially adjusted benefits for a shorter period of time under the new early retirement age, and thus their monthly benefits would be relatively higher than the monthly benefits they would have received if they had retired at the current early retirement age. Since a dependent’s benefit is linked to the worker’s initial benefit amount, an increase in the worker’s benefit would also increase the dependent’s benefit, mitigating some of the negative effects of other reforms. Similarly, raising the FRA coupled with a partial exemption from a benefit reduction could offer some additional protection for disabled worker benefits. With an increase in the FRA, disabled workers would receive (exempted) DI benefits for a longer period of time because the age at which their disability benefits are converted to retiree benefits would rise with the new FRA. In general, the reform elements we examined reduce median lifetime benefits for disabled workers and dependents. Because disabled workers may not have the financial resources—especially earnings related income—to adjust to benefit reductions, we explored the interaction of reform elements and certain options to offset them. According to our projections, protections from a reduction in the COLA could restore benefits of disabled workers to levels close to those scheduled under current law. Reducing the COLA by one percentage point would result in about a 10 percent decrease in median lifetime benefits for workers who become disabled before age 60. To offset such a decrease, they could be partially or fully exempted. With a COLA reduction, a partial exemption would mean that the Social Security Administration would increase a disabled worker’s benefits annually as scheduled under current law (i.e., using the full COLA) until the worker reached the full retirement age. At that point, the disabled worker’s benefits would grow annually by the reduced COLA (1 percentage point lower than what it would be under current law). Our projections showed that a partial exemption as described above would raise median lifetime benefits from their reduced levels by 7 percent (up to 96 percent of scheduled levels under current law). In contrast, a full exemption would allow annual COLA adjustments in line with current law until death (fig. 8). In addition to a decrease in the COLA, we analyzed options for protecting the benefits of disabled workers under three reform elements that have an impact on the initial benefit amount a disabled worker receives—price indexing, longevity indexing, and progressive price indexing. There are several protection options for mitigating the effects of these reform elements, including full and partial exemptions. In the case of price indexing initial benefits, we projected that the median lifetime benefits of disabled workers would be about 75 percent of the median benefits under current law (fig. 9). A full exemption for disabled workers would raise the benefits of those disabled workers who exclusively receive DI benefits to the currently scheduled levels. However, a partial exemption from price indexing would restore the median lifetime benefit to 89 to 90 percent of scheduled levels, depending on how the partial exemption is implemented. One type of partial exemption (Type I) uses price indexing to calculate the portion of the benefits based on the years a person is out of the workforce and receiving DI benefits. In contrast, the other type of partial exemption (Type II) uses wage indexing to cover the same time period. (For more details, please see app. I.) The difference between the two partial exemptions becomes more substantial the earlier one becomes disabled, as the difference between wages and prices increases over time. While offering some protection from benefit reductions, both types of partial exemptions involve a recalculation of benefits at the full retirement age. This recalculation would result in lower benefits for the DI recipient and could create a potential problem if that individual relied on the prior benefit amount and had limited options for replacing the lost income. (See figs. 10 and 11 for longevity indexing and progressive price indexing, respectively.) Another protection option would be to allow disability benefits to grow at a greater rate than other benefits. For example, disabled workers could be explicitly included in the scope of the reform, and receive reduced initial benefits. However, instead of receiving annual increases based on the current-law COLA, disabled workers could have their benefits increased by a “super COLA”—one that is set above the Consumer Price Index. In this case, benefits for the disabled would grow at a faster rate than they would under current law and could approach or even exceed current law levels. Variations on the super-COLA could include an “age-indexed super COLA” which would be greater for those disabled at younger ages. For those workers who become disabled near the full retirement age the COLA would be closer to that used for retirees. These protections could be particularly beneficial for disabled workers who receive benefits for a prolonged period of time. While protections for disabled workers would generally cover all such beneficiaries, the options for protecting dependent benefits could be more targeted to specific dependents and not necessarily applied to the full range of dependents, which includes spouses, divorcees, widow(er)s, and child survivors. The circumstances around which a person becomes a dependent vary greatly, as does the role of Social Security benefits in their lives. For some, Social Security may be the primary source of support; for others, it may be only a small proportion of their income. Protections could target children, who make up about 8 percent of Social Security beneficiaries, receiving benefits as the survivors or dependents of disabled or retired workers. Table 3 shows the number of children who receive benefits in each category and the average monthly benefit for these children. One way to protect the benefits of children would be to exempt them from any reform, keeping their benefit calculation tied to current law. Another way to protect their benefits to some degree would be to raise the maximum benefit a family could receive on a single worker’s earnings record. The majority of experts with whom we spoke told us that increasing the maximum amount that a family could receive from one worker’s earnings record could help protect child and other dependent benefits. Such an increase could help those dependents who are constrained by the family maximum. A family may have several people receiving benefits based on one worker’s record. The sum of the family members’ benefits may exceed the specified maximum, which is calculated as a percentage of the worker’s benefit amount. Thus, any reform that would result in a decrease in the primary benefit amount would also result in a decrease in the amount that each eligible family member would receive and a corresponding decrease in the total amount a family would receive. Certain options, including increased allowable benefits for widows or partial exemptions, could be designed to protect the benefits of widow(er)s or others who may have fewer resources available to them. Under current law, widows and widowers can collect 100 percent of their deceased spouse’s benefits (or their own benefit—whichever is greater); a “widow’s boost” would allow them to receive up to 75 percent of the couple’s combined benefits. Widow(er)s may rely on Social Security for a large percentage of their retirement income, in part because they may live many years beyond the exhaustion of other financial resources, may find it difficult to work, or may incur large health expenses that deplete their other resources. A reduction in the COLA may be particularly detrimental to the lifetime benefits of those who live long lives, because the effect of reducing the COLA is compounded over time. As such, it may be desirable to protect older widow(er)s—along with other individuals who receive benefits for a prolonged period of time—from the effect of a COLA reduction. For example, in our projections for the COLA reduction, we found that for the group of widows who received some benefits and who died before age 75, median lifetime benefits would be approximately 93 percent of those under current law. In contrast for those who lived past age 95, median lifetime benefits would be only 83 percent of currently scheduled levels. The options for protecting the benefits of disabled workers and those of dependents come at a cost to the Social Security program in terms of its solvency. In addition, some protections options may create incentives for people to apply to the Disability Insurance program if DI benefits increase while retirement benefits stay stable. Further, protection options could provide disincentives for some to return to work. The Social Security reform elements we examined were designed primarily to improve program solvency. These reform elements would generally reduce benefits from their currently scheduled but underfunded levels. While protecting the benefits of disabled workers and dependents may be socially desirable, such protection would come at some cost to the Social Security program. In particular, the protections lessen the degree to which the potential reforms could restore solvency. One could counter these costs with further benefit reductions to beneficiaries considered less vulnerable than those recipients whose benefits are specifically protected. That is, reform packages with certain benefit protections for vulnerable populations may necessitate further reductions in the benefits of retired workers or increases in revenues to achieve the intended solvency effect. In addition to the effects on solvency, some of the protections discussed may also have administrative costs associated with them. Protecting the benefits of disabled workers may increase the number of people who apply for disability benefits. This may also be relevant to certain reform elements. An increase in the full retirement age coupled with the reduction in benefits for early retirement could motivate some individuals approaching the early retirement age to apply for disability benefits, if they believed that they could qualify for the now greater DI benefits. For example, before a change in the retirement age a worker who is a year away from the full retirement age, and who would qualify for DI but is unsure of that outcome, may choose to wait and only receive Old Age benefits. Once the full retirement age is raised, this worker may choose to apply for DI, rather than waiting to receive retirement benefits. The greater the benefit disparity between the two programs, the more likely it may be that DI applications and enrollment will increase. Thus, the potential for an increase in DI program costs exists with any reform elements that decrease the generosity of the Old Age component of OASDI without a corresponding decrease in that of the DI component. Under current law, there may already be an incentive for older workers to apply for DI rather than retire early. Using individual level data from the simulation model, we analyzed the benefits of two similar individuals under current law and under price indexing with and without full and partial exemptions. Both of the simulated individuals had similar lifetime earnings, close to the median for the simulated 1985 cohort, and both would have received initial benefits at age 62. However, they differed in two significant ways: one retired at age 62, while the other was disabled at age 62, and the retiree had lower lifetime benefits under current law. The retiree, who died at age 84, had lifetime benefits of about $433,000, while the disabled worker, who died at age 82, had lifetime benefits of about $505,000—about 16 percent higher than those of the retired worker. A full exemption for disabled workers from certain reform elements could similarly create discrepancies between the two programs, resulting in incentives to apply for the DI program. Under price indexing, the lifetime benefits of both individuals would be reduced, but the relative difference would remain at about 16 percent. However, if disabled workers were fully exempted from price indexing, the simulated disabled worker’s lifetime benefits would be back to the initial amount of $505,000, or 72 percent greater than those of the retired worker. This difference in potential benefits would likely increase the incentive to apply for the DI program. Figure 12 and table 4 show the total lifetime benefits and the average monthly benefits of these two simulated individuals under current law, price indexing, and with exemptions. However, partial rather than full exemptions or other protections, such as an age-indexed super COLA, could provide benefit protections without substantially increasing the disparity between the programs for people approaching the early or full retirement ages. Under a partial exemption, in which the disabled worker would be exempted from the reform until full retirement age, the added incentive that could be created by a full exemption would be reduced. Such a partial exemption for the disabled worker in our example would result in lifetime benefits that are about 33 percent higher than those of the retired worker under price indexing. The family maximum limits the amount that can be received off of a worker’s record. This limit is compatible with the incentive for individuals to work. Changing such a limit could affect beneficiaries’ work decisions. For example, protecting benefits of dependents by increasing the family maximum could affect an individual’s work decisions. Under the current family maximum with a benefit reduction in place, if a person chooses to work 30 hours a week, an increase in the total amount a family (or individual dependents) could receive might affect this decision and decrease the person’s time in the workforce. In such a case, the individual may find that the increase in the benefits received would allow for fewer weekly hours of work without a change in total income. In addition, protections that increase the benefits of disabled workers, such as the super COLA, can also create disincentives for such beneficiaries to return to work. As such, some individuals may continue to rely on the DI program, rather than finding a way to re-enter the workforce. Social Security’s financial challenges may result in program modifications that may include benefit reductions. These benefit reductions will likely affect all beneficiaries, including vulnerable individuals who may not be able to adjust to these reductions or who rely on Social Security as their primary source of income. While protecting the benefits of vulnerable populations may be desirable, such action does come at a cost. Further benefit reductions or revenue increases would be needed to achieve program solvency. These offsets, in turn, may create new financial vulnerabilities among other beneficiaries who would bear the burden of these protections. Few reform proposals consider the impact that benefit reductions would have on all beneficiary types, instead treating all beneficiaries similarly. However, some special consideration should be given to the effects of the reform on the benefits of the most vulnerable, especially when these individuals are disproportionately affected. If the solution to Social Security’s financing problems includes benefit reductions, then the equal treatment of all beneficiaries may need to be reconsidered, and the complex interactions of benefit reductions, protections, and direct and indirect costs to the system and to other retirees will need to be weighed carefully. Benefit protections can be a part of a comprehensive reform package and the reform debate should consider the design, inclusion, and implications of such measures to assure income adequacy. Likewise, to the extent that Social Security aligns the disability program with the current state of science, medicine, technology, and labor market conditions, such modernization should also be considered. Accordingly, in light of potential reform, Congress should consider the potential implications of reform on disability and dependent beneficiaries. Such a review might usefully be coordinated with any modernization of the Social Security disability program. We provided a draft of this report to SSA and the Department of the Treasury, which generally agreed with our findings. Both provided technical comments, and SSA also provided general comments, which appear in appendix III. We incorporated the comments throughout our report as appropriate. In general, SSA concurred with the methodology, overall findings, and conclusions of the report. However, SSA felt that the report could benefit from a more direct comparison of disabled beneficiaries and retired beneficiaries (and a similar construct for dependents). While such a comparison could be beneficial and give context to the reform discussion, this report was premised on the notion that certain beneficiaries would be less able to offset benefit reductions, rather than a comparison of relative welfare. Finally, GAO agrees that one could better assess the degree to which a reform element or protection option support the program’s goal of adequacy if benefits were compared to a standard of adequacy; however such a comparison was beyond the scope of the current study. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution until 30 days after the date of this letter. At that time, we will send copies of this report to the Social Security Administration and the Department of the Treasury, as well as other interested parties. Copies will also be made available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-7215, if you have any questions about this report. Other major contributors include Michael Collins, Nagla’a El-Hodiri, Jennifer Gregory, Joe Applebaum, Melinda Cordero, Mark Goldwein, Meaghan Mann, and Dan Schwimer. To analyze the effects of individual reform elements and certain protections from these reforms on Social Security benefit levels for disabled workers and dependents, we simulated their benefits using the Policy Simulation Group’s (PSG) microsimulation models. We based our analysis on projected lifetime benefits for a simulated 1985 birth cohort. In order to have a point of comparison, we also used the microsimulation models to simulate Social Security benefits of retirees who receive benefits on their own record. To simulate longevity indexing, which links the growth of initial benefits to changes in life expectancy, we successively modified the PIA formula replacement factors (90, 32, 15) beginning in 2009, reducing them annually by multiplying them by 0.995. This specification mimics provision 1 of Model 3 of the President’s Commission to Strengthen Social Security (CSSS). The CSSS solvency memorandum notes that the 0.995 successive reductions “reduces monthly benefit levels by an amount equivalent to increasing the normal retirement age (NRA) for retired workers by enough to maintain a constant life expectancy at NRA, for any fixed age of benefit entitlement.” This provision as specified and scored—using the intermediate assumptions of the 2001 Trustees’ report—in the CSSS memo by SSA’s Office of the Chief Actuary would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 1.17 percent of taxable payroll. We also simulated the effects of price indexing, where initial benefits would be indexed to the consumer price index (CPI) in order to limit the growth of benefits. We successively modified the primary insurance amount (PIA) formula replacement factors (90, 32, and 15) beginning in 2012, reducing them successively by real wage growth in the second prior year. This specification mimics provision B6 of the August 10, 2005, memorandum to SSA’s Chief Actuary regarding the provision requested by the Social Security Advisory Board (SSAB), which is an update of provision 1 of Model 2 of the CSSS. As noted in the CSSS’s solvency memorandum from SSA’s Chief Actuary, “his provision would result in increasing benefit levels for individuals with equivalent lifetime earnings across generations (relative to the average wage level) at the rate of price growth (increase in the CPI), rather than at the rate of growth in the average wage level as in current law.” This provision as specified and scored by OCACT in the SSAB memo would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 2.38 percent of taxable payroll. To simulate the effects of implementing a progressive price index, we mimicked provision B7 of the August 10, 2005, memorandum to SSA’s Chief Actuary. We created a new bend point at the 30th percentile of earnings, beginning in 2012. We maintained current-law benefits for earners at the 30th percentile and below. We also maintained the lower two PIA formula replacement factors (90 and 32). We reduced the upper two PIA formula replacement factors (32 and 15) so that maximum worker benefits from one generation to the next grew by inflation rather than the growth in average wages. This provision as specified and scored by OCACT would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 1.43 percent of taxable payroll. In our modeling of this reform element, we gradually reduced the number of drop out years from 5 to 0, thereby extending the number of computation years from 35 to 40. The number of computation years would increase to 36 in 2007, 37 in 2008, 38 in 2010, 39 in 2012, and 40 in 2014. This specification mimics provision B2 of the August 10, 2005 memorandum to SSA’s Chief Actuary. This provision as specified and scored by OCACT would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 0.46 percent of taxable payroll. We also simulated a reduction in the cost-of-living adjustment (COLA) of one percentage point, beginning in 2012. This specification mimics provision A2 of the August 10, 2005, memorandum to SSA’s Chief Actuary. This provision as specified and scored by OCACT would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 1.49 percent of taxable payroll. Some reform proposals have called for reducing the COLA by about 0.2 percent to 0.4 percent, in response to methodological concerns that the CPI for urban wage earners and clerical workers, the current CPI measure used to adjust benefits, overstates inflation. The intent of these proposals is to implement a COLA that may more accurately reflect inflation. To simulate the effects of fully exempting disabled workers from the various reform elements, we modified the simulation to exclude the benefits of disabled workers from the reform elements. As such, there would be no recalculation of benefits when the exempted beneficiary reached full retirement age. We defined partial exemptions for disabled workers to mean that their benefit would be exempted from any simulated reform until the FRA and then would be recalculated. For the COLA reduction, we simply started the one percentage point reduction at the FRA for disabled workers. However, for the reforms that involved a change in the initial benefit amount (longevity indexing, price indexing, and progressive price indexing), we simulated the recalculation of benefits at the FRA in two different ways. The first partial exemption, which we refer to as Partial Exemption Type I, followed the Kolbe-Stenholm model of converting benefits at the FRA. The Kolbe-Stenholm model reduces benefits in proportion to the difference in the disabled-worker PIA and the retired-worker PIA at the DI-onset age. This OASI benefit amount would be indexed by the COLA to for the years between the disability onset age and age 62. ) DIC is the promised DI benefit level under current law YD is the number of years (ages 21 to 62) that the disabled worker received DI benefits OASI is the OASI benefit level, calculated by computing the PIA under the reform using the formula applicable for newly eligible retired workers in the year the converting worker reached age 62. In this case, earnings from the years prior to disability would be wage indexed. The disability freeze years would apply in computing the AIME. To assess the reliability of simulated data from GEMINI, we reviewed PSG’s published validation checks and examined the data for reasonableness and consistency. PSG has published a number of validation checks of its simulated life histories. For example, simulated life expectancy is compared with projections from the Social Security Trustees; simulated benefits at age 62 are compared with administrative data from SSA; and simulated educational attainment, labor force participation rates, and job tenure are compared with values from the Current Population Survey. We found that simulated statistics for the life histories were reasonably close to the validation targets. Social Security offers a variety of types of benefits, and although they are all based upon the same formula, they are calculated in different ways. The methods for calculating the different types of benefits are outlined below. Old Age benefits are calculated through a four-step process in order to provide retirees with progressive yet wage-based cash payments (see fig. 13). First a worker’s Average Indexed Monthly Earnings (AIME) is calculated by indexing the worker’s past earnings to changes in average wage levels over the worker’s lifetime and then averaging them. The AIME formula considers all years in which a worker earned covered earnings. It then uses the number of elapsed years from 1950 or attainment of age 21 through the age of 62 (or death) and allows for 5 “drop-out years” so that the worker’s highest 35 years of covered indexed earnings are used in the calculation. Once the AIME is determined, a progressive formula is applied to the AIME to yield a worker’s Primary Insurance Amount (PIA). In 2007, the PIA formula had the following bend points: 90 percent of the first $680 of AIME, plus 32 percent of the next $3,420, and 15 percent of any earnings above that level (fig. 13). For example, the PIA of a worker whose AIME was $1000, the equivalent of at $12,000 annual salary, would be the sum of $612 (90 percent of $680) and $102.40 (32 percent of $320), yielding a total initial monthly benefit of around $715. Similarly, the PIA of a worker with an $8,000 AIME (the equivalent of a $96,000 annual salary) would be the sum of $612 (90 percent of $680), $1094.40 (32 percent of $3420), and $585 (15 percent of $3,900), for a total of just under $2,292. Because the formula is both wage-based and progressive, the second worker receives a much higher actual benefit than the first worker ($2,292 versus $715), but his benefits are a much lower proportion of his past earnings than the first worker’s benefits (28.6 percent versus 71.4 percent). If a worker retires at the full retirement age, which is currently between ages 65 and 66, and legislated to reach 67 in 2027, this PIA represents the first year’s benefit (although it is adjusted for inflation through a cost-of- living adjustment (COLA)). However, workers can begin receiving reduced benefits at 62; benefits are progressively larger for each month workers postpone drawing them, up to age 70. In general, benefits are actuarially neutral to the Social Security program; that is, the reduction for starting benefits before full retirement age and the credit for starting after full retirement age are such that the total value of benefits received over one’s lifetime is approximately equivalent for the average individual. Those receiving benefits before the full retirement age will also be subject to an earnings test. If earned income is above a certain threshold, Social Security withholds one dollar of benefits for every two dollars of earning above the threshold. Each year, benefits receive a COLA to keep pace with inflation. Similarly to Old Age benefits, disability benefits are determined by calculating a worker’s AIME, applying the progressive PIA formula to it, and then adjusting benefit levels through yearly COLAs (fig. 14). However, because disabled workers are likely to have shorter work histories, their benefits calculation relies on fewer years of earnings. In general, the number of years of earnings used to calculate the AIME is based on the total number of years between when a worker turns 21 and when he applies for DI. If this number of years is 25 or more, a worker’s 5 lowest (or zero) earnings years will be dropped from the calculation. The number of drop-out years gradually declines as a worker applies for disability earlier in life. If the disabled worker is 60 at the time of application, for example, 38 years would have elapsed since age 21. He will receive 5 drop out years, and his AIME will be calculated based upon his 33 highest-earning years. In contrast, if a worker applies for DI at 32, he would have only had 10 elapsed years since age 21, and only be eligible for 2 drop-out years; his AIME would be calculated based upon his top 8 years. At the full retirement age, disabled workers begin receiving retirement benefits, instead of disability benefits; however, benefit levels remain the same and continue to grow through annual COLAs. Spouses: In addition to being eligible to receive retirement benefits on their own earnings records as early as age 62, individuals can also receive dependents’ benefits at age 62, based on their spouse’s benefit amount or, in some cases, that of an ex-spouse (table 5). These individuals can collect these benefits regardless of whether their spouse is concurrently receiving retired or disabled worker benefits. If collection begins at full retirement age, these individuals are eligible for either one-half of their spouse’s benefit amount, or the benefits based on their own earnings record; whichever is greater. As with Old Age benefits, adjustments are made if these individuals chooses to take early retirement. Dependent Children: Dependent children may also qualify for one- half of their retired or disabled parent’s benefit amount. This benefit is available for disabled adult children who are not working on a regular basis, children under age 18, or children still in high school and under age 19. Like other benefits, dependents’ benefits receive annual COLAs. Dependent benefits are subject to a family maximum, whereby a family is limited in the total amount of benefits that can be received from a single individual’s earnings record. The size of the family maximum is currently between 150 percent and 188 percent of the primary beneficiary’s benefit. Widow(er)s may be eligible to receive a one-time death benefit of $255. In addition, widow(er)s, surviving parents, children under the age of 18 (19 if the child is still in school) and disabled adult children can collect benefits off of the deceased person’s earnings record. A widow(er) at full retirement age will receive 100 percent of his or her spouse’s benefits, unless his or her own benefit is higher. Younger widow(er)s (those between age 60 and the full retirement age) can receive between 71 and 99 percent of their deceased spouses’ benefits depending on how close they are to the full retirement age. Furthermore, regardless of age, a widow(er) with young children, can receive 75 percent of the deceased spouse’s benefit. Surviving parents and children can also collect up to 75 percent of their deceased family members’ benefits. All of these benefits receive annual COLA adjustments and are subject to the family maximum. Retirement Security: Women Face Challenges in Ensuring Financial Security in Retirement. GAO-08-105. Washington, D.C.: October 11, 2007. Retirement Decisions: Federal Policies Offer Mixed Signals about When to Retire. GAO-07-753. Washington, D.C.: July 11, 2007. Social Security Reform: Implications of Different Indexing Choice. GAO-06-804. Washington, D.C.: Sept ember 14, 2006. Social Security: Societal Changes Add Challenges to Program Protections. GAO-05-706T. Washington, D.C.: May 17, 2005. Options for Social Security Reform. GAO-05-649R. Washington, D.C.: May 6, 2005. Social Security Reform: Answers to Key Questions. GAO-05-193SP. Washington, D.C.: May 2, 2005. Social Security Reform: Early Action Would Be Prudent. GAO-05-397T. Washington, D.C.: March 9, 2005. Long Term Fiscal Issues: The Need for Social Security Reform. GAO-05-318T. Washington, D.C. February 9, 2005. Social Security: Distribution of Benefits and Taxes Relative to Earnings Level. GAO-04-747. Washington, D.C.: June 15, 2004. Social Security: Program’s Role in Helping Ensure Income Adequacy. GAO-02-62. Washington, D.C.: November 30, 2001. Social Security Reform: Potential Effects on SSA’s Disability Programs and Beneficiaries. GAO-01-35. Washington, D.C.: January 24, 2001. Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29. Washington, D.C.: November 4, 1999. Social Security Reform: Implications of Raising the Retirement Age. GAO/HEHS-99-112. Washington, D.C.: August 27, 1999. Social Security: Issues in Comparing Rates of Return with Market Investments. GAO/HEHS-99-110. Washington, D.C.: August 5, 1999. Social Security: Criteria for Evaluating Social Security Reform Proposals. GA0/T-HEHS-99-94. Washington, D.C.: March 25, 1999.

Many recent Social Security reform proposals to improve program solvency include elements that would reduce benefits currently scheduled for future recipients. To date, debate has focused primarily on the potential impact on retirees, with less attention to the effects on other Social Security recipients, such as disabled workers and dependents. As these beneficiaries may have fewer alternative sources of income than traditional retirees, there has been interest in considering various options to protect the benefits of disabled workers and certain dependents. This report examines (1) how certain elements of Social Security reform proposals could affect disability and dependent benefits, (2) options for protecting these benefits and how they might affect disabled workers and dependents, and (3) how protecting benefits could affect the Social Security program. To conduct this study, GAO used a microsimulation model to simulate benefits under various reform scenarios. GAO also interviewed experts and reviewed various reform plans, current literature, and GAO's past work. We considered several reform elements that could improve Social Security Trust Fund solvency by reducing the initial benefits received or the growth of individual benefits over time. According to our simulations, these reform elements would reduce median lifetime benefits for disabled workers by up to 27 percent and dependents by up to 30 percent of currently scheduled levels. While the size of the benefit reduction could vary across individuals, it could be substantial for the vast majority of these beneficiaries, depending upon the reform element. Options for protecting the benefits of disabled workers and dependents from the impact of reform elements include, among others, a partial exemption, whereby currently scheduled benefits are maintained until retirement age. For example, while simulations showed that one reform element could decrease median lifetime benefits of disabled workers to about 89 percent of currently scheduled levels, a partial exemption could restore them to about 96 percent. Further, these protections could be more targeted. For example, a larger cost of living adjustment would result in more rapid benefit growth for those disabled workers who receive benefits for a prolonged period of time. Some protections for dependent benefits could be targeted to a single group of dependents, such as widows, while others could affect multiple groups. For example, increasing the maximum benefit a family can receive could protect a wider group of beneficiaries, including children and spouses of disabled workers, and disabled adult children. While it may be desirable to protect the benefits of disabled workers and certain dependents, such protections would come at a cost to Social Security. Protecting benefits could lessen the impact that a reform element would have on solvency. In addition, such protections could create incentives to apply for Disability Insurance, if disability benefits remained stable while retirement benefits were reduced.

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When EESA was enacted on October 3, 2008, the U.S. financial system was facing a severe crisis that rippled throughout the global economy, moving from the U.S. housing market to the financial markets and affecting an array of financial assets and interbank lending. The crisis restricted access to credit and made the financing on which businesses and individuals depended increasingly difficult to obtain. Further tightening of credit exacerbated a global economic slowdown. During the crisis, Congress, the President, federal regulators, and others took a number of steps to facilitate financial intermediation by banks and the securities markets. While the financial system has generally stabilized and investor confidence has improved, some concerns persist that global demand will remain weak for a significant period of time, and that central bank efforts to combat inflation could disrupt financial markets. Under EESA, Treasury established a variety of TARP programs. American International Group, Inc. (AIG) Investment Program. Provided support to AIG to avoid disruptions to financial markets as the insurer’s financial condition deteriorated. Asset Guarantee Program. Provided federal government assurances for assets held by financial institutions that were viewed as critical to the functioning of the nation’s financial system. Bank of America and Citigroup were the only two participants in this program. AIFP. Aimed to prevent a significant disruption of the American automotive industry through government investments in domestic automakers Chrysler and GM and auto financing companies Chrysler Financial and Ally Financial (formerly known as General Motors Acceptance Corporation, or GMAC). Capital Assessment Program. Created to provide capital to institutions not able to raise it privately to meet Supervisory Capital Assessment Program—or “stress test”—requirements. This program was never used. CPP. The largest TARP program, designed to provide capital investments to financially viable financial institutions. Treasury received preferred shares and subordinated debentures, along with warrants. Consumer and Business Lending Initiative programs. The AIG Investment Program was formerly known as the Systemically Significant Failing Institutions Program. Community Development Capital Initiative (CDCI.) Provided capital to Community Development Financial Institutions (CDFI) by purchasing preferred stock and subordinated debentures. Small Business Administration (SBA) 7(a) Securities Purchase Program. Provided liquidity to secondary markets for government- guaranteed small business loans in SBA’s 7(a) loan program. Term Asset-backed Securities Loan Facility (TALF). Provided liquidity in securitization markets for various asset classes to improve access to credit for consumers and businesses. Public-Private Investment Program (PPIP). Created to address the challenge of “legacy assets” as part of Treasury’s efforts to repair balance sheets throughout the financial system. Treasury partnered with private funds that purchased residential and commercial mortgage-backed securities. Targeted Investment Program (TIP). Sought to foster market stability and strengthen the economy by making case-by-case investments in institutions that Treasury deemed critical to the functioning of the financial system. Bank of America and Citigroup were the only two institutions that participated in this program. Many of these programs are winding down or have ended. For example, as of September 30, 2014, Treasury had recovered all debt and equity investments made in PPIP. Furthermore, the AIG Assistance Program, the Asset Guarantee Program, the Capital Assessment Program, the SBA 7(a) Securities Purchase Program, and TIP are no longer active, and Treasury no longer holds assets related to these programs. Treasury still holds investments in CPP, CDCI, and AIFP, and the housing assistance programs remain active. The housing programs include: Making Home Affordable (MHA). MHA includes several housing programs, but the cornerstone is the Home Affordable Modification Program (HAMP), under which Treasury shares the cost of reducing monthly payments on first-lien mortgages with mortgage holders/investors and provides other financial incentives to servicers, borrowers, and mortgage holders/investors for loans modified under the program. There are several other programs that operate under MHA: Home Affordable Foreclosure Alternatives (HAFA) Program. The HAFA Program offers assistance to homeowners looking to relinquish their homes through a short sale or a deed-in-lieu of foreclosure. Treasury offers incentives to eligible homeowners, servicers, and investors under the program. Principal Reduction Alternative (PRA). PRA, a companion program to HAMP, requires servicers to evaluate the benefit of principal reduction for mortgages being assessed for a HAMP first-lien loan modification that have a loan-to-value ratio of 115 percent or more and that are not owned or guaranteed by Fannie Mae or Freddie Mac. Servicers are required to evaluate homeowners for PRA when evaluating them for a HAMP first-lien modification but are not required to actually reduce principal as part of the modification. Second Lien Modification Program (2MP). 2MP provides additional assistance to homeowners receiving a HAMP first-lien permanent modification who have an eligible second lien with participating servicers. When a borrower’s first lien is modified under HAMP, participating program servicers must offer to modify the borrower’s eligible second lien according to a defined protocol. This assistance can result in a modification or even full or partial extinguishment of the second lien. Treasury provides incentive payments to second lien mortgage holders in the form of a percentage of each dollar in principal reduction on the second lien. Treasury doubled the incentive payments offered to second lien mortgage holders for 2MP permanent modifications that included principal reduction and had an effective date on or after June 1, 2012. Government-insured or guaranteed loans (Federal Housing Administration (FHA-HAMP) and Rural Development (RD- HAMP)). FHA and the Department of Agriculture’s Rural Housing Service (RHS) have implemented modification programs similar to HAMP Tier 1 for FHA-insured and RHS-guaranteed first-lien mortgage loans. RD-HAMP provides borrowers with a monthly mortgage payment equal to 31 percent of the homeowners’ monthly gross income and FHA-HAMP provides for payment reduction based on a formula that considers gross income options (31 percent and 25 percent) and current payment (80 percent). Both programs require borrowers to complete a trial payment plan before permanent modification. If a modified FHA-insured or RHS- guaranteed mortgage loan meets Treasury’s eligibility criteria, the borrower and servicer can receive TARP-funded incentive payments from Treasury. Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund). The Hardest Hit Fund seeks to help homeowners in the states hit hardest by unemployment and house price declines by funding innovative measures developed by state housing finance agencies and approved by Treasury. By September 2010, Treasury had completed the distribution of $7.6 billion in funds across 18 states and the District of Columbia.for funding either because their unemployment rates were at or above the national average or they had experienced housing price declines of 20 percent or more that left some borrowers owing more on their mortgages than the value of their homes. Although the type of assistance provided varies by state, all states use some portion of their funds to help unemployed homeowners make mortgage payments. Some states have programs that reduce principal to help make mortgage payments more affordable, reduce or eliminate borrowers’ second liens, and provide transition assistance to borrowers leaving their homes. Department of Housing and Urban Development’s (HUD) FHA Short Refinance program (FHA Short Refinance). FHA Short Refinance enables homeowners whose mortgages exceed the value of their homes to refinance into more affordable mortgages. Treasury continues to make progress in winding down the TARP nonhousing programs. According to Treasury, its decision to exit a program depends on various circumstances, including market conditions and other factors outside the government’s control. Treasury estimates that some nonhousing programs have produced, or will produce, a lifetime income while others have, or are expected to have, a lifetime cost. For example, repayments and income from the federal government’s investments in participating CPP institutions have exceeded the original amounts. Further, Treasury’s estimates of the lifetime costs of CDCI have been falling significantly as participants exit the program. However, under AIFP Treasury sold its stock in GM at a loss, although it will make a profit on the sale of its investments in Ally Financial. Treasury expects lifetime income from two other programs— TALF and PPIP. As of September 30, 2014, Treasury had completed the wind down of four of nine TARP nonhousing programs that were once active. Treasury has stated that when deciding to sell assets and exit TARP programs, it strives to: protect taxpayer investments and maximize overall investment returns within competing constraints, and promote the stability of financial markets and the economy by preventing disruptions to the financial system; bolster markets’ confidence in order to encourage private capital dispose of investments as soon as practicable. We and others have noted that these goals can at times conflict.example, we previously reported that deciding to unwind some of its assistance to GM by participating in an initial public offering (IPO) presented Treasury with a conflict between maximizing taxpayer returns and exiting as soon as practicable. Holding its shares longer could have meant realizing greater gains for the taxpayer but only if the stock appreciated in value. By participating in GM’s November 2010 IPO, Treasury tried to fulfill both goals, selling almost half of its shares at an early opportunity. Treasury officials stated that although they strove to balance these competing goals, they had no strict formula for doing so. Rather, they ultimately relied on the best available information in deciding when to start exiting this program. Moreover, in some cases Treasury’s ability to exercise control over the timing of its exit from TARP programs is limited. For example, Treasury has limited control over its exit from CDCI because the program’s exit depends on when each financial institution decides to repay Treasury’s investments. For As shown in table 1, Treasury estimates that several of the TARP nonhousing programs will provide or have provided income over their lifetimes, while others will incur a lifetime cost. Though direct costs for TARP—including potential lifetime income—can be estimated and quantified, certain indirect costs connected to the government’s assistance are less easily measured. For example, as we have previously concluded, when the government provides assistance to the private sector, it may increase moral hazard that would then need to be mitigated. That is, in the face of government assistance, private firms are motivated to take risks they might not take in the absence of such assistance, or creditors may not price into their extensions of credit the full risk assumed by the firm, believing that the government would provide assistance should the firm become distressed. Government interventions can also have consequences for the banking industry as a whole, including institutions that do not receive bailout funds. For instance, investors may perceive the debt associated with institutions that received government assistance as being less risky because of the potential for future government bailouts. This perception could lead them to choose to invest in such assisted institutions instead of those that did not receive assistance. Treasury continues to wind down CPP, the largest TARP investment program, which was designed to provide capital investments to viable financial institutions, and thus far, repayments and income have exceeded the total amount of original outlays. As we have reported, Treasury disbursed $204.9 billion to 707 financial institutions nationwide from October 2008 through December 2009. As of September 30, 2014, Treasury had received $226.4 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by $21.5 billion (see fig. 1). The repayments and income amounts include $199.4 billion in repayments and sales of original CPP investments, as well as $12.1 billion in dividends and interest, and $14.9 billion in proceeds in excess of costs, which includes $8.0 billion from the sale of warrants. After accounting for write-offs and realized losses from sales totaling $4.9 billion, CPP had $625 million in outstanding investments as of September 30, 2014. Treasury estimated a lifetime income of $16.1 billion for CPP as of September 30, 2014. As of September 30, 2014, a total of 664 of the 707 institutions (94 percent) that originally participated in CPP had exited the program. Of these, 253 had repurchased their preferred shares or subordinated debentures in full (see fig. 2). Another 165 institutions refinanced their shares through other federal programs: 28 through CDCI and 137 through another Treasury fund—separate from TARP—the Small Business Lending Fund (SBLF).investments sold through auction or other sales, and 30 institutions went into bankruptcy or receivership. The remaining 4 merged with another institution. Treasury created the CDCI program to help mitigate the adverse impacts of the financial crisis on communities underserved by traditional banks by providing capital to CDFIs—banks and credit unions—that provide financial services to low- and moderate-income, minority, and other underserved communities. CDCI, which is structured much like CPP, provides capital to financial institutions by purchasing preferred equity and subordinated debt from them.original 84 CDCI institutions remained in the program. Of the 16 institutions that had exited the program, 15 had done so through repayment and 1 had done so as a result of its subsidiary bank’s failure. Three of the 68 remaining institutions had begun to repay the principal on investments they had received, while the other remaining institutions had paid only dividends and interest. As of September 30, 2014, 68 of the As of September 30, 2014, the outstanding investment balance for CDCI was $465 million of an original investment of $570 million. As of the same date, Treasury had received approximately $98 million in principal repayments from CDCI participants, and had written off approximately $7 million. CDCI participants have also paid approximately $43 million in dividends and interest. Treasury has lowered its estimates of the program’s lifetime cost over the last 3 years as market conditions have improved and institutions have begun to repay their investments. As of November 2010, Treasury estimated the program’s lifetime cost at about $290 million. As of September 30, 2014, Treasury estimated the program’s lifetime cost at $110 million. As we have reported, Treasury continues to monitor the performance of CDCI participants because their financial strength will affect their ability to repay Treasury. Generally, the number of CDCI institutions with missed quarterly dividend or interest payments has been low, representing, on average, about 4 percent of all remaining institutions over the life of the program. The percentage of remaining institutions with missed payments has ranged from 0 to about 7 percent (0 to 6 institutions). Since November 2010 (the first quarter that dividend and interest payments were due), nine institutions (seven banks and two credit unions) have missed at least one quarterly payment. Of those institutions, three banks have missed at least eight payments, the threshold at which Treasury has the right to elect directors to their boards. However, as of September 30, 2014, Treasury had not appointed directors to the board of any CDCI banks, but it had sent an observer to one bank and asked to send an observer to a second. In an effort to preserve their capital and promote safety and soundness, federal and state regulators generally do not allow institutions on these lists to make dividend payments. As of September 30, 2014, Treasury was continuing to assess exit alternatives for the CDCI program. Treasury had not yet determined a final exit strategy and associated timing and has limited control over participants’ decision to exit. As we previously reported, CDCI participants said that the 2 percent dividend rate they would pay on investments until 2018 was lower than the cost of private capital and that access to capital would play a major factor in their decision to repay their CDCI investments. The dividend rate will increase from 2 percent to 9 percent in 2018 and may be a key factor for many CDCI participants in the decision to stay in or exit the program. Treasury disbursed $79.7 billion through AIFP from December 2008 through June 2009 to support two automakers, Chrysler and GM, and their automotive finance companies, Chrysler Financial and Ally Financial (then known as GMAC). As of September 30, 2014, the government had recovered $68.9 billion (86.3 percent) of the funds disbursed through the program, and expects AIFP to have a lifetime cost of $12.2 billion. Chrysler. In May 2011, Chrysler repaid its outstanding TARP loans, 6 years ahead of schedule. Chrysler returned more than $11.1 billion of $12.4 billion committed to Chrysler through principal repayments, interest, and cancelled commitments. Treasury has fully exited its investment in Chrysler Group under TARP. GM. On December 9, 2013, Treasury fully exited its investment in GM. Treasury completed its fourth and final pre-arranged trading plan for the sale of its remaining 31.1 million shares. Treasury recovered a total of $39.7 billion from its original investment of $51.0 billion in GM. Chrysler Financial. In July 2009, Chrysler Financial repaid its $1.5 billion in TARP loans plus around $7 million in interest. Chrysler Financial has since ceased operations. Also through AIFP, Treasury provided $17.2 billion of assistance to Ally Financial, a large financial holding company, whose primary business is auto financing. To provide this assistance, Treasury purchased senior equity, mandatory convertible preferred shares, and trust preferred securities, some of which Treasury ultimately converted into common shares. By December 2010, Treasury held common shares totaling 74 percent of Ally financial as well as $5.9 billion in mandatory convertible preferred shares. Treasury retained this level of ownership through the third quarter of 2013. Then, in late 2013, three key regulatory and legal developments helped Treasury accelerate the wind down of its investments in Ally Financial (see text box). As a result, in November 2013, Ally Financial made cash payments totaling $5.9 billion to repurchase all remaining mandatory convertible preferred shares outstanding and terminate an existing share adjustment provision. Additionally, Ally Financial issued $1.3 billion of common equity to third- party investors, reducing Treasury’s ownership share from 74 to 63 percent. The Board of Governors of the Federal Reserve System (Federal Reserve) did not object to Ally Financial’s resubmitted capital plan, allowing Ally Financial to complete the private placement of common shares valued at $1.3 billion, which it had announced in August 2013. The private placement, intended in part to help finance the repurchase of the $5.9 billion remaining Treasury-owned mandatory convertible preferred shares, was completed in November 2013, and the Treasury shares were repurchased. In December 2013, the bankruptcy of Ally Financial’s subsidiary ResCap was substantially resolved. The final bankruptcy agreement included a settlement that the bankruptcy court judge had approved in June 2013. It released Ally Financial from any and all legal claims by ResCap and, with some exceptions, all other third parties, in exchange for $2.1 billion in cash from Ally Financial and its insurers. Also in December 2013, Ally Financial obtained Federal Reserve approval to convert from a bank holding company to a financial holding company, enabling it to continue insurance underwriting and other Because of the positive results of the March 2014 stress test and Comprehensive Capital Analysis and Review (CCAR) conducted by the Board of Governors of the Federal Reserve System (Federal Reserve) on Ally Financial, Treasury decided to further reduce its ownership share.The day after the release of the CCAR results in March 2014, Treasury announced that it would sell Ally Financial common stock in an initial public offering (IPO). In April 2014, Treasury completed the IPO of 95 million shares at $25 per share. The $2.4 billion sale reduced Treasury’s ownership share to approximately 17 percent. Following the IPO, Ally Financial became a publicly held company. In May 2014, Treasury received $181 million from the sale of additional shares after underwriters exercised the option to purchase an additional 7 million shares from Treasury at the IPO price. This additional sale reduced Treasury’s ownership share to approximately 16 percent. In September 2014, Treasury announced the completion of its first trading strategy for Ally common stock. With this plan, Treasury sold 8.89 million shares and recovered approximately $218.7 million, further reducing its ownership share to 13.8 percent (around 64 million shares of common stock). On September 12, 2014, Treasury announced that it would continue to wind down its investment in Ally by selling additional shares of common stock through its second pre-defined written trading plan, with sales beginning that day. As of September 30, 2014, Treasury had recovered approximately $18.1 billion in sales proceeds and interest and dividend payments on its total $17.2 billion investment in Ally Financial. On December 19, 2014, Treasury announced an agreement to sell all of its remaining common shares in Ally Financial. Treasury reported that it recovered $19.6 billion from Ally, which is approximately $2.4 billion more than its initial investment of $17.2 billion. This results in the exit of Treasury’s last outstanding investments in AIFP. The Federal Reserve established TALF in an effort to reopen the securitization markets and improve access to credit for consumers and Treasury committed funds to the TALF special-purpose businesses.vehicle, TALF LLC, established by the Federal Reserve Bank of New York (FRBNY) to provide credit protection to FRBNY for TALF loans should borrowers fail to repay and surrender the asset-backed securities (ABS) or commercial mortgage-backed securities (CMBS) pledged as collateral. Treasury disbursed $100 million for start-up costs to TALF LLC (see fig. 5). TALF LLC repaid Treasury’s initial $100 million disbursement in 2013, and as of September 30, 2014, had accumulated $759 million in income from the TALF loans, of which $632 million was paid to Treasury as contingent interest. On November 6, 2014, the net portfolio holdings of TALF LLC were reduced to zero, and TALF LLC together with the other TALF agreements were terminated, effectively closing the TALF program. To create PPIP, Treasury partnered with private funds that purchased troubled mortgage-related assets (“legacy assets”) from financial institutions in order to help repair balance sheets throughout the financial system. The program’s Public-Private Investment Funds (PPIF) each had a 3-year investment period that began at each fund’s inception date, and at the completion of the investment period each fund had 5 years to completely divest. Treasury provided these PPIFs with equity and loan commitments of $7.4 billion and $14.7 billion, respectively, but disbursed a total of $18.6 billion (see fig. 6). On September 30, 2014, Treasury received its final $1.8 million distribution from the PPIP. With this distribution all nine PPIFs have completely divested their assets and Treasury recovered a total of $22.5 billion. According to Treasury officials, as of December 29, 2014, all nine PPIFs had formally provided Treasury official termination notices and the PPIP program had been effectively wound down. As of September 30, 2014, Treasury had disbursed $13.7 billion (36 percent) of the $38.5 billion in TARP funds that had been allocated to support housing programs. The number of new HAMP permanent modifications added on a quarterly basis rose slightly in early 2013 but has declined in 2014, falling to 29,000 in the third quarter, the lowest level since the program’s inception. Treasury has taken steps to help more borrowers, including by extending the deadline for HAMP applications for a third time. Treasury’s Office of Homeownership Preservation within OFS is tasked with finding ways to help prevent avoidable foreclosures and preserve homeownership. Treasury established three initiatives under TARP to address these issues: MHA, the Hardest Hit Fund, and FHA Short Refinance. As of September 30, 2014, Treasury had disbursed approximately $13.7 billion (36 percent) of the $38.5 billion in TARP housing funds, though the amount of disbursements varied across the three programs (see fig. 7). For example, of the $29.8 billion dedicated to MHA, the largest TARP-funded housing program, Treasury had disbursed $9.3 billion (31 percent) as of September 2014. In the case of the Hardest Hit Fund, $7.6 billion (59 percent) had been disbursed as of that date. In contrast, only $0.01 billion (0.13 percent) had been disbursed for the FHA Short Refinance program. As we have reported, Treasury officials said that they anticipated using all of the remaining MHA funds, and in April 2014, the Congressional Budget Office (CBO) increased its estimate of likely disbursements under TARP-funded housing programs because of extensions of the MHA program. But CBO has continued to project an $11 billion dollar surplus for the TARP-funded housing programs because it anticipates that fewer households will participate in the housing programs. Treasury will continue to disburse TARP funds under the housing programs for several more years. Specifically, homeowners have until at least December 31, 2016, to apply for assistance under MHA programs, and Treasury will continue to pay incentives for up to 6 years after the last permanent modification begins. Treasury’s obligation under FHA Short Refinance will continue until September 2020. Unlike TARP expenditures under some other programs, such as those that provided capital infusions to banks, expenditures under these programs are generally direct outlays of funds with no provision for repayment. As of September 30, 2014, the estimated lifetime cost for the housing programs was $37.4 billion. The centerpiece of Treasury’s MHA program is HAMP, which seeks to help eligible borrowers facing financial distress avoid foreclosure by reducing their monthly first-lien mortgage payments to more affordable levels. Treasury announced HAMP (which originally included what is now called HAMP Tier 1) on February 18, 2009. At that time, Treasury projected that the program would help up to 3 million to 4 million borrowers who were at risk of default and foreclosure. However, we noted then that reaching the projected number of borrowers might be difficult for several reasons. In an effort to reach more borrowers, Treasury expanded HAMP to include HAMP Tier 2, which servicers began implementing in June 2012. Treasury also provides incentive payments to services, investors, and borrowers for modifications under HAMP Tier 1 and HAMP Tier 2. Since the HAMP first lien modification program began in 2009 through September 2014, there have been 2,246,680 trial modifications and 1,416,705 permanent modifications. These modifications resulted in a median monthly mortgage payment reduction of $490 per month. As shown in figure 8, HAMP participation, as measured by trial and permanent modifications started each quarter, peaked in early 2010, generally declined in 2011, and then held relatively steady through the middle of 2013. However, beginning with the third quarter of 2013, the number of new HAMP trial modifications began to decline, falling to 27,000 in the second quarter of 2014, then increasing slightly, to 33,000 in the third quarter of 2014—the most recent for which data are available. During the same period, the number of new HAMP permanent modifications declined steadily, from 46,000 in the third quarter of 2013 to 29,000 in the third quarter of 2014. As we have reported, according to Treasury, the decline in HAMP modifications is a reflection of the shrinking pool of HAMP-eligible mortgages, as evidenced in the declining number of 60-day-plus delinquencies reported by the industry. Treasury has taken steps to increase HAMP participation, including extending the program application deadline and making other program changes. First, in June 2014, Treasury announced the third extension of the program to at least December 31, 2016. With this extension, Treasury has increased the period for eligible borrowers—including the unemployed and those facing an increase in interest rates—to apply for assistance by 4 years from the initial program deadline of December 31, 2012. However, as we have reported earlier, the pool of mortgages eligible for HAMP programs is declining. Second, in September 2014 Treasury, in conjunction with HUD and the Ad Council, launched a new series of public service advertisements (PSA) to raise awareness of the free government resources available through MHA to assist struggling homeowners in avoiding foreclosure. The campaign includes television, print, radio, outdoor (billboards and other signage), and digital PSAs. According to Treasury, since the campaign was initially launched in 2010, media outlets have donated about $137 million in airtime and physical and digital space, and more than 16,000 outdoor or transit ads have been placed nationwide. Treasury officials said that calls to the Homeowner’s HOPETM Hotline increased by 20 percent during the first week of the campaign. Treasury attributes the increase to the September 2014 campaign effort. Lastly, in late 2014, Treasury released two Supplemental Directives. The first, Supplemental Directive 14-04, was issued in October 2014 and stated that the interest rate on a HAMP Tier 2 modification would be lowered effective January 1, 2015, to the weekly Freddie Mac Primary Mortgage Market Survey Rate minus 50 basis points (down from zero basis points). Treasury is lowering the rate in an effort to increase the population that is potentially eligible for HAMP and provide greater payment reduction. In particular, Treasury believes the lowered rate will allow more HAMP Tier 1 borrowers, who might struggle with an interest rate step-up under Tier 1, to qualify for a HAMP Tier 2 modification. On November 30, 2014, Treasury issued Supplemental Directive 14-05, which made several changes to HAMP that, among other things, will extend the pay-for-performance borrower incentives by an additional year, to a sixth year for the modification, and increases the amount of the incentive payment for that additional year to $5,000, up from $1,000 for years 1 to 5. While previously Tier 2 modifications were not eligible for pay-for-performance incentive payments, the changes in Supplemental Directive 14-05 apply to both Tier 1 and Tier 2 modifications, as well as to FHA-HAMP and RD-HAMP modifications. Among the other programs designed to help borrowers, HAFA has assisted the largest number of borrowers—approximately 169,000— through September 2014. Under HAFA, 162,498 short sales and 6,975 deeds-in-lieu had taken place, as of September 2014 PRA had provided an estimated $14.8 billion in principal reduction to borrowers, through 163,951 permanent loan modifications, with $68,861 in median principal reduction. Through 2MP, servicers reported starting about 141,697 second-lien modifications, of which 38,480 fully extinguished the second lien as of September 2014. Nearly 67,708 trial modifications were started that received Treasury FHA-HAMP incentives as of June 2014, and the median monthly payment reduction for active permanent modifications was $232. However, as of June 2014, only 187 modifications had been made that qualified for Rural Development (RD)-HAMP incentives. For the RD-HAMP loans, the median monthly payment reduction for active permanent modifications was $260. As discussed earlier, Treasury extended HAMP and all MHA programs until at least December 31, 2016. However, Treasury officials told us that they might decide at a future date to wind down some programs under MHA at an earlier date or to extend MHA beyond 2016. They added that their decision would be based on market conditions, program volume, and other factors. As of September 30, 2014, six states and the District of Columbia had closed their Hardest Hit Fund application process in anticipation of full commitment of program funds. As of that date, participating states and the District of Columbia had committed a total of $3.4 billion of the $7.6 billion dedicated to the program, and assisted a total of 207,511 homeowners. However, as we have reported, progress in disbursing funds and meeting state-level targets for household participation varied across states. As we also reported, state officials told us that, with Treasury’s help, they had confronted challenges related to staffing and infrastructure, servicer participation, borrower outreach, and program implementation In terms of an exit strategy and end date for the Hardest Hit Fund, state housing finance agencies must commit funds by December 31, 2017, but can continue to spend committed funds after that date. According to Treasury officials, currently there are no plans to extend the deadline for committing Hardest Hit Fund monies beyond 2017. However, Treasury will continue to evaluate that deadline over time, taking into account changing market conditions in Hardest Hit Fund areas, program performance, and other factors. Finally, FHA refinanced 4,963 loans between September 2010 and September 2014 through the FHA Short Refinance program. As of September 30, 2014, Treasury would pay a portion of claims in the event Through September 2014, of a default for 3,015 of those loans.Treasury had paid one claim of approximately $48,000 and spent approximately $10 million in administrative costs. The scheduled end date for the FHA Short Refinance program was December 31, 2014. However, on November 14, 2014, FHA extended the program for an additional 2 years, with all loans required to close on or before December 31, 2016. Treasury officials are evaluating whether the extension through 2016 will require an extension of Treasury’s line of credit. We provided a draft of this report to Treasury for review and comment. In its written comments, reproduced in appendix II, Treasury generally concurred with our findings. Treasury stated that it will continue its efforts to wind down the remaining investment programs while protecting taxpayers’ interests and maximizing returns and continue to implement TARP-funded housing programs, primarily through mortgage modifications and other assistance programs. Treasury also provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees. This report will be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives in this report were to examine the condition and status of (1) nonhousing-related Troubled Asset Relief Programs (TARP) and (2) TARP-funded housing programs. To assess the condition and status of all the nonhousing-related programs initiated under TARP, we collected and analyzed data about program utilization and assets held, as applicable, focusing primarily on financial information that we had audited in the Office of Financial Stability’s (OFS) financial statements, as of September 30, 2014. In some instances we analyzed more recent, unaudited financial information. The financial information includes the types of assets held in the program, obligations that represent the highest amount obligated for a program (to provide historical information on total obligations), disbursements, and income. We also used OFS cost estimates for TARP that we audited as part of the financial statement audit. As part of the financial statement audit, we tested OFS’s internal controls over financial reporting. The financial information used in this report is sufficiently reliable to assess the condition and status of TARP programs based on the results of our audits of fiscal years 2009 through 2014 financial statements for TARP. Further, we reviewed the Department of the Treasury’s (Treasury) documentation such as press releases and reports on TARP programs and costs. Also, we interviewed OFS program officials and obtained information from them to determine the current status of each TARP program and to update what is known about exit considerations for TARP programs. In reporting on these programs and their exit considerations, we leveraged our previous TARP reports, as appropriate. In addition, we did the following: For the Capital Purchase Program, we used OFS’s reports to describe the status of the program, including which participants had begun repaying Treasury investments, the number of institutions that had exited the program, and the amount of dividends paid. In addition, we reviewed Treasury’s press releases on the program and interviewed Treasury officials. For the Community Development Capital Initiative, we interviewed program officials to determine what exit concerns Treasury has for the program. To update the status of the Automotive Industry Financing Program and Treasury’s plans for managing its investment in the companies, we reviewed information on Treasury’s plans for overseeing its financial interests in Ally Financial, including Treasury reports. We also interviewed officials from Treasury. For the Term Asset-Backed Securities Loan Facility, we interviewed OFS officials about their role in the program as it continues to unwind. To update the status of the Public-Private Investment Program, we analyzed program quarterly reports, term sheets, and other documentation related to the public-private investment funds. We also interviewed OFS staff responsible for the program to determine the status of the program while it remains in active investment status. To assess the status of TARP-funded housing programs, we reviewed Treasury reports, guidance, and documentation and interviewed Treasury officials, in addition to leveraging our recent work.determine the status of Treasury’s TARP-funded housing programs, we obtained and reviewed Treasury’s published reports on the programs, as well as guidelines and related updates issued by Treasury for each of the programs. In addition, we obtained information from and interviewed Treasury officials about the status of the TARP-funded housing programs. We conducted this performance audit from September 2014 to January 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. A. Nicole Clowers, (202) 512-8678 or [email protected]. In addition to the contacts named above, Marcia Carlsen, Lynda E. Downing, Harry Medina, and Karen Tremba (lead assistant directors); Kristeen McLain (Analyst-in-Charge), Bethany M. Benitez, Emily R. Chalmers, William R. Chatlos, Rachel DeMarcus, Alex Fedell, John A. Karikari, Dragan Matic, Marc Molino, and Jena Y. Sinkfield have made significant contributions to this report. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2014 and 2013 Financial Statements. GAO-15-132R. Washington, D.C.: November 7, 2014. Troubled Asset Relief Program: Treasury Could Better Analyze Data to Improve Oversight of Servicers’ Practices. GAO-15-5. Washington, D.C.: October 6, 2014. Troubled Asset Relief Program: Government’s Exposure to Ally Financial Lessens as Treasury’s Ownership Share Declines. GAO-14-698. Washington, D.C.: August 5, 2014. Community Development Capital Initiative: Status of the Program and Financial Health of Remaining Participants. GAO-14-579. Washington, D.C.: June 6, 2014. Troubled Asset Relief Program: Status of the Wind Down of the Capital Purchase Program. GAO-14-388. Washington, D.C.: April 7, 2014. Troubled Asset Relief Program: More Efforts Needed on Fair Lending Controls and Access for Non-English Speakers in Housing Programs. GAO-14-117. Washington, D.C.: February 6, 2014. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2013 and 2012 Financial Statements. GAO-14-172R. Washington, D.C.: December 12, 2013. Troubled Asset Relief Program: Status of Treasury’s Investments in General Motors and Ally Financial. GAO-14-6. Washington, D.C.: October 29, 2013. Troubled Asset Relief Program: GAO’s Oversight of the Troubled Asset Relief Program Activities. GAO-13-840R. Washington, D.C.: September 6, 2013. Troubled Asset Relief Program: Treasury’s Use of Auctions to Exit the Capital Purchase Program. GAO-13-630. Washington, D.C.: July 8, 2013. Capital Purchase Program: Status of the Program and Financial Health of Remaining Participants. GAO-13-458. Washington, D.C.: May 7, 2013. Troubled Asset Relief Program: Status of GAO Recommendations to Treasury. GAO-13-324R. Washington, D.C.: March 8, 2013. Troubled Asset Relief Program: Treasury Sees Some Returns as It Exits Programs and Continues to Fund Mortgage Programs. GAO-13-192. Washington, D.C.: January 7, 2012. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2012 and 2011 Financial Statements. GAO-13-126R. Washington, D.C.: November 9, 2012. Treasury Continues to Implement Its Oversight System for Addressing TARP Conflicts of Interest. GAO-12-984R. Washington, D.C.: September 18, 2012. Troubled Asset Relief Program: Further Actions Needed to Enhance Assessments and Transparency of Housing Programs. GAO-12-783. Washington, D.C.: July 19, 2012. Troubled Asset Relief Program: Government’s Exposure to AIG Lessens as Equity Investments Are Sold. GAO-12-574. Washington, D.C.: May 7, 2012. Capital Purchase Program: Revenues Have Exceeded Investments, but Concerns about Outstanding Investments Remain. GAO-12-301. Washington, D.C.: March 8, 2012. Management Report: Improvements Are Needed in Internal Control over Financial Reporting for the Troubled Asset Relief Program. GAO-12-415R. Washington, D.C.: February 13, 2012. Troubled Asset Relief Program: As Treasury Continues to Exit Programs, Opportunities to Enhance Communication on Costs Exist. GAO-12-229. Washington, D.C.: January 9, 2012. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2011 and 2010 Financial Statements. GAO-12-169. Washington, D.C.: November 10, 2011. Troubled Asset Relief Program: Status of GAO Recommendations to Treasury. GAO-11-906R. Washington, D.C.: September 16, 2011. Troubled Asset Relief Program: The Government’s Exposure to AIG Following the Company’s Recapitalization. GAO-11-716. Washington, D.C.: July 28, 2011. Troubled Asset Relief Program: Results of Housing Counselors Survey on Borrowers’ Experiences with the Home Affordable Modification Program. GAO-11-367R. Washington, D.C.: May 26, 2011. Troubled Asset Relief Program: Survey of Housing Counselors about the Home Affordable Modification Program, an E-supplement to GAO-11-367R. GAO-11-368SP. Washington, D.C.: May 26, 2011. TARP: Treasury’s Exit from GM and Chrysler Highlights Competing Goals, and Results of Support to Auto Communities Are Unclear. GAO-11-471. Washington, D.C.: May 10, 2011. Management Report: Improvements Are Needed in Internal Control Over Financial Reporting for the Troubled Asset Relief Program. GAO-11-434R. Washington, D.C.: April 18, 2011. Troubled Asset Relief Program: Status of Programs and Implementation of GAO Recommendations. GAO-11-476T. Washington, D.C.: March 17, 2011. Troubled Asset Relief Program: Treasury Continues to Face Implementation Challenges and Data Weaknesses in Its Making Home Affordable Program. GAO-11-288. Washington, D.C.: March 17, 2011. Troubled Asset Relief Program: Actions Needed by Treasury to Address Challenges in Implementing Making Home Affordable Programs. GAO-11-338T. Washington, D.C.: March 2, 2011. Troubled Asset Relief Program: Third Quarter 2010 Update of Government Assistance Provided to AIG and Description of Recent Execution of Recapitalization Plan. GAO-11-46. Washington, D.C.: January 20, 2011. Troubled Asset Relief Program: Status of Programs and Implementation of GAO Recommendations. GAO-11-74. Washington, D.C.: January 12, 2011. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2010 and 2009 Financial Statements. GAO-11-174. Washington, D.C.: November 15, 2010. Troubled Asset Relief Program: Opportunities Exist to Apply Lessons Learned from the Capital Purchase Program to Similarly Designed Programs and to Improve the Repayment Process. GAO-11-47. Washington, D.C.: October 4, 2010. Troubled Asset Relief Program: Bank Stress Test Offers Lessons as Regulators Take Further Actions to Strengthen Supervisory Oversight. GAO-10-861. Washington, D.C.: September 29, 2010. Financial Assistance: Ongoing Challenges and Guiding Principles Related to Government Assistance for Private Sector Companies. GAO-10-719. Washington, D.C.: August 3, 2010. Troubled Asset Relief Program: Continued Attention Needed to Ensure the Transparency and Accountability of Ongoing Programs. GAO-10-933T. Washington, D.C.: July 21, 2010. Management Report: Improvements are Needed in Internal Control Over Financial Reporting for the Troubled Asset Relief Program. GAO-10-743R. Washington, D.C.: June 30, 2010. Troubled Asset Relief Program: Treasury’s Framework for Deciding to Extend TARP Was Sufficient, but Could be Strengthened for Future Decisions. GAO-10-531. Washington, D.C.: June 30, 2010. Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs. GAO-10-634. Washington, D.C.: June 24, 2010. Debt Management: Treasury Was Able to Fund Economic Stabilization and Recovery Expenditures in a Short Period of Time, but Debt Management Challenges Remain. GAO-10-498. Washington, D.C.: May 18, 2010. Troubled Asset Relief Program: Update of Government Assistance Provided to AIG. GAO-10-475. Washington, D.C.: April 27, 2010. Troubled Asset Relief Program: Automaker Pension Funding and Multiple Federal Roles Pose Challenges for the Future. GAO-10-492. Washington, D.C.: April 6, 2010. Troubled Asset Relief Program: Home Affordable Modification Program Continues to Face Implementation Challenges. GAO-10-556T. Washington, D.C.: March 25, 2010. Troubled Asset Relief Program: Treasury Needs to Strengthen Its Decision-Making Process on the Term Asset-Backed Securities Loan Facility. GAO-10-25. Washington, D.C.: February 5, 2010. Troubled Asset Relief Program: The U.S. Government Role as Shareholder in AIG, Citigroup, Chrysler, and General Motors and Preliminary Views on its Investment Management Activities. GAO-10-325T. Washington, D.C.: December 16, 2009. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial Statements. GAO-10-301. Washington, D.C.: December 9, 2009. Troubled Asset Relief Program: Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM. GAO-10-151. Washington, D.C.: November 2, 2009. Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges. GAO-10-16. Washington, D.C.: October 8, 2009. Troubled Asset Relief Program: Capital Purchase Program Transactions for October 28, 2008, through September 25, 2009, and Information on Financial Agency Agreements, Contracts, Blanket Purchase Agreements, and Interagency Agreements Awarded as of September 18, 2009. GAO-10-24SP. Washington, D.C.: October 8, 2009. Debt Management: Treasury Inflation Protected Securities Should Play a Heightened Role in Addressing Debt Management Challenges. GAO-09-932. Washington, D.C.: September 29, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-1048T. Washington, D.C.: September 24, 2009. Troubled Asset Relief Program: Status of Government Assistance Provided to AIG. GAO-09-975. Washington, D.C.: September 21, 2009. Troubled Asset Relief Program: Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable. GAO-09-837. Washington, D.C.: July 23, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-920T. Washington, D.C.: July 22, 2009. Troubled Asset Relief Program: Status of Participants’ Dividend Payments and Repurchases of Preferred Stock and Warrants. GAO-09-889T. Washington, D.C.: July 9, 2009. Troubled Asset Relief Program: June 2009 Status of Efforts to Address Transparency and Accountability Issues. GAO-09-658. Washington, D.C.: June 17, 2009. Troubled Asset Relief Program: Capital Purchase Program Transactions for October 28, 2008, through May 29, 2009, and Information on Financial Agency Agreements, Contracts, Blanket Purchase Agreements, and Interagency Agreements Awarded as of June 1, 2009. GAO-09- 707SP. Washington, D.C.: June 17, 2009. Auto Industry: Summary of Government Efforts and Automakers’ Restructuring to Date. GAO-09-553. Washington, D.C.: April 23, 2009. Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues. GAO-09-504. Washington, D.C.: March 31, 2009. Troubled Asset Relief Program: Capital Purchase Program Transactions for the Period October 28, 2008 through March 20, 2009 and Information on Financial Agency Agreements, Contracts, and Blanket Purchase Agreements Awarded as of March 13, 2009. GAO-09-522SP. Washington, D.C.: March 31, 2009. Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues. GAO-09-539T. Washington, D.C.: March 31, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-484T. Washington, D.C.: March 19, 2009. Federal Financial Assistance: Preliminary Observations on Assistance Provided to AIG. GAO-09-490T. Washington, D.C.: March 18, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-474T. Washington, D.C.: March 11, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-417T. Washington, D.C.: February 24, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-359T. Washington, D.C.: February 5, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-296. Washington, D.C.: January 30, 2009. Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency. GAO-09-266T. Washington, D.C.: December 10, 2008. Auto Industry: A Framework for Considering Federal Financial Assistance. GAO-09-247T. Washington, D.C.: December 5, 2008. Auto Industry: A Framework for Considering Federal Financial Assistance. GAO-09-242T. Washington, D.C.: December 4, 2008. Troubled Asset Relief Program: Status of Efforts to Address Defaults and Foreclosures on Home Mortgages. GAO-09-231T. Washington, D.C.: December 4, 2008. Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency. GAO-09-161. Washington, D.C.: December 2, 2008.

The Emergency Economic Stabilization Act of 2008 (EESA) authorized Treasury to create TARP, designed to restore liquidity and stability to the financial system and to preserve homeownership by assisting borrowers struggling to make their mortgage payments. Congress reduced the initial authorized amount of $700 billion to $475 billion as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. EESA also required that GAO report every 60 days on TARP activities in the financial and mortgage sectors. This report provides an update on the condition of all TARP programs—nonhousing and housing—as of September 30, 2014. To conduct this work, GAO analyzed audited financial data for various TARP programs; reviewed documentation such as press releases, and agency reports on TARP programs; and interviewed Treasury officials. GAO provided a draft of this report to Treasury. Treasury generally concurred with GAO's findings and provided technical comments, which GAO has incorporated, as appropriate. GAO makes no recommendations in this report. The Department of the Treasury (Treasury) continues to wind down Troubled Asset Relief Program (TARP) nonhousing programs that were designed to support financial and automotive markets (see figure). As of September 30, 2014, Treasury had exited four of the nine nonhousing programs that were once active, and was managing assets totaling $2.9 billion under those remaining. Some programs have yielded returns that exceed the original investment. For example, as of September 30, 2014, repayments and income from participants in the Capital Purchase Program, which provided capital to over 700 financial institutions, had exceeded original investments. In contrast, as of the same date Treasury had recouped 86 percent of its expenditures and incurred an estimated lifetime cost of $12.2 billion for the Automotive Industry Finance Program, which invested in major domestic automakers to prevent a significant industry disruption. Treasury's decision to fully exit a program depends on various factors, including the participating institutions' health and market conditions. TARP-funded housing programs, which focus on preventing avoidable foreclosures, are ongoing. As of September 30, 2014, Treasury had disbursed $13.7 billion (36 percent) of the $38.5 billion in TARP housing funds (see figure). The number of new Home Affordable Modification Program (HAMP) permanent modifications added on a monthly basis rose in early 2013 but fell in 2014 to the lowest level since the program's inception. According to Treasury, this decline is attributable in part to the shrinking pool of eligible mortgages, as evidenced in the declining number of 60-day-plus delinquencies reported by the industry. Treasury has taken steps to help more borrowers, including by extending the deadline for program applications for a third time until at least 2016. Also, Treasury launched a new series of public service advertisements that were distributed through a donated media campaign.

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Because of the abundance of coal and its historically low cost, coal-fueled electricity generating units provide a large share of the electricity produced in the United States. In 2012, according to Energy Information Administration (EIA) data, there were 1,309 coal-fueled generating units in the United States, with a total of 309,680 megawatts (MW) of net summer generating capacity—about 29 percent of the total net summer generating capacity in the United States.produced by using other fossil fuels, particularly natural gas and oil; nuclear power; and renewable sources, including hydropower, wind, geothermal, and solar. Historically, coal-fueled generating units have provided about half of the electricity produced in the United States—an amount that has declined in recent years, falling to 37 percent in 2012. In addition to coal, electricity is To address concerns over air pollution, water resources, and solid waste, several environmental laws, including the Clean Air Act, Clean Water Act, and Resource Conservation and Recovery Act, were enacted. As required or authorized by these laws, EPA recently proposed or finalized four key regulations that will affect coal-fueled units. As outlined in table 1, these regulations are at different stages of development and have different compliance deadlines. These four regulations have potentially significant implications for public health and the environment. In particular, EPA projected that, among other benefits, CSAPR would reduce SO emissions by over half in covered states, reducing asthma and related human health impacts. In addition, EPA projected that MATS would reduce mercury emissions by 75 percent from coal-fueled electricity generating units, reducing the impacts of mercury on adults and children. In addition to these four regulations, on June 2, 2014, EPA proposed new regulations to reduce carbon dioxide emissions from existing fossil-fueled generating units that, if finalized, will impact the electricity industry, including coal-fueled generating units, aiming for overall reductions equivalent to 30 percent from 2005 emissions levels by 2030. The proposed regulations include state-specific goals for carbon dioxide emissions and guidelines for states to follow in developing, submitting, and implementing plans to achieve these goals, which would be due in June 2016, although, under some circumstances, a state may submit an initial plan by June 2016 and a completed plan up to 2 years later. In addition to DOE, FERC, and EPA, other key stakeholders have certain responsibilities for overseeing actions power companies take in response to the regulations and have a role in mitigating some potential adverse implications. These other stakeholders include state environmental and electricity regulators and system planners that coordinate planning decisions regarding transmission and generation infrastructure to maintain the reliable supply of electricity to consumers. System planners and operators attempt to avoid reliability problems through advance planning of transmission and, in some cases, generation resources, and coordinating or determining operational decisions such as which generating resources are operated to meet demand throughout the day. The role of a system planner can be carried out by individual power companies or RTOs. System planners’ responsibilities include analyzing expected future changes in generation and transmission assets, such as the retirement of a generating unit; customer demand; and emerging reliability issues. For example, once a power company notifies the system planner that it is considering retiring a generating unit, the system planner generally studies the electricity system to assess whether the retirement would cause reliability challenges and identify long- or short-term solutions to mitigate any impacts. The solutions could include building new generating units, reducing demand in specific areas, building new transmission lines or adding other equipment. DOE, EPA, and FERC have taken initial steps to implement the recommendation we made in our July 2012 report that these agencies develop and document a formal, joint process to monitor industry progress in responding to the four EPA regulations. Since that time, DOE, EPA, and FERC have taken initial steps collectively and individually to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. However, recent and pending actions on the four existing regulations, as well as EPA’s recently proposed regulations to reduce carbon dioxide emissions from existing generating units may require additional monitoring efforts, according to DOE, EPA, and FERC officials. DOE, EPA, and FERC have taken initial steps to implement the recommendation we made in our July 2012 report. In that report we found the agencies had undertaken individual monitoring efforts of varied scale and scope and engaged in informal coordination, but lacked a formal documented process for routinely monitoring industry progress toward compliance with the regulations. As such, we recommended that these agencies develop and document a formal, joint process to monitor industry progress in responding to EPA regulations. We concluded that such a process was needed until at least 2017 to monitor the complexity of implementation and extent of potential effects on price and reliability. Since that time, DOE, EPA, and FERC have taken initial steps collectively to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. Currently, these monitoring efforts are primarily focused on industry implementation in regions with a large amount of capacity that must comply with the MATS regulation—the only one of the four regulations that has taken effect. According to EPA officials, DOE, EPA, and FERC officials have met three times since our July 2012 report to coordinate the efforts under way at each agency to monitor industry’s progress implementing the MATS regulation and other related issues, including EPA’s development of recently proposed regulations to reduce carbon dioxide emissions from existing generating units. In addition, in May 2013, staff from DOE, EPA, and FERC jointly developed a coordination memorandum that was intended to identify how the agencies would work together to address the potential effects of EPA’s regulations on reliability. According to one EPA official, the memorandum was intended to be an evolving document that the agencies would revisit as appropriate, for example, as additional EPA regulations are finalized. These four RTOs include PJM Interconnection, which serves all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia; Midcontinent ISO, which serves parts of Arkansas, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, North Dakota, South Dakota, Texas, and Wisconsin, as well as the Canadian province of Manitoba; the Southwest Power Pool, which serves parts of Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, and Texas; and the Electric Reliability Council of Texas, which serves parts of Texas. control equipment in use and retrofit plans, and other information such as reliability assessments under way in the region. As part of these meetings, officials told us that the RTOs provided information of varying levels of detail to the agencies, including information on retirement notifications and associated impacts as determined by the reliability studies completed by the RTOs; the status and findings of reliability assessments they conduct; data on the generating capacity of units with planned, announced, or completed retirements and retrofits; and data on planned outages. RTO officials told us they each gathered information about the plans for generating units in the areas they oversee. Officials from several RTOs told us that they gathered this information by surveying owners of generating units to identify, among other things, information on decisions related to retiring or retrofitting specific generating units. According to EPA officials, the agencies’ monitoring and technical assistance efforts are primarily focused on implementation of the MATS requirements because it has taken effect and includes requirements that must be achieved within well-defined time frames. The MATS regulation was finalized in February 2012 and calls for a 3-year compliance period for existing generating units with the deadline of April 16, 2015, but permitting authorities may provide an extra year for certain generating units that request additional time to comply. Agency officials and stakeholders told us that state agencies are generally providing the 1- year extension for generating units—providing these units a total of 4 years to comply. In addition, according to the National Association of Clean Air Agencies (NACAA), as of May 2014, all but 9 of over 100 requests for extensions were granted by the state permitting agencies. In addition to the MATS extension, EPA also provided a mechanism to allow certain units—generating units that are needed to address specific and documented reliability concerns—to request an additional year to come into compliance through the use of Clean Air Act administrative orders—which, if granted, would provide a total of 5 years to comply. According to EPA officials, compliance with the MATS requirements has been less challenging for industry than anticipated, and operators have generally been able to undertake retrofits as part of scheduled maintenance outages; however, certain retrofits, such as the installation of a fabric filter will require additional or longer outages to be completed. According to EPA officials, whether a plant will need to schedule outages for retrofits will depend on a number of factors including the type of controls required for compliance. EPA officials told us they anticipate few administrative orders to be requested. However, if EPA receives a request for an administrative order, EPA has stated in its policy that it will rely on the advice and counsel of reliability experts, including FERC, to identify and analyze reliability risks, but EPA officials will make the final decision on these requests. In May 2012, FERC issued a policy statement detailing how it intends to provide advice to EPA on such requests. In addition to participating in the EPA-facilitated meetings with industry and reviewing information provided from the RTOs through those meetings, DOE, FERC, and EPA have taken other steps to individually monitor or support industry progress implementing EPA regulations. DOE. DOE is offering technical assistance to state public utility commissioners, generating unit owners and operators, and utilities on implementing the new and pending EPA regulations affecting the electric utility industry. Specifically, according to DOE officials and documents, DOE may provide technical information on cost and performance of the various retrofit control technologies; technical information on generation or transmission alternatives for any replacement power needed for retiring generating units; and assistance to public utility commissions regarding any regulatory evaluations or approvals they may have to make on utility compliance strategies. According to agency officials, while DOE offers technical assistance on implementing new and pending EPA rules, DOE has received limited requests for such assistance. EPA. According to EPA officials, EPA has conducted outreach to ensure state agencies understand their ability to provide MATS extensions and EPA officials also review information from NACAA on the status of MATS extension requests. In addition, EPA has updated its power sector modeling tool—a model EPA uses to analyze the impact of policies, regulations, and legislative proposals on the power sector—to reflect MATS requirements along with changes in other market conditions. FERC. FERC officials told us that they monitor information from several sources including the NERC reliability assessments,capacity additions, and information from NACAA on the status of MATS extension requests. In addition, FERC obtained industry information on EIA data on reliability challenges through a technical conference that it convened to obtain information on the effect of recent cold weather events on the RTOs. Recent and pending actions on the four existing regulations, as well as EPA’s recently proposed regulations to reduce carbon dioxide emissions from existing generating units, may require additional agency effort to monitor industry’s progress in responding to the regulations and any potential impacts on reliability. DOE, EPA, and FERC officials told us that, in light of these changes, their coordination efforts may need to be revisited. Specifically, one EPA official noted that the agencies may need to reexamine their coordination efforts, as appropriate, in light of changing conditions, including newly proposed EPA regulations. In addition, according to FERC officials, since not all the regulations have been finalized, conditions will continue to change, making continued monitoring of potential reliability or resource adequacy challenges important. Furthermore, in April 2014, a FERC Commissioner testified before Congress about concerns and uncertainty related to potential reliability and price impacts associated with environmental regulations.Specifically, the Commissioner expressed concerns about the reliability of data on which generating units are retiring and the resources to replace those retiring generating units and called for a more formal review process including FERC, EPA, and others to analyze the specific details of retiring units, as well as the new units and new transmission that will be needed to manage the transition and ensure reliability of the nation’s electricity sector. RTO officials and other industry stakeholders also told us that recent and pending actions on regulations could have impacts on the industry’s ability to reliably deliver electricity. Officials from several RTOs told us that, while widespread reliability concerns are not anticipated, some regions may face reliability challenges including challenges associated with increasing reliance on natural gas. Officials from several RTOs said that their efforts to monitor reliability impacts will include evaluating the recently proposed regulations to reduce carbon dioxide emissions, which may present challenges in the future. In addition, officials from one RTO told us that compliance with new and proposed EPA regulations and an evolving generation portfolio will have significant effects on the industry’s ability to reliably deliver electricity. Officials from this RTO reported that their region is forecasting shortfalls in its reserve margin—additional capacity that exceeds the maximum expected demand to provide for potential backup—in some areas. In addition, these RTO officials and industry stakeholders noted that retirement of coal-fueled generating units may lead to increasing reliance on natural gas, as these generating units are replaced with natural gas fueled generating units, which will require construction of new pipeline and storage infrastructure. As a result, according to officials from one RTO, their region has increased coordination with the natural gas industry through a stakeholder forum and a series of gas infrastructure studies. These officials said that, while relying on natural gas to generate electricity has not historically negatively affected reliability, greater reliance on natural gas may require more consideration of potential fuel-related future reliability challenges. RTO officials and other industry stakeholders also told us recent and pending actions on regulations could have impacts on electricity prices. For example, industry stakeholders told us that the retirements that are occurring or planned are significant and could lead to increased electricity rates in some regions. In addition, as we reported in July 2012, the studies we reviewed estimated that increases in electricity prices could vary across the country, with one study projecting a range of increases from 0.1 percent in the Northwest to an increase of 13.5 percent in parts of the South more dependent on electricity generated from coal. Officials from several RTOs told us that, while they analyze the potential reliability impacts of specific generating units that power companies are considering retiring, they do not analyze the potential market impacts of these retirements on electricity prices or other market factors. In addition, several RTO officials told us they cannot estimate the impacts of these potential retirements on the markets due to the number of factors involved in determining market prices and affecting markets. Based on our discussions with agency officials, FERC, DOE, and EPA are not evaluating the potential impacts of planned retirements or retrofits on electricity prices as part of their monitoring efforts. However, EPA officials told us it uses its power sector modeling tool to analyze the potential impact of new regulations on economic factors including electricity prices and has used the tool to examine the potential impact of the new carbon rule that reflected publicly announced retirements and retrofits at the time of its analysis. According to EPA’s analysis for the recently proposed regulations to reduce carbon dioxide emissions from existing generating units, it projected an increase in the national average retail electricity price between 5.9% and 6.5% in 2020 compared with its base case estimate. According to our analysis, power companies plan to retire a greater percentage of coal-fueled net summer generating capacity and retrofit less capacity with environmental controls than the estimates we reported in July 2012. Specifically, our analysis indicates that power companies retired or plan to retire about 13 percent of coal-fueled net summer generating capacity (42,192 MW) from 2012 through 2025, which exceeds the estimates of 2 to 12 percent of capacity we reported in 2012. In addition, power companies have planned or completed some type of retrofit on about 70,000 MW of net summer generating capacity to reduce SO, NO, or particulate matter from 2012 through 2025, which is less than estimates we reported in 2012. In addition to our analysis of publicly announced retirements and retrofits, RTO officials told us that power companies may take additional steps and provided information on generating units that owners may take steps to retire or retrofit; specifically, about 7,000 MW of additional capacity from 46 generating units may be retired from 2012 through 2025, beyond what we identified in our analysis of SNL data. According to our analysis of SNL data, planned retirements of coal-fueled generating units appear to have increased and are above the high end of the estimates we reported in July 2012. Specifically, power companies retired or plan to retire about 13 percent of coal-fueled net summer generating capacity (42,192 MW from 238 units) from 2012 through 2025. When we reported in July 2012, projections suggested that 2 to 12 percent of coal-fueled capacity may be retired. Based on our analysis of SNL data, power companies retired 100 coal-fueled units from January 2012 to May 2014 with a total of 14,887 MW net summer generating capacity. In addition, based on our analysis of SNL data, power companies have reported plans to retire an additional 138 coal- fueled units with a total of 27,306 MW of net summer generating capacity from June 2014 through 2025. Another recent review also identified higher projected retirements of coal-fueled capacity than estimates we reported in July 2012. Specifically, in April 2014, EIA projected that retirements from 2012 through 2020 could reach approximately 50,000 MW or about 16 percent of net summer generating capacity available at the end of 2012. Consistent with the reasons we had reported for retirements in 2012, some stakeholders we interviewed said that some of these projected retirements may have occurred without the environmental regulations. Specifically, these stakeholders noted that several industry trends may be contributing to the retirement of coal-fueled generating units, including relatively low natural gas prices, increasing prices for coal, and low expected growth in demand for electricity. In addition, in June 2012, we reported that operators of some coal-fueled generating units had entered into agreements with EPA to retire or retrofit units to settle EPA enforcement actions. However, we also reported in July 2012 that, according to some stakeholders, the new environmental regulations may accelerate retirements because power companies may not want to invest in retrofitting units with environmental controls for those units they expect to retire soon for other reasons. About three-quarters of the retirements we identified in our analysis of SNL data are expected to occur by the end of 2015, corresponding to the initial April 2015 MATS compliance deadline (see fig. 1). This level of retirements is significantly more retirements than have occurred in the past; for example, according to our analysis, between 2000 and 2011, 150 coal-fueled units with a total net summer generating capacity of 13,786 MW have been retired. According to our analysis of SNL data, the units that power companies have retired or plan to retire are generally older, smaller, and more polluting, and this is generally consistent with what we reported in October 2012. In addition, we found that many of the units that companies have retired or plan to retire are those that are not used extensively and are geographically concentrated, with some exceptions. Specifically, we found the following: Older. Generating units that power companies have retired or plan to retire are generally older. The fleet of operating coal-fueled units was built over many decades, with most of the capacity currently in service built in the 1970s and 1980s. In particular, from 2012 through 2025, power companies retired or plan to retire about 80 percent of net summer generating capacity from units that were placed in service prior to 1970 (33,419 MW from 213 of the 238 units). However, SNL data indicate that power companies retired or plan to retire some newer generating units, including one generating unit placed into service in 2008. Smaller. Generating units that power companies have retired or plan to retire are generally smaller. Smaller generating units are generally less fuel efficient than larger units and can be more expensive to retrofit, maintain, and operate on a per-MW basis. In particular, smaller units—those less that 300 MW—comprise about 63 percent of the net summer generating capacity that power companies retired or plan to retire from 2012 through 2025 (26,659 MW from 208 of the 238 units). However, some larger generating units are also planned for retirement. In particular, according to our analysis, power companies retired 4 generating units with a net summer generating capacity of over 300 MW from 1990 to 2012, and they retired or plan to retire about 30 such generating units from 2012 through 2025. More polluting. Generating units that power companies retired or plan to retire over the next 3 years emit air pollutants such as SO at generally higher rates than the remaining fleet. According to our analysis, units that were retired or are planned for retirement from 2014 through 2017 emitted on average almost three times as much SO per unit of fuel used at the generating unit in 2013 as units that are not planned for retirement. Similarly, units that were retired or are planned for retirement from 2014 through 2017 emitted on average about 41 percent more NO per unit of fuel used at the generating unit in 2013 than units not planned for retirement. Not used extensively. Most generating units that power companies have retired or plan to retire have not been extensively used in recent years, but other units were used more often. Specifically, according to our analysis, from 2012 through 2025, power companies retired or plan to retire units that comprise about 70 percent of the net summer generating capacity (30,000 MW from 186 of the 238 units) that operated the equivalent of less than half of the hours they were available over the past few years. However, data also indicate that about 13 of the 238 units that companies retired or plan to retire— which represent about 4,200 MW of net summer generating capacity—operated the equivalent of 70 percent or more of the hours they were available over the past few years. Geographically concentrated. Generating units that power companies have retired or plan to retire are concentrated in certain states (see fig. 2). Specifically, about 38 percent of the net summer generating capacity that power companies retired or plan to retire from 2012 through 2025 is located in four states—Ohio (14 percent), Pennsylvania (11 percent), Kentucky (7 percent), and West Virginia (6 percent). In particular, figure 2 shows how completed or planned retirements from 2012 through 2025 are distributed nationwide and how these are concentrated in certain areas. According to our analysis of SNL data, completed or planned retrofits of coal-fueled generating units include less capacity than estimates we reported in July 2012. These retrofits include the use of a wide range of the technologies we reported at that time. As noted in our July 2012 report, operators of generating units were expected to rely on the combined installation of several technologies to comply with the regulations. These technologies include: (1) fabric filters or electrostatic precipitators to control particulate matter; (2) flue gas desulfurization units—also known as scrubbers—or dry sorbent injection units to control SO and acid gas emissions; (3) selective catalytic reduction or selective noncatalytic reduction units to control NO; and (4) activated carbon injection units to reduce mercury emissions. Appendix I includes a description of these controls, how they operate, and their potential capacity to remove pollutants. that power companies have either installed or expect to install a scrubber—generally intended to reduce SO—on about 34,000 MW of net summer generating capacity from 2012 through 2025, an effort that we reported in July 2012 has typically been costly and can take some time to complete. In addition, about 20,000 MW have completed or planned to complete a retrofit to reduce particulates, including about 17,000 MW with completed or planned installations of fabric filters known as “baghouses.” By comparison, in July 2012, we reported that several studies forecasted the steps generating unit owners would take to retrofit units. In particular, EPA estimated that, in response to MATS, companies would retrofit 102,000 MW of generating capacity with fabric filters and 83,000 MW with new scrubbers or scrubber upgrades. In addition, a study by NERC, which collectively examined early versions of all four regulations in 2011, estimated that 576 units that account for about 234,371 MW of capacity would be retrofitted by the end of 2015. We identified two key characteristics of the units that power companies have retrofitted or plan to retrofit as follows: Larger. Most of the net summer generating capacity that have completed or plan to complete a retrofit—about 68 percent—is at larger units with capacity greater than 500 MW. Geographically concentrated. A large share of the net summer generating capacity that has completed or plan to complete a retrofit—about 36 percent—is composed of generating units located in four states: Illinois, Indiana, Kansas, and Texas. In addition, some states have completed or plan to complete more retrofits than others. In particular, seven states (Kansas, Louisiana, New Hampshire, New Mexico, Oregon, South Dakota, and Washington) have completed or plan to retrofit more than half of the net summer generating capacity located in that state. Based on information provided by RTOs, power companies may be considering retiring or retrofitting some additional generating units. In particular, RTO officials provided information on additional generating capacity that power companies have either announced plans to retire or retrofit, or are in the process of considering for a retirement or retrofit. In particular, RTOs identified about 46 coal-fueled generating units that account for about 7,000 MW of additional generating capacity that may be retired from 2012 through 2025, beyond what we identified in our analysis of SNL data. In addition, RTOs identified a total of 260 units that account for about 108,000 MW of generating capacity that have completed or may undertake a retrofit from 2012 through 2025, which may include the capacity identified in our analysis. The electricity sector is in the midst of a significant transition as power companies face decisions on the future of coal-fueled electricity generating units in light of new regulations and changes in the market, such as recent low prices for natural gas, and even though compliance deadlines for three of the regulations remain uncertain, power companies have already identified retirements beyond the range of estimates we reported in 2012. Reliable electricity remains critically important to U.S. homes and businesses and is itself reliant upon the availability of sufficient generating capacity. DOE, EPA, and FERC have taken initial steps to implement our recommendation to establish a joint process to monitor industry’s progress in responding to the four EPA regulations and other factors. However, stakeholders, including a FERC Commissioner, continue to express concerns about reliability and electricity prices. Furthermore, proposed regulations focused on reducing emissions of carbon dioxide from the electricity sector, when finalized, may pose additional challenges for coal-fueled generating units. The initial coordination efforts now under way across the three agencies are an important tool for understanding and monitoring the potential effects of EPA regulations and other factors on the electricity sector. However, consistent with our recommendation in 2012, careful monitoring and coordination by the federal agencies incorporating the views of other stakeholders such as RTOs will be even more important over the next several years as key regulations are finalized and implemented. We are not making new recommendations in this report. We provided a draft of this report to DOE, EPA, and FERC, for review and comment. In written comments from DOE, EPA, and FERC, reproduced in appendixes II, III, and IV respectively, the three agencies generally concurred with our analysis. The agencies stated that they will continue to monitor the progress of industry implementation of the regulations and coordinate with one another to address potential reliability challenges. Specifically, DOE stated that these coordination efforts have primarily focused on MATS and may be revisited as they work with industry to monitor compliance with other EPA regulations. EPA stated that it will monitor compliance with all of the rules, as appropriate, to ensure that reliability is not put at risk. FERC stated that it is working with industry to explore reliability issues stemming from new and pending environmental rules for the power sector, and that it will continue to monitor industry’s progress implementing these rules and will coordinate with DOE, EPA, and industry. We continue to believe it is important that these agencies jointly monitor industry’s progress in responding to the EPA regulations and fully document these steps as we recommended in 2012. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, the Administrator of the EPA, the Chairman of FERC, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix V. How it works An induced electrical charge removes particles from flue gas. Fabric filter (commonly referred to as a “baghouse”) Flue gas passes through tightly woven fabric filter “bags” that filter out the particulates. Flue gas desulfurization unit (commonly referred to as a “scrubber”) Wet flue gas desulfurization units inject a liquid sorbent slurry, such as a limestone slurry, into the flue gas to form a wet solid that can be disposed of or sold. Dry flue gas desulfurization units inject a dry sorbent, such as lime, into the flue gas to form a solid byproduct that is collected. Coal combustion conditions are adjusted so less NO is formed. For SCR, ammonia is injected into flue gas to react with NO to form nitrogen (N) and water and uses a catalyst to enhance the reaction. For SNCR, ammonia or urea is injected into flue gas to react with NO as well, but does not use a catalyst. Activated carbon injection units Powdered activated carbon sorbent is injected into flue gas, binds with mercury, and is collected in particulate matter control device. In addition to the individual named above, Jon Ludwigson (Assistant Director), Janice Ceperich, Margaret Childs, Philip Farah, Quindi Franco, Cindy Gilbert, Richard Johnson, Armetha Liles, and Alison O’Neill made key contributions to this report.

EPA recently proposed or finalized four regulations affecting coal-fueled electricity generating units, which provide about 37 percent of the nation's electricity supply. These regulations are the: (1) Cross-State Air Pollution Rule; (2) Mercury and Air Toxics Standards; (3) Cooling Water Intake Structures regulation; and (4) Disposal of Coal Combustion Residuals regulation. In 2012, GAO reported that, in response to these regulations and other factors such as low natural gas prices, companies might retire or retrofit some units. GAO reported that these actions may increase electricity prices and, according to some stakeholders, may affect reliability–the ability to meet consumers' demand—in some regions. In 2012, GAO recommended that DOE, EPA, and FERC develop and document a formal, joint process to monitor industry's progress responding to these regulations. In June 2014, EPA proposed new regulations to reduce carbon dioxide emissions that will also affect these units. GAO was asked to update its 2012 report. This report examines (1) agencies' efforts to respond to GAO's recommendation and (2) what is known about planned retirements and retrofits. GAO reviewed documents, analyzed data, and interviewed agency officials and stakeholders. The Department of Energy (DOE), the Environmental Protection Agency (EPA), and the Federal Energy Regulatory Commission (FERC) have taken initial steps to implement a recommendation GAO made in 2012 that these agencies develop and document a joint process to monitor industry's progress in responding to four proposed or finalized EPA regulations affecting coal-fueled generating units. GAO concluded that such a process was needed until at least 2017 to monitor the complexity of implementation and extent of potential effects on price and reliability. Since that time, DOE, EPA, and FERC have taken initial steps to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. Currently, these monitoring efforts are primarily focused on industry's implementation of one of four EPA regulations—the Mercury and Air Toxics Standards—and the regions with a large amount of capacity that must comply with that regulation. Agency officials told GAO that in light of EPA's recent and pending actions on regulations including those to reduce carbon dioxide emissions from existing generating units, these coordination efforts may need to be revisited. According to GAO's analysis of public data, power companies now plan to retire a greater percentage of coal-fueled generating capacity and retrofit less capacity with environmental controls than the estimates GAO reported in July 2012. About 13 percent of coal-fueled generating capacity—42,192 megawatts (MW)—has either been retired since 2012 or is planned for retirement by 2025, which exceeds the estimates of 2 to 12 percent of capacity that GAO reported in 2012 (see fig.). The units that power companies have retired or plan to retire are generally older, smaller, more polluting and not used extensively, with some exceptions. For example, some larger generating units are also planned for retirement. In addition, the capacity is geographically concentrated in four states: Ohio (14 percent), Pennsylvania (11 percent), Kentucky (7 percent), and West Virginia (6 percent). GAO's analysis identified about 70,000 MW of generating capacity that has either completed some type of retrofit to reduce sulfur dioxide, nitrogen oxides, or particulate matter since 2012 or plan to complete one by 2025, which is less than the estimate of 102,000 MW GAO reported in 2012. GAO is not making new recommendations but believes it is important that these agencies jointly monitor industry progress and fully document these steps as GAO recommended in 2012. The agencies concurred with GAO's findings.

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While many estates are kept open for legitimate reasons, we found that FSA field offices do not systematically determine the eligibility of all estates kept open for more than 2 years, as regulations require, and when they do conduct eligibility determinations, the quality of the determinations varies. Without performing annual determinations, an essential management control, FSA cannot identify estates being kept open primarily to receive these payments and be assured that the payments are proper. Generally, under the 1987 Act, once a person dies, farm program payments may continue to that person’s estate under certain conditions. For most farm program payments, USDA regulations allow an estate to receive payments for the first 2 years after the death of the individual if the estate meets certain eligibility requirements for active engagement in farming. Following these 2 years, the estate can continue to receive program payments if it meets the active engagement in farming requirement and the local field office determines that the estate is not being kept open primarily to continue receiving program payments. Estates are commonly kept open for longer than 2 years because of, among other things, asset distribution and probate complications, and tax and debt obligations. However, FSA must annually determine that the estate is still active and that obtaining farm program payments is not the primary reason it remains open. Our review of FSA case file documents found the following. First, we found FSA did not consistently make the required annual determinations. Only 39 of the 181 estates we reviewed received annual eligibility determinations for each year they were kept open beyond the initial 2 years FSA automatically allows, although we found shortcomings with these determinations, as discussed below. In addition, 69 of the 181 estates had at least one annual determination between 1999 and 2005, but not with the frequency required. Indeed, the longer an estate was kept open, the less likely it was to receive all required determinations. For example, only 2 of the 36 estates requiring a determination every year over the 7-year period, 1999 through 2005, received all seven required determinations. FSA did not conduct any program eligibility determinations for 73, or 40 percent, of the 181 estates that required a determination from 1999 through 2005. Because FSA did not conduct the required determinations, the extent to which these estates remained open for reasons other than for obtaining program payments is not known. Sixteen of these 73 estates received more than $200,000 in farm program payments and 4 received more than $500,000 during this period. In addition, 22 of the 73 estates had received no eligibility determinations during the 7-year period we reviewed, and these estates had been open and receiving payments for more than 10 years. In one case, we found that the estate has been open since 1973. The following estates received farm program payments but did not receive FSA eligibility determinations for the period we reviewed: A North Dakota estate received farm program payments totaling $741,000 from 1999 through 2003. An Alabama estate—opened since 1981—received payments totaling $567,000 from 1999 through 2005. Two estates in Georgia—opened since 1989 and 1996, respectively— received payments totaling more than $330,000 each, from 1999 through 2005. A New Mexico estate, open since 1991, received $320,000 from 1999 through 2005. Second, even when FSA conducted at least one eligibility determination, we found shortcomings. FSA sometimes approved eligibility for payments when the estate had provided insufficient information—that is, either no information or vague information. For example, in 20 of the 108 that received at least one eligibility determination, the minutes of FSA county committee meetings indicated approval of eligibility for payments to these estates, but the associated files did not contain any documents that explained why the estate remained active. FSA also approved eligibility on the basis of insufficient explanations for keeping the estate open. In five cases, executors explained that they did not want to close the estate but did not explain why. In a sixth case, documentation stated that the estate was remaining active upon the advice of its lawyers and accountants, but did not explain why. Some FSA field offices approved program payments to groups of estates kept open after 2 years without any apparent determination. In one case in Georgia, minutes of an FSA county committee meeting listed 107 estates as eligible for payments by stating that the county committee approved all estates open over 2 years. Two of the estates on this list of 107 were part of the sample that we reviewed in detail. In addition, another 10 estates in our sample, from nine different FSA field offices, were also approved for payments without any indication that even a cursory determination had been conducted. Third, the extent to which FSA field offices make eligibility determinations varies from state to state, which suggests that FSA is not consistently implementing its eligibility rules. Overall, FSA field offices in 16 of the 26 states we reviewed made less than one-half of the required determinations of their estates from 1999 to 2005. The percentage of estates reviewed by FSA ranged from 0 to 100 percent in the states we reviewed. Eligibility determinations could also uncover other problems. Under the three-entity rule, individuals receiving program payments may not hold a substantial beneficial interest in more than two entities also receiving payments. However, because a beneficiary of an Arkansas estate we reviewed received farm program payments through the estate in 2005, as well as through three other entities, the beneficiary was able to receive payments beyond what the three-entity rule would have allowed. FSA was unaware of this situation until we brought it to officials’ attention, and FSA has begun taking steps to recover any improper payments. Had FSA conducted any eligibility determinations for this estate during the period, it might have determined that the estate was not eligible for these payments, preventing the beneficiary from receiving what amounted to a payment through a fourth entity. We informed FSA of the problems we uncovered during the course of our review. According to FSA field officials, a lack of sufficient personnel and time, and competing priorities for carrying out farm programs explain, in part, why many determinations were either not conducted or not conducted thoroughly. Nevertheless, officials told us that they would investigate these cases for potential receipt of improper payments and would start collection proceedings if they found improper payments. FSA cannot be assured that millions of dollars in farm program payments it made to thousands of deceased individuals from fiscal years 1999 through 2005 were proper because it does not have appropriate management controls, such as computer matching, to verify that it is not making payments to deceased individuals. In particular, FSA is not matching recipients listed in its payment databases with individuals listed as deceased in the Social Security Administration’s Death Master File. In addition, complex farming operations, such as corporations or general partnerships with embedded entities, make it difficult for FSA to prevent improper payments to deceased individuals. FSA paid $1.1 billion in farm program payments in the names of 172,801 deceased individuals—either as individuals or as members of entities, from fiscal years 1999 through 2005, according to our matching of FSA’s payment databases with the Social Security Administration’s Death Master File. Of the $1.1 billion in farm payments, 40 percent went to individuals who had been dead for 3 or more years, and 19 percent went to individuals who had been dead for 7 or more years. Figure 1 shows the number of years in which FSA made farm program payments after an individual had died and the value of those payments. We identified several instances in which FSA’s lack of management controls resulted in improper payments to deceased individuals. For example, FSA provided more than $400,000 in farm program payments from 1999 through 2005 to an Illinois farming operation on the basis of the ownership interest of an individual who had died in 1995. According to FSA’s records, the farming operation consisted of about 1,900 cropland acres producing mostly corn and soybeans. It was organized as a corporation with four shareholders, with the deceased individual owning a 40.3-percent interest in the entity. Nonetheless, we found that the deceased individual had resided in Florida. Another member of this farming operation, who resided in Illinois and had signature authority for the operation, updated the operating plan most recently in 2004 but failed to notify FSA of the individual’s death. The farming operation therefore continued to qualify for farm program payments on behalf of the deceased individual. As noted earlier, FSA requires farming operations to certify that they will notify FSA of any change in their operation and to provide true and correct information. According to USDA regulations, failure to do so may result in forfeiture of payments and an assessment of a penalty. FSA recognized this problem in December 2006 when the children of the deceased individual contacted the FSA field office to obtain signature authority for the operation. FSA has begun proceedings to collect the improper payments. USDA recognizes that its farm programs have management control weaknesses, making them vulnerable to significant improper payments. In its FY 2006 Performance and Accountability Report to the Office of Management and Budget, USDA reported that poor management controls led to improper payments to some farmers, in part because of incorrect or missing paperwork. In addition, as part of its reporting of improper payments information, USDA identified six FSA programs susceptible to significant risk of improper payments with estimated improper payments totaling over $2.8 billion in fiscal year 2006, as shown in table 1. Farm program payments made to deceased individuals indirectly—that is, as members of farming entities—represent a disproportionately high share of post-death payments. Specifically, payments to deceased individuals through entities accounted for $648 million—or 58 percent of the $1.1 billion in payments made to all deceased individuals from 1999 through 2005. In contrast, payments to all individuals through entities accounted for $35.6 billion—or 27 percent of the $130 billion in farm program payments FSA provided from 1999 through 2005. The complex nature of some types of farming entities, in particular, corporations and general partnerships, increases the potential for improper payments. For example, a significant portion of farm program payments went to deceased individuals who were members of corporations and general partnerships. Deceased individuals identified as members of corporations and general partnerships received nearly three- quarters of the $648 million that went to deceased individuals in all entities. The remaining one-quarter of payments went to deceased individuals of other types of entities, including estates, joint ventures, limited partnerships, and trusts. With regard to the number of deceased individuals who received farm program payments through entities, they were most often members of corporations and general partnerships. Specifically, of the 39,834 deceased individuals who received farm program payments through entities, about 57 percent were listed in FSA’s databases as members of corporations or general partnerships. Furthermore, of the 172,801 deceased individuals identified as receiving farm program payments, 5,081 received more than one payment because (1) they were a member of more than one entity, or (2) they received payments as an individual and were a member of one or more entities. According to FSA field officials, complex farming operations, such as corporations and general partnerships with embedded entities, make it difficult for FSA to prevent making improper payments to deceased individuals. In particular, in many large farming operations, one individual often holds signature authority for the entire farming operation, which may include multiple members or entities. This individual may be the only contact FSA has with the operation; therefore, FSA cannot always know that each member of the operation is represented accurately to FSA by the signing individual for two key reasons. First, it relies on the farming operation to self-certify that the information provided is accurate and that the operation will inform FSA of any operating plan changes, which would include the death of an operation’s member. Such notification would provide USDA with current information to determine the eligibility of the operation to receive the payments. Second, FSA has no management controls, such as computer matching of its payment databases with the Social Security Administration’s Death Master File, to verify that an ongoing farming operation has failed to report the death of a member. FSA has a formidable task—ensuring that billions of dollars in program payments are made only to estates and individuals that are eligible to receive them. The shortcomings we have identified underscore the need for improved oversight of federal farm programs. Such oversight can help to ensure that program funds are spent as economically, efficiently, and effectively as possible, and that they benefit those engaged in farming as intended. In our report, we recommended that USDA conduct all required annual estate eligibility determinations, implement management controls to verify that an individual receiving program payments has not died, and determine if improper payments have been made to deceased individuals or to entities that failed to disclose the death of a member, and if so, recover the appropriate amounts. USDA agreed with these recommendations and has already begun actions to implement them. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Lisa Shames, Director, Natural Resources and Environment, (202) 512-3841 or [email protected]. Key contributors to this testimony were James R. Jones, Jr., Assistant Director; Thomas M. Cook; and Carol Herrnstadt Shulman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Farmers receive about $20 billion annually in federal farm program payments, which go to individuals and "entities," including corporations, partnerships, and estates. Under certain conditions, estates may receive payments for the first 2 years after an individual's death. For later years, the U.S. Department of Agriculture (USDA) must determine that the estate is not being kept open primarily to receive farm program payments. This testimony is based on GAO's report, Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates and Deceased Individuals ( GAO-07-818 , July 9, 2007). GAO discusses the extent to which USDA (1) follows its regulations that are intended to provide reasonable assurance that farm program payments go only to eligible estates and (2) makes improper payments to deceased individuals. USDA has made farm program payments to estates more than 2 years after recipients died, without determining, as its regulations require, whether the estates were kept open to receive these payments. As a result, USDA cannot be assured that farm payments are not going to estates kept open primarily to obtain these payments. From 1999 through 2005, USDA did not conduct any of the required eligibility determinations for 73, or 40 percent, of the 181 estates GAO reviewed. Sixteen of these 73 estates had each received more than $200,000 in farm payments, and 4 had each received more than $500,000. Only 39 of the 181 estates received all annual determinations as required. Even when FSA conducted determinations, we found shortcomings. For example, some USDA field offices approved groups of estates for payments without reviewing each estate individually or without a documented explanation for keeping the estate open. USDA also cannot be assured that it is not making improper payments to deceased individuals. For 1999 through 2005, USDA paid $1.1 billion in farm payments in the names of 172,801 deceased individuals (either as an individual recipient or as a member of an entity). Of this total, 40 percent went to those who had been dead for 3 or more years, and 19 percent to those dead for 7 or more years. Most of these payments were made to deceased individuals indirectly (i.e., as members of farming entities). For example, over one-half of the $1.1 billion in payments went through entities from 1999 through 2005. In one case, USDA paid a member of an entity--deceased since 1995--over $400,000 in payments for 1999 through 2005. USDA relies on a farming operation's self-certification that the information it provides USDA is accurate; operations are also required to notify USDA of any changes, such as the death of a member. Such notification would provide USDA with current information to determine the eligibility of the operation to receive payments. The complex nature of some farming operations--such as entities embedded within other entities--can make it difficult for USDA to avoid making payments to deceased individuals.

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As the principal component of the NAS, FAA’s ATC system must operate continuously—24 hours a day, 365 days a year. Under federal law, FAA has primary responsibility for operating a common ATC system—a vast network of radars; automated data processing, navigation, and communications equipment; and traffic control facilities. FAA meets this responsibility by providing such services as controlling takeoffs and landings and managing the flow of air traffic between airports. Users of FAA’s services include the military, other government users, private pilots, and commercial aircraft operators. Projects in FAA’s modernization program are primarily organized around seven functional areas—automation, communications, facilities, navigation and landing, surveillance, weather, and mission support. Over the past 16 years, FAA’s modernization projects have experienced substantial cost overruns, lengthy schedule delays, and significant performance shortfalls. To illustrate, the centerpiece of that modernization program—the Advanced Automation System (AAS)—was restructured in 1994 after estimated costs to develop the system tripled from $2.5 billion to $7.6 billion and delays in putting significantly less-than-promised system capabilities into operation were expected to run 8 years or more over original estimates. The Congress has appropriated over $25 billion for ATC modernization between fiscal years 1982 and 1998. FAA estimates that it plans to spend an additional $11 billion through fiscal year 2003 on projects in the modernization program. Of the over $25 billion appropriated to date, FAA has reported spending about $5.3 billion on 81 completed projects and $15.7 billion on about 130 ongoing projects. Of the remaining funds, FAA has reported spending about $2.8 billion on projects that have been cancelled or restructured and $1.6 billion for personnel-related expenses associated with systems acquisition. (See app. I for a list of completed projects.) FAA has fielded some equipment, most recently a new voice communications system. However, delays in other projects have caused the agency to implement costly interim projects. Furthermore, the agency is still having difficulties in acquiring new systems within agreed-to schedule and cost parameters. FAA has been fielding new ATC systems. For example, in February 1997, FAA commissioned the last of 21 Voice Switching and Control System (VSCS) units. As one of the original projects in the 1983 modernization plan, the VSCS project encountered many difficulties during its early years. Since the project was restructured in 1992, FAA has been successful in completing the first phase of the project—installing the equipment into existing en route controller workstations. The second phase is now underway—making VSCS interface with the new display replacement equipment that is being installed in the en route centers. During the past year, FAA has commissioned 183 additional systems or units of systems. For example, FAA commissioned an additional 97 units for its Automated Surface Observing System, which brings the total of commissioned units to 230 out of 597 that are planned. (See app. II for details on the implementation status of 17 major ongoing modernization projects and app. III for data on changes in their cost and schedules.) Problems with modernization projects have caused delays in replacing FAA’s aging equipment, especially the automation equipment in the en route and terminal facilities. We found that FAA has added four interim projects—three for the TRACONs and one for the en route centers—reported to cost about $655 million—to sustain and enhance current automated air traffic control equipment. FAA began its first program for the TRACONs in 1987 and expects to complete its third program in 2000. In general, these programs provide new displays and software and upgrade hardware and data-processing equipment to allow TRACONs to handle increased traffic. One program for the en route centers—the Display Complex Channel Rehost—was completed in 1997. Under this program, FAA transferred existing software from obsolete display channel computers to new more reliable and maintainable computers at five en route centers. The cost for interim projects could go even higher if FAA decides to implement an interim solution to overcome hardware problems and resolve year 2000 date requirements with the Host computer system. FAA is assessing the Host computer’s microcode—low-level machine instructions used to service the main computer—with a plan to resolve any identified year 2000 date issues, while at the same time preparing to purchase and implement new hardware—Interim Host—for each of its 20 en route centers before January 1, 2000. FAA expects to incur costs of about $160 million during fiscal years 1998 and 1999 for the Interim Host. Two key components of the modernization effort—the Wide Area Augmentation System (WAAS) and the Standard Terminal Automation Replacement System (STARS)—have encountered delays and cost increases. In September 1997, FAA estimated total life cycle costs for WAAS at $2.4 billion ($900 million for facilities and equipment and $1.5 billion for operations). In January 1998, the estimate had increased by $600 million to $3 billion ($1 billion for facilities and equipment and $2 billion for operations). The increased costs for facilities and equipment are attributable to FAA’s including previously overlooked costs for periodically updating WAAS’ equipment. The revised cost estimate for operations and maintenance is largely attributable to higher than expected costs to lease geostationary satellites. In developing WAAS, FAA has also encountered delays. When signing the original development contract with Wilcox Electric in August 1995, FAA planned for the initial system to be operational by December 1997. Because of concerns about the contractor’s performance, however, FAA terminated the original contract and signed a development contract with Raytheon (formerly Hughes Aircraft) in October 1996 that called for the initial system to be operational by April 1999. The 16-month schedule slippage was caused by problems with the original contractor’s performance, design changes, and increased software development. Last year, we reported that the implementation of STARS—particularly at the three facilities targeted for operating the system before fiscal year 2000—will likely be delayed if FAA and its contractor experience any difficulties in developing the software. These difficulties have materialized. In January 1998, FAA reported that more delays are likely because software requirements could increase to resolve air traffic controllers’ dissatisfaction with the system’s computer-human interface. FAA also reported an unexpected cost increase of $35 million for STARS during fiscal year 1998. It attributed the increase to such factors as adding resources to maintain the program’s schedule and the effects of any design changes to address new computer-human interface concerns. Also, the estimated size of software development—measured in source lines of code—is now 50 percent larger than the original November 1996 estimate. FAA has requested a reprogramming of fiscal year 1998 funds to address this cost increase. Our reviews have identified some of the root causes of long-standing problems with FAA’s modernization and have recommended solutions to them. Among the causes of these problems were the lack of a complete and enforced systems architecture, unreliable cost information, lack of mature software acquisition processes, and an organizational culture that did not always act in the agency’s long-term best interest. While FAA has begun to implement many of our recommendations, it will need to stay focused on continued improvement. FAA has proceeded to modernize its many ATC systems without the benefits of a complete systems architecture, or overall blueprint, to guide their development and evolution. In February 1997, we reported that FAA has been doing a good job of defining one piece of its architecture—the logical architecture. That architecture describes FAA’s concept of operations, business functions, high-level descriptions of information systems and their interrelationships, and information flows among systems. This high-level architecture will guide the modernization of FAA’s ATC systems over the next 20 years. We identified shortcomings in two main areas. FAA’s system modernization lacked a technical architecture and an effective enforcement mechanism. FAA generally agreed with the recommendation in our February 1997 report to develop a technical architecture and has begun the task. We will continue to monitor FAA’s efforts. Also, to be effective, the architecture must be enforced consistently. FAA has no organizational entity responsible for enforcing architectural consistency. Until FAA defines and enforces a complete ATC systems architecture, the agency cannot ensure compatibility among its existing and future programs. We also recommended in the February 1997 report that FAA develop a management structure for enforcing the architecture that is similar to the provisions of the Clinger-Cohen Act of 1996 for department-level Chief Information Officers (CIO). FAA disagrees with this recommendation because it believes that the current location of its CIO, within the research and acquisition line of business, is effective. We continue to believe that such a structure is necessary. FAA’s CIO does not report directly to the Administrator and does not have organizational or budgetary authority over those who develop ATC systems or the units that operate and maintain them. Furthermore, the agency’s long history of problems in managing information technology projects reflects weaknesses in its current structure. In January 1997, we reported that FAA lacks reliable cost-estimating processes and cost-accounting practices needed to effectively manage investments in information technology, which leaves it at risk of making ill-informed decisions on critical multimillion, even billion, dollar air traffic control systems. Without reliable cost information, the likelihood of poor investment decisions is increased, not only when a project is initiated, but also throughout its life cycle. We recommended that FAA improve its cost-estimating processes and fully implement a cost-accounting system. Our recent review of the reliability of FAA’s reported financial information and the possible program and budgetary effects of reported financial statement deficiencies again highlights the need for reliable cost information. The audit of FAA’s 1996 financial statement disclosed many problems in reporting of operating materials and supplies and property and equipment. Many of these problems resulted from the lack of a reliable system for accumulating project cost accounting information. Although FAA has begun to institutionalize defined cost-estimating processes and to acquire a cost-accounting system, it will be awhile before FAA and other decisionmakers have accurate information to determine and control costs. In March 1997, we reported that FAA’s processes for acquiring software—the most costly and complex component of ATC systems—are ad hoc, sometimes chaotic, and not repeatable across projects. As a result, FAA is at great risk of acquiring software that does not perform as intended and is not delivered on time and within budget. Furthermore, FAA lacks an effective approach for improving its processes for acquiring software. In the March 1997 report, we recommended that FAA improve its software acquisition capabilities by institutionalizing mature acquisition processes and reiterated our prior recommendation that FAA establish a management structure similar to the department-level CIOs to instill process discipline. FAA concurred with part of our recommendation and has initiated efforts to improve its software acquisition processes. These efforts, however, are not comprehensive, are not complete, and have not yet been implemented agencywide. Furthermore, FAA disagrees with our recommendation related to its management structure. Without establishing strong software acquisition processes and an effective management structure, FAA risks making the same mistakes it did on failed systems acquisition projects. In August 1996, we reported that an underlying cause of FAA’s ATC acquisition problems is its organizational culture—the beliefs, the values, and the attitudes and expectations shared by an organization’s members that affect their behavior and the behavior of the organization as a whole.We found that FAA’s acquisitions were impaired when employees acted in ways that did not reflect a strong commitment to mission focus, accountability, coordination, and adaptability. We recommended that FAA develop a comprehensive strategy for cultural change that (1) addresses specific responsibilities and performance measures for all stakeholders throughout FAA and (2) provides the incentives needed to promote the desired behaviors and achieve agencywide cultural change. In response to our recommendations, FAA issued a report outlining its overall strategy for changing its acquisition culture and describing its ongoing actions to influence organizational culture and improve its life cycle acquisition management processes. For example, the Acquisition and Research (ARA) organization has proposed restructuring its personnel system to tie pay to performance based on 15 measurable goals, each with its own performance plan. ARA’s proposed personnel system is under consideration by the Administrator. In our August 1996 report, we also noted that the Integrated Product Development System, based on integrated teams, was a major FAA initiative to address the shortcomings with its organizational culture. According to an ARA program official, FAA has 15 integrated product teams, the majority of which have approved plans. The official indicated that all team members have received training to prepare them for their roles and that ARA is developing a set of standards to measure the performance of the integrated teams. However, the official also acknowledged that FAA has had difficulty in gaining commitment to the integrated team concept throughout the agency because offices outside of ARA have been resistant to integrated teams. To help overcome institutional cultural barriers, FAA and external stakeholders have been discussing the establishment of a special program office responsible for the acquisition of free flight systems. Although, the details of how such an office would operate have not been put forward, one option would be for this office to have its own budget and the authority to make certifications and regulations and to determine system requirements. Such an office could be viewed as the evolutionary successor to the integrated product team system. Another approach being considered by FAA is the establishment of a single NAS manager at the level of associate administrator to eliminate traditional “stovepipes” between the acquisition and air traffic organizations. As FAA considers recommendations to create a new structure, we believe that it would be advantageous for FAA to implement our recommendation to create a management structure similar to the department-level CIO as called for in the Clinger-Cohen Act. Having an effective CIO, with the organizational and budgetary authority to implement and enforce a complete, agencywide systems architecture would go a long way towards eliminating traditional “stovepipes” between integrated product teams, as well as between the acquisition and air traffic organizations. Furthermore, the agency could gain valuable insight from the experiences of other organizations that have implemented similar structures. Regardless of future direction, FAA recognizes that considerable work is needed to modify behaviors and create comprehensive cultural change. A continued focus on cultural change initiatives will be critical in the years ahead. While FAA is involving external and internal stakeholders in revising its approach to the modernization program, it will need to stay focused on implementing solutions to the root causes of past problems, ensure that all aspects of its acquisition management system are effectively implemented, and quickly address the looming crisis with the year 2000 date requirements. The FAA Administrator has begun an outreach effort with the aviation community to build consensus on and seek commitment to the future direction of the agency’s modernization program. Similar to our findings on the logical architecture, a review of this program by the NAS Modernization Task Force concluded that the architecture under development builds on the concept of operations for the NAS and identifies the programs needed to meet the needs of the user community. However, the task force found that the architecture is not realistic because of (1) an insufficient budget; (2) the preponderance of risks associated primarily with certifying and deploying new equipment and with users’ cost to acquire equipment; and (3) unresolved institutional issues and a lack of user commitment. The task force recommended a revised approach that would be less costly and would be focused more on providing near-term user benefits. Under this revised approach, FAA would (1) implement a set of core technologies to provide immediate user benefits; (2) modify the Flight 2000 initiative to address critical risk areas associated with key communications, navigation, and surveillance programs; and (3) proceed with implementing critical time-driven activities related to the Host computer and the year 2000 problems and with implementing such systems as STARS, surveillance radars, and en route displays to replace aging infrastructure. The details on how FAA intends to implement the task force’s recommendations are not yet known. However, from our discussions with task force officials, their practical effect would be that the development and the deployment of some current programs would be accelerated while others would be slowed down. Meanwhile, FAA would continue developing programs like STARS and the Display System Replacement and work to ensure that its computers recognize the year 2000. For example, under the revised approach, the WAAS program would be slowed down after Phase I, which is scheduled to provide initial satellite navigation capabilities by 1999, to enable FAA to resolve technical issues and explore how costs could be reduced. Further development would be subject to review and risk mitigation under the expanded Flight 2000 initiative. FAA faces both opportunities and challenges as it revises the modernization program. On the one hand, FAA has an opportunity to regain user confidence by delivering systems that benefit them. On the other hand, FAA is challenged to follow through with its investment management process improvements. We urge FAA to proceed cautiously as it attempts to expedite the deployment of key technologies to avoid repeating past practices, such as undue concern for schedules at the expense of disciplined systems development and careful, thorough testing. FAA will need to resist this temptation, as the results are typically systems that cost more than expected, are of low quality, and are late as well. Concerned that burdensome procurement rules were a primary contributor to FAA’s acquisition problems, the Congress exempted FAA from many procurement rules. In response, the agency implemented its Acquisition Management System (AMS) on April 1, 1996, to improve its acquisition of new technology. AMS is intended to provide high-level acquisition policy and guidance and to establish rigorous investment management practices. We are currently reviewing FAA’s investment management approach, including its practices and processes for selecting, controlling, and evaluating projects, and expect to report later this year. As FAA continues to implement AMS and embarks on a revised modernization approach, it will need to establish baselines for individual projects and performance measurements to track key goals. Under AMS, an acquisition project should have a baseline, which establishes the performance, life-cycle cost, schedule, and benefit boundaries within which the program is authorized to operate. Having an effective investment analysis capability is important in developing these baselines. In its May 1997 report on AMS, FAA noted that it has focused more attention on investment management analyses. The agency reported that it has established several investment analysis teams of individuals with expertise in such areas as cost estimating, market analysis, and risk assessment to help prepare program baselines to use in determining the best way to satisfy mission needs. Although FAA has begun efforts to establish new baselines for projects that were underway prior to AMS, program evaluation officials question the availability and the quality of operations and maintenance data that are being used to estimate life-cycle project costs. FAA’s history of unplanned cost increases, most recently seen with its STARS and WAAS programs, coupled with past deficiencies in cost estimating processes and practices point to the need to use reliable and complete data to establish realistic baselines. As for performance measurements, FAA does not have a unified effort underway to effectively measure progress toward achieving acquisition goals. FAA has established a goal to reduce the time to field systems by 50 percent and to reduce the cost of acquisitions by 20 percent during the first 3 years under AMS. FAA also plans to measure performance in such other critical areas as customer satisfaction and the quality of products and services. According to FAA’s evaluation, while individual organizations are attempting to measure progress in meeting the two goals, a coordinated agencywide measurement effort is lacking. FAA’s failure to field systems on time and within cost indicates the need for a comprehensive system of performance measurements that can help provide systematic feedback about accomplishments and progress in meeting mission objectives. The need for such measurements will become even more critical as FAA expedites the deployment of some projects. Clearly identified performance measurements will help FAA, the Congress, and system users assess how well the agency achieves its goals. On January 1, 2000, computer systems worldwide could malfunction or produce inaccurate information simply because the century has changed. Unless corrected, such failures could have a costly, widespread impact. The problem is rooted in how dates are recorded and computed. For the past several decades, systems have typically used two digits to represent the year, such as “97” for 1997, to save electronic storage space and reduce operating costs. This practice, however, makes 2000 indistinguishable from 1900, and the ambiguity could cause systems to malfunction in unforeseen ways or to fail completely. FAA’s challenge is great. Correcting this problem will be difficult and expensive, and must be done while such systems continue to operate. In less than 2 years, hundreds of computer systems that are critical to FAA’s operations, such as monitoring and controlling air traffic, could fail to perform as needed unless proper date-related calculations can be made. FAA’s progress in making its systems ready for the year 2000 has been too slow. We have reported that, at its current pace, it will not make it in time. The agency has been severely behind schedule in completing basic awareness and assessment activities—critical first and second phases in an effective year 2000 program. For example, just this month FAA appointed a program manager who reports to the Administrator. Delays in completing the first two phases have left FAA little time for critical renovation, validation, and implementation activities—the final three phases in an effective year 2000 program. With less than 2 years left, FAA is quickly running out of time, making contingency planning for continuity of operations even more critical. If critical FAA systems are not year 2000 compliant and ready for reliable operation on January 1 of that year, the agency’s capability in several areas—including the monitoring and controlling of air traffic—could be severely compromised. The potential serious consequences could include degraded safety, grounded or delayed flights, increased airline costs, and customer inconvenience. We have made a number of recommendations aimed at expediting the completion of overdue awareness and assessment activities. Mr. Chairman, this concludes my statement. We will be happy to answer any questions from you or any Member of the Subcommittee. Automated Radar Terminal System (ARTS) IIIA Assembler (22-02) Additional ARTS IIIA at FAA Technical Center (22-05) Consolidated Notice to Airmen System (23-03) Visual Flight Rules Air Traffic Control Tower Closures (22-14) Altitude Reporting Mode of Secondary Radar (Mode-C) (21-10) Enhanced Target Generator Displays (ARTS III) (22-03) National Airspace Data Interchange Network IA (25-06) Hazardous In Flight Weather Advisory Service (23-08) (continued) En Route Automated Radar Tracking System Enhancements (21-04) Sustain New York Terminal Radar Approach Control (TRACON) (22-18) National Radio Communication System (26-14) Direct Access Radar Channel System (21-03) National Airspace Data Interchange Network II (25-07) Modernization of Unmanned FAA Buildings and Equipment (26-08) Large Airport Cable Loop Systems (26-05) Interfacility Data Transfer System for Edwards Air Force Base Radar Approach Control (35-20) Acquisition of Flight Service Facilities (26-10) (continued) Radar Pedestal Vibration Analysis (44-43) Low-Level Wind Shear Alert System (23-12) Brite Radar Indicator Tower Equipment (22-16) National Implementation of the “Imaging” Aid for Dependent Converging Runway Approaches (62-24) Integrated Communications Switching System (23-13) System Engineering and Integration Contract (26-13) National Airspace Data Interchange Network II Continuation (35-07) Instrument Landing System and Visual Navaids Engineering and Sparing (44-24) Oceanic Display and Planning System (21-05) Integrated Communications Switching System Logistics Support (43-14) Replacement of Controllers Chairs (42-24) ARTS IIIA-Expand 1 Capacity and Provide Mode C Intruder Capability (32-20) (continued) Civil Aviation Registry Modernization (56-24) Precision Automated Tracking System (56-16) National Airspace Integrated Logistic Support (56-58) Long Range Radar Radome Replacement (44-42) Installed at en route centers to allow processing of existing air traffic control software on new equipment. Project comprised a variety of tower and terminal replacement and modernization projects. Project was continued in the Capital Investment Plan under projects 42-13 and 42-14. Also known as the Radio Communications Link project, it was designed to convert aging “special purpose” Radar Microwave Link System into a “general purpose” system for data, voice, and radar communications among en route centers and other major FAA facilities. Project was activated to sustain and upgrade air traffic control operations and acquire eight terminal radars awaiting the full implementation of the Advanced Automation System. Project comprised a variety of diverse support projects and has been continued in the Capital Investment Plan under Continued General Support (46-16). Over the past decade, we have reported on FAA’s progress in meeting schedule commitments for last-site implementation, which signals completion of the project. Prior to this year, we have used the dates from the 1983 NAS modernization plan. This year, after discussions with FAA officials, we are measuring FAA’s progress against an interim date—which in most cases represents the date of contract award or investment decision. We will continue to show the original date, but will only measure progress against the interim date. 57 TDLS I57 TDLS IIStage 0: 21 Stage 1 and 2: 21 0 TDLS is the Tower Data Link Services. TDLS I (Predeparture Clearance/Flight Data Input/Output CRT/Rank Emulation) has been commissioned at all 57 sites; TDLS II (Digital-Automatic Terminal Information Service) has been installed at all 57 sites and commissioned at 48 sites. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the Federal Aviation Administration's (FAA) program to modernize its National Airspace System (NAS), focusing on: (1) the status of key modernization projects; (2) FAA's actions to implement recommendations to correct modernization problems; and (3) the opportunities and challenges facing FAA as it embarks upon its new modernization approach. GAO noted that: (1) since 1982, Congress has appropriated over $25 billion to the modernization program; (2) while FAA has fielded some equipment, historically, the agency has experienced considerable difficulty in delivering systems with promised cost and schedule parameters; (3) as a result, FAA has been forced to implement costly interim projects; (4) meanwhile, two key systems--the Wide Area Augmentation System and the Standard Terminal Automation Replacement System--have encountered cost increases and schedule delays; (5) GAO's work has pinpointed the root causes of FAA's modernization problems and has recommended actions to overcome them; (6) most recently, GAO found shortcomings in the areas of systems architecture or the overall modernization blueprint, cost estimating and accounting, software acquisition, and organizational culture; (7) although FAA has begun to implement many of GAO's recommendations, sustained management attention is required to improve the management of the modernization program; (8) FAA is collaborating with and seeking commitment from users in developing a new approach to make the modernization less costly and to provide earlier user benefits; (9) the challenge for FAA is to have disciplined processes in place in order to deliver projects as promised; and (10) FAA will also need to quickly address the looming year 2000 computer crisis to ensure that critical air traffic control systems do not malfunction or produce inaccurate information simply because the date has changed.

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During fiscal years 1993-98, the United States funded rule of law programs and related activities in countries throughout the world. Over this period, rule of law assistance totaled at least $970 million. Figure 1 illustrates the worldwide U.S. rule of law funding for fiscal years 1993-98. Over the period, the total annual rule of law funding increased from $128 million to $218 million. Although funding appears to have declined substantially in 1996, this may be largely explained by the fact that USAID could not readily provide rule of law funding information for fiscal year 1996 due to problems with its automated information system. On a regional basis, the Latin America and the Caribbean region received the largest share, with about 36 percent. Africa, Central Europe, and the newly independent states of the former Soviet Union received about 15 percent each. (See table 1.) From fiscal year 1993 to 1998, rule of law funding shifted primarily from the Latin America and the Caribbean region to other regions, mainly Central Europe. Funding for Central Europe grew from about $9 million in fiscal year 1993 to over $67 million in fiscal year 1998, accounting for 31 percent of the worldwide rule of law assistance that year. Over the same period, rule of law assistance in Latin America and the Caribbean declined from about $57 million (44 percent of the worldwide total) to $42 million (19 percent). Rule of law assistance to Africa also declined from $38 million (30 percent of the worldwide total) in 1993 to $29 million (13 percent) in 1998. Figure 2 illustrates these trends; appendix I provides more detailed data.

Pursuant to a congressional request, GAO provided information on U.S. rule of law assistance programs and activities, focusing on the: (1) amount of U.S. rule of law funding provided worldwide in fiscal years 1993-1998; and (2) U.S. Departments and agencies involved in providing rule of law assistance. GAO noted that: (1) based on the funding data cognizant Departments and agencies made available, during fiscal years 1993-1998, the United States provided at least $970 million in rule of law assistance to countries throughout the world; (2) the Latin America and the Caribbean region was the largest recipient of U.S. rule of law assistance over the period, accounting for $349 million, or more than one-third of the total assistance; (3) in recent years, Central European countries received an increasingly larger share and, in 1998, Central Europe was the largest regional recipient, accounting for about one-third of all rule of law assistance; (4) the United States provided at least some assistance to 184 countries--ranging from $138 million for Haiti to $2,000 for Burkina Faso; (5) while most countries received less than $1 million, 15 countries, including 7 in Latin America and the Caribbean, accounted for just over half of the total funding; (6) at least 35 entities from various U.S. Departments and agencies have a role in the U.S. rule of law assistance programs; (7) the Departments of State and Justice and the Agency for International Development are the principal organizations providing rule of law training, technical advice, and related assistance; (8) the Department of Defense, the U.S. Information Agency, numerous law enforcement agencies and bureaus, and other U.S. Departments and agencies also have a direct role; (9) 40 countries in the Latin America and the Caribbean region received some rule of law assistance; (10) more than three-fourths of the $349 million in assistance was provided to seven countries; (11) Haiti received nearly $138 million, or about 40 percent of the regional total, largely in connection with U.S. and international efforts to restore order and democracy after a September 1991 military coup; (12) six other countries in the region--ranging from about $41 million for El Salvador to $12 million for Panama--accounted for about $127 million, or nearly 37 percent of the regional total; (13) most of the rule of law assistance for Latin America and the Caribbean was provided to help the countries reform their criminal justice or law enforcement organizations, including training and technical assistance for prosecutors, public defenders, police officers, and investigators; and (14) a substantial amount was also dedicated to improving court operations, including modernizing court administration and enhancing public access to the judicial system.

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Franchise funds are government-run, self-supporting businesslike enterprises managed by federal employees. Franchise funds provide a variety of common administrative services, such as payroll processing, information technology support, employee assistance programs, public relations, and contracting. This review focuses on DOD’s use of the franchise funds’ contracting services. Franchise funds are required to recover their full costs of doing business and are allowed to retain up to 4 percent of their total annual income. To cover their costs, the franchise funds charge fees for services. The Government Management Reform Act of 1994 authorized the Office of Management and Budget to designate six federal agencies to establish the franchise fund pilot program. Congress anticipated that the franchise funds would be able to provide common administrative services more efficiently than federal agencies’ own personnel. The original operating principles for franchise funds included offering services on a fully competitive basis, using a comprehensive set of performance measures to assess the quality of franchise fund services, and establishing cost and performance benchmarks against their competitors—other government organizations providing the same types of services. Although there are five franchise funds currently in operation, DOD primarily uses two for contracting services—GovWorks, operated by the Department of the Interior, and FedSource, operated by the Department of the Treasury. Figure 1 shows the revenues for GovWorks and FedSource and the percentage of revenue derived from doing business with DOD in fiscal year 2004. Effective contract management requires specialized knowledge and careful attention to a range of regulatory requirements and contracting practices designed to protect the government’s interests. In obtaining contracting services through a franchise fund, three main parties share responsibilities for ensuring that proper procedures are followed: government customer—the program office or agency in need of a good or service; franchise fund—the federal entity that provides contracting services; and contractor—the vendor that provides the good or service desired by the government customer. DOD program officials are most familiar with the technical requirements for the goods and services they need. DOD contracting officers can place orders directly through many interagency contracts. Alternatively, DOD pays the franchise fund to assume many of the contracting responsibilities that normally would have been handled by DOD’s contracting officers if the customers had relied on them to purchase the goods or services. Whether DOD makes purchases directly or through another agency, regulatory procedures and requirements are the same, such as ensuring competition, determining fair and reasonable pricing, and monitoring contractor performance. Table 1 shows the basic steps to acquire a good or service through GovWorks or FedSource. GovWorks and FedSource can either make use of their own or other agencies’ contracts, or they can develop new, customized contracts to satisfy a DOD customer’s needs. GovWorks generally uses other agencies’ contracts, and FedSource generally uses its own contracts. Table 2 lists the various types of contracting methods the franchise funds use. While use of other agencies’ contracting services may offer convenience and efficiency, our prior work and that of some agency inspectors general have identified problems with the use of other agencies’ contracting services, including lack of compliance with federal requirements for competition and lack of contractor oversight. In prior work, we found that increasing demands on the acquisition workforce and insufficient training and guidance are among the causes for these deficiencies. Two additional factors are worth noting. First, the fee-for-service arrangement creates an incentive to increase sales volume because revenue growth supports growth of the organization. This incentive can lead to an inordinate focus on meeting customer demands at the expense of complying with contracting policy and required procedures. Second, it is not always clear where the responsibility lies for such critical functions as describing requirements, negotiating terms, and conducting oversight. Several parties—the government customer, the agencies providing the contracting services, and, in some cases, the contractors—are involved with these functions. But, as the number of parties grows, so too does the need to ensure accountability. We have previously reported that ensuring the proper execution of the contracting process is a shared responsibility of all parties involved in the acquisition process and that specific responsibilities need to be more clearly defined. GovWorks and FedSource did not always obtain the full benefits of competitive procedures, did not otherwise ensure fair and reasonable prices, and may have missed opportunities to achieve savings on behalf of DOD customers for millions of dollars worth of goods and services. With limited evidence that prices were fair and reasonable, GovWorks sometimes added millions of dollars of work to existing orders—as high as 20 times the original order value. In addition, we found limited and inconsistent evidence in the GovWorks and FedSource contract files we reviewed that the franchise funds sought to negotiate prices or conducted price analysis when required. DOD customers told us they were under the impression that franchise funds ensure competition and analyze prices. However, we found numerous cases in which these practices did not occur. The FAR states that contracting officers must purchase goods and services from responsible sources at fair and reasonable prices. Price competition is the preferred method to ensure that prices are fair and reasonable. The FAR also includes special competition procedures for orders placed under the types of contracts the franchise funds use, including GSA schedules and multiple-award contracts. DOD’s procurement regulations have additional procedures for ensuring competition when purchasing services from these types of contracts with certain exceptions—such as urgency or logical follow-on. For example, when ordering from GSA schedules, DOD procurement regulations require contracting officers to request proposals from as many contractors as practicable and receive at least three offers. If three offers are not received, a contracting officer must determine in writing that no additional contractors can fulfill the requirement. Alternatively, the contracting officer may provide notice to all schedule holders that could fulfill the requirement. When prices for the specific services being ordered are not established in the contract, the FAR and GSA ordering procedures require contracting officers to analyze proposed prices and to document that they are determined to be fair and reasonable. For example, when labor rates are established in the contract, relying on labor rates alone is not a good basis for deciding which contractor is the most competitive. The labor rates do not reflect the full cost of the order or critical aspects of the service being provided, such as the number of hours and mix of labor skill categories needed to perform the work. These procedures are designed to ensure that the government’s interests are protected when purchasing goods and services. We reviewed 10 orders—totaling about $164 million in fiscal year 2003 funding—in which GovWorks provided contracting services to DOD’s customers. With the exception of two orders, which were placed against GovWorks’ own contracts, the orders we reviewed were placed against GSA schedules. In 5 of the 10 cases, GovWorks sought, but did not receive, competing proposals as required for the types of contracts used. In 3 of the 10 cases, GovWorks sought and received multiple proposals for the work. In the remaining 2 cases, GovWorks placed orders on a sole-source or single-source basis and provided relevant explanations, such as an urgent need for the work and an award to a small disadvantaged business. Table 3 provides details on these 10 orders, and additional information is available in appendix I. In the five cases for which GovWorks sought competing proposals but received only one proposal for each order, GovWorks allowed 2 weeks or less for proposals to be submitted. In four of these cases, orders were ultimately placed with incumbent contractors to fill requirements for ongoing programs. For example, when the Air Force’s Office of the Deputy Chief of Staff Air and Space Operations sought a contractor to provide analytical services, GovWorks gave potential contractors 4 days—around Christmas—to respond. The one contractor that responded was the incumbent and received the order, which totaled $63.4 million. When the Air Force’s Aging Landing Gear Life Extension Program needed a contractor to provide services involving landing gear technology, GovWorks invited 17 contractors to submit proposals and posted the solicitation on the Internet allowing 14 days for proposals to be submitted. The incumbent contractor, which had provided services to the program since its inception in 1998, submitted the only proposal and received the order, which totaled $19.8 million. Each of these 5 orders was subject to the standards for obtaining competing offers for DOD orders, but in only the case of the Aging Landing Gear Life Extension Program did contract documentation indicate that GovWorks had attempted to meet Defense procurement regulations for ordering from GSA schedules. Our findings at GovWorks are consistent with our previous work on DOD’s use of other agencies’ contracts. In our prior work we found that the reasons only one contractor responded to opportunities to compete for work included a perception among potential contractors that incumbent contractors have an advantage in competing for ongoing work and that very short time frames to prepare proposals discouraged others from competing. In this review, we found GovWorks received multiple proposals for work when there was no incumbent contractor and longer time frames allowed for competition to occur. In the five cases in which competing proposals were sought but not obtained, we found limited evidence of price analyses in GovWorks’ contract files. In four of these cases, orders were subject to GSA ordering procedures for services requiring a statement of work. In the fifth case, an Interior multiple-award contract, the FAR required price analysis. (See table 3.) Consequently, GovWorks should have determined that the total price was fair and reasonable. GovWorks told us that it had conducted analyses, but we found that the files generally included only brief statements that prices had been determined reasonable, and GovWorks generally could not provide us with documentation showing what data had been gathered or analyses conducted to support the conclusion for the cases we reviewed. In 6 of the 10 cases we reviewed, GovWorks added substantial work beyond what was originally planned without determining that prices were fair and reasonable. For example, GovWorks increased an original order 20-fold by adding $45.5 million for management consulting services for the National Guard Bureau Chief Information Office. GovWorks modified another National Guard order on numerous occasions, this time increasing the value of the original order for an automated information system from $17.6 million to $44.6 million. An order for reconnaissance and surveillance flight support to Army combatant commands increased in value from $7.4 million to $34.9 million. The order was intended to provide support in Bosnia, for a period of 15 months with no option to renew, but was expanded to include operations in Colombia, and the period of performance was extended by more than 2 years. In each of these examples, GovWorks assigned the additional work without conducting price analyses to determine whether the prices charged were fair and reasonable. We reviewed seven FedSource projects—amounting to $85 million in fiscal year 2003—and found that the franchise fund did not compete orders it placed under multiple-award contracts or perform analyses to ensure fair and reasonable pricing. FedSource commonly used multiple-award contracts to make purchases for DOD. When placing orders against multiple-award contracts, DOD is generally required to ensure that contract holders have a fair opportunity to submit an offer and have that offer fairly considered for each order with certain exceptions—such as urgency or logical follow-on. In addition, FedSource used Blanket Purchase Agreements and requirements contracts for some of the projects we reviewed. Table 4 provides detail on the seven projects, and additional information is available in appendix I. The FedSource business model involves a two-step process of placing an order under previously awarded contracts and subsequently developing work assignments to define requirements for that order. In the first step, contracting officers issue orders indicating the type and approximate dollar value of work that FedSource anticipates will be required under each contract. This estimated value is based on historical usage. The second step is executed later when DOD identifies its needs. At this point, FedSource administrative personnel define tasks and outcomes and assign work to a contractor. In our past work, we recommended that the FAR clarify that agencies should not award large, undefined orders against multiple-award contracts and subsequently define specific tasks. The FAR was revised to encourage agencies to define work clearly so that the total price for work could be established at the time orders are issued. Although this requirement was in effect for the period of our review, we found that FedSource routinely allowed modifications to orders through work assignments that substantially increased the total price of the orders. FedSource did not provide contractors the opportunity to submit offers for orders under multiple-award contracts and have their offers fairly considered, as required by the FAR. FedSource officials told us that their business model does not provide contractors the opportunity to submit offers on orders. Instead, FedSource officials told us that administrative personnel were responsible for providing contractors a fair opportunity to be considered for work under multiple-award contract orders when assigning specific work to contractors. However, we found this generally did not occur. Of the 120 work assignments we reviewed, 75 were for work under multiple-award contracts. We found that in most of the 75 work assignments, FedSource administrative personnel did not provide contractors this opportunity. For example, FedSource used one of these contracts to fill several individual support staff positions at Brooke Army Medical Center at Fort Sam Houston and generally assigned work to one of the three multiple-award contractors without providing the other two contractors an opportunity to be considered. Justifications accompanying these assignments stated that assigning work to more than one contractor might create conflict among assigned staff over variations in pay and benefits. The Army’s Fort McCoy used FedSource to obtain contractor support for a variety of construction projects, and FedSource assigned the work noncompetitively for all 12 work assignments we reviewed to 1 of 3 multiple-award contract holders—totaling $7.2 million. The contract holder, a firm specializing in staffing, subsequently passed the work through to local construction companies that Fort McCoy officials had identified. Justifications accompanying some of the projects stated that the FedSource contracting officer’s representative had determined that it was “in the best interest of the government to award task orders to the vendor that solicited and brought in the business.” A FedSource quality review later concluded that these justifications were inadequate. Many months after the assignments were made, a second justification was placed in the contract files citing numerous reasons for selecting the preferred contractor. One of the reasons was that the project required expedited effort to support urgent requirements, which might have been an acceptable reason, except that the justification did not indicate that use of the other two contractors would have resulted in unacceptable delays. In another example, the Navy needed to fill several administrative positions at its 31 regional recruiting centers around the country. Under another purchasing arrangement, FedSource assigned the work to two contractors, one for recruiting centers east of the Mississippi River and the other for centers to the west of the river. These arrangements did not establish prices for any of the services provided, and FedSource personnel told us that they accepted the prices provided by the contractors. This type of purchasing arrangement does not justify purchasing from only one source—contracting officers are still required to solicit price quotations from other sources. However, there was no evidence FedSource personnel had negotiated or analyzed these prices. In addition, FedSource did not always demonstrate that prices were reasonable. For example, in two of the customer projects we reviewed, FedSource made work assignments for construction services at the Army’s Fort McCoy and Fort Snelling against a contract for operational support. Because the original contract had a very broad and undefined statement of work that did not explicitly include construction, no prices for that type of work had been established in the contract. For the project at Fort McCoy, the contractor that received the assignment solicited prices from potential subcontractors and presented their price, including a markup, to FedSource. We did not find any analysis to determine that the contractor’s price was reasonable in FedSource’s files. FedSource officials told us that they have since awarded a separate contract for construction services. In four of the five projects involving staffing support, FedSource paid contractors higher prices for services than were established in the contract. Most of the files we reviewed contained no justifications for the higher prices. For example, in our review of 25 work assignments for staffing support services at an Army medical center, 14 of the work assignments were priced higher than the price established in the contracts. In 9 of these cases, FedSource had agreed to additional sick leave or vacation time as part of the hourly rate, but FedSource’s contract file contained no documentation indicating that the contractor employee qualified for the additional benefits. DOD did not follow sound management practices designed to ensure value while expeditiously acquiring goods and services. DOD customers chose to use franchise funds based on convenience, rather than as part of an acquisition plan. DOD conducted little analysis, if any, to determine whether using franchise funds’ contracting services was the best method for acquiring a particular good or service. For their part, although franchise funds’ business operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors, they did not perform analyses that DOD could use to assess whether the franchise funds deliver good value. Their performance measures generally focus on customer satisfaction and generating revenues, rather than proper use of contracts and sound management practices. This focus on customer satisfaction and generating revenues provides an incentive to emphasize customer service rather than ensuring proper use of contracts and good value. DOD customers told us that they did not formally analyze contracting alternatives but generally chose to pay GovWorks and FedSource to provide contracting services because the franchise funds provided quick and convenient service. Some customers were dissatisfied with the speed and quality of services provided by DOD’s in-house contracting offices. For example, two DOD customers told us that their contracting offices required 9 months to respond to their purchasing needs, while the franchise fund required only a few weeks. The franchise fund’s ability to place orders quickly was valuable to DOD customers in these situations. DOD customers said that franchise funds’ contracting services were less restrictive than other DOD contracting alternatives. Some DOD customers told us that GovWorks and FedSource made it easier to spend funds at the end of a fiscal year unlike DOD’s in-house contracting offices. Two DOD customers said that GovWorks made it easier to spend small amounts of funding because GovWorks would place orders incrementally as funding became available. Some DOD customers mentioned that using FedSource meant they did not have to “live with the terms and conditions” of a long term contract or that it was easier to replace problem contractor employees. In one case, we were told that, if the organization had to fill positions with government employees, it would have less flexibility to hire the personnel it needed in a timely manner. Analysis of contracting alternatives helps to ensure that purchases are made by the most appropriate means and are in DOD’s best interest; however, DOD has no clear mechanism for making this determination when using other agencies’ contracting services. DOD’s guidance on the use of these vehicles has been evolving for several years and has not yet been fully implemented. DOD also lacks a means to gather data on the use of interagency contracts on a recurring basis, although it has been subject over the years to various requirements to monitor interagency purchases. In 2003, in response to a congressional mandate, DOD was unable to compile complete data on spending through interagency contracts. DOD officials told us that their financial systems are not designed to collect this data. Without this type of data, it is difficult to make informed decisions about the use of other agencies’ contracting services. DOD issued guidance in October 2004 that requires the military departments and defense agencies to determine whether using interagency contracts—such as those the franchise funds manage—is in DOD’s best interest. While this guidance outlines procedures to be developed, and general factors to consider, it does not provide specific criteria for how to make this determination and does not require military departments and agencies to report on the use of interagency contracts. DOD has directed the military departments and defense agencies to develop their own guidance to implement this policy. Congress has also recently taken action to ensure DOD’s proper use of interagency contracts. The conference report accompanying this legislation established expectations that DOD’s procedures will ensure that any fees paid by DOD to the contracting agency are reasonable in relation to work actually performed. In 2001, Congress adopted legislation requiring DOD to establish a management structure and establishing savings goals for the procurement of services. The legislation also requires DOD to ensure that contracts for services are entered into or issued and managed in compliance with applicable laws and regulations regardless of whether the services are procured by DOD directly or through a non-DOD contract or task order. One of the goals of this legislation was to allow DOD to improve the management of the procurement of services. However, DOD generally chose to use franchise funds for reasons of speed, convenience, and flexibility rather than taking a strategic and coordinated approach to acquiring services. We found that prior to choosing to use a franchise fund, DOD did not analyze costs and benefits or prepare business cases to determine whether the franchise fund provided better value—considering the fees it charges—compared with other alternatives, such as using a DOD contracting office or purchasing goods or services through another federal agency’s existing contract. As a result, DOD customers did not consider opportunities to leverage their buying power when using franchise funds. None of the DOD customers we spoke to analyzed trade- offs between total price, including fees, and the benefits of convenience. For example, on a group of work assignments for construction services valued at $7.2 million, the Army’s Fort McCoy paid FedSource a total of about $1 million, or 17 percent above the subcontractor’s proposed price, for the contractor markup and the franchise fund fee. Most of these assignments were placed towards the end of the fiscal year. This may have led to a higher price for the services than DOD would have paid in contracting directly with the subcontractors. Figure 2 shows the general process by which the Army’s Fort McCoy used FedSource to obtain contractor support for construction services. The DOD customer said that FedSource made it easier than his own contracting office to assign work with values greater that $25,000 late in the fiscal year because FedSource’s deadlines were not as strict. He also speculated that the subcontractor probably would have charged more if contracting directly with the government because dealing with the government is cumbersome and costly. He did not have information to indicate what the subcontractor’s price might have been, nor did he perform any formal analysis to compare FedSource with other contracting opportunities. Conducting a thorough analysis also might have given DOD a better understanding of the fees paid to make purchases through the franchise funds. For example, DOD customers sometimes paid a GovWorks fee, or service charge, on top of a fee to use another agency’s contract because GovWorks generally uses other agencies’ contracts to make purchases for DOD customers. While some customers were aware of the fees they paid, in two cases, DOD customers selected GovWorks because its fees were lower than fees charged by other agencies; however, the customers did not realize that GovWorks’ fees were in addition to the other agencies’ fees. GovWorks’ fees generally ranged from 2 percent to 4 percent of the price for goods and services purchased, and our analysis showed that FedSource fees ranged from 2 percent to 8 percent for the contracts and orders we reviewed. Congress has mandated that DOD agencies report fees paid for the use of other agencies’ contracts in the past and required DOD to do so again for fiscal year 2005. The franchise funds’ business operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors. However, they did not perform analyses that DOD could use to assess whether the franchise funds deliver good value. FedSource claims that it achieves lower prices on goods and services because it aggregates requirements and negotiates price discounts. Further, FedSource claims that competition with other contracting offices provides an incentive to provide better quality at lower cost. However, this incentive may not drive costs down unless customers are sensitive to the cost of doing business with one agency over another and make decisions based on costs. Franchise fund officials told us that demonstrating these advantages was difficult because they lacked insight into the prices customers would have paid when using other contracting alternatives to fill their requirements. FedSource officials also explained that quantifying the value of the other benefits they provide—such as convenience and flexibility—is difficult. Instead, GovWorks and FedSource have used such measures as growth in total contracting activity and revenues as well as customer satisfaction but have little data to demonstrate that they provide better quality and lower price goods and services than other federal contracting alternatives can provide. In fact, GovWorks marketing materials emphasize convenience and value-added service rather than costs. In our prior work, we found that fee-for-service contracting arrangements emphasize the overall sustainability of the contracting operation, as the fees collected are used to cover the costs of doing business, which may lead to a focus on customer service at the expense of compliance with contracting policy and procedures. DOD, GovWorks, and FedSource did not follow federal contracting procedures designed to ensure value while expeditiously acquiring goods and services. DOD and the franchise funds did not define desired outcomes and the specific criteria against which contractor performance could be measured and paid limited attention to monitoring contractors’ work. As we have reported previously, it is not always clear where the responsibility lies for such critical functions as describing requirements, negotiating terms, and conducting oversight. Although the FAR states that contracting officers are responsible for including appropriate quality requirements in solicitations and contracts and for contract surveillance, the franchise funds do not have sufficient knowledge about the DOD customers’ needs to fulfill these responsibilities without the assistance of the DOD customer. Recently, the franchise funds contracting operations performed some internal reviews that have findings similar to ours, and the funds are working to address the problems. These shortcomings mirror many of the findings of our previous work and are among the reasons we have designated interagency contracting as a governmentwide high-risk area. In the GovWorks and FedSource cases we reviewed, required outcomes were not well-defined, work was generally described in broad terms, and orders sometimes specifically indicated that work would be defined more fully after the order was placed. GovWorks and FedSource files we reviewed lacked clear descriptions of outcomes to be achieved or requirements that the contractor was supposed to meet. The FAR states that contracting officers are responsible for including the appropriate quality requirements in solicitations and contracts. Without these criteria, accountability becomes harder to determine and the risk of poor performance is increased. Clear definition of requirements promotes better mutual understanding of the government’s needs. In a typical situation, the customer—a DOD program office, for example—is best qualified to know what it needs. However, once a DOD program office chooses to pay a franchise fund to make purchases on its behalf, the office must then rely on the franchise fund to provide the contracting expertise. The two parties have to work together to ensure that requirements for purchases are well-defined with sufficient detail to determine whether the desired outcomes were met and the goods and services provided meet the government’s needs. Critical information must be documented in order to make these determinations. GovWorks and FedSource use different processes, and the tables in appendix III explain some of the pertinent contract documents used to define desired outcomes and criteria. In 7 of the 10 GovWorks orders we reviewed, statements of work were very broad. For example, six of these orders contained language stating that specific tasks could be added, deleted, or redefined throughout the period of performance. In some cases, DOD program officials told us that the statements of work were broad because they were not aware of all requirements when the order was placed or because they were operating in a constantly changing technological environment. DOD program officials also told us that the broad statements of work gave them flexibility to add requirements to existing orders as additional needs arose. Orders placed by FedSource against its contracts contained only a very general statement—generally just a few words—describing the work in broad terms and an anticipated dollar value. These orders did not clearly describe all services to be performed or supplies to be delivered so that the full price for the work could be established when the order was placed, as required by the FAR. As noted earlier, FedSource officials explained that in their business model, orders were not intended to describe specific work to be completed. Instead, FedSource administrative personnel issued work assignments that were intended to provide the clear descriptions of desired outcomes that the orders did not. However, we found that these work assignments were often unclear as well. Five of FedSource’s largest customer projects for DOD involved use of contracts to provide staff. Work assignments for staffing services often described the position to be filled, including a general outline of duties. However, the assignments did not contain criteria for evaluating the work performed by contract employees. In addition, when providing staffing support, FedSource uses these contracts to fill positions individually, rather than describing functional needs or desired results. For example, at an Army medical center FedSource filled over 200 positions individually instead of aggregating these positions into fewer functional requirements. This acquisition approach does not provide contractors with the flexibility to determine how best to staff a function and does not lend itself to a performance- based approach. Under performance-based contracting, the contracting agency specifies the outcome or result it desires and leaves it to the contractor to decide how best to achieve the desired outcome. FedSource officials said they were moving toward a more performance- based contracting approach. To determine whether an environment had been created that would allow improper personal services relationships to develop, we interviewed officials at five DOD program offices that used FedSource contracts to staff individual positions. We asked questions about the work performed by the contractor employees and the relationships between the DOD customers and the contractor employees. The DOD officials said that generally: the services provided by the contract employee were integral to agency functions or missions; the contractor employees were providing services comparable to those performed using civil service personnel; and the services were provided on site and with the use of equipment provided by the government. With regard to the work relationships, DOD customers told us that government employees assigned and prioritized daily tasks for the contractor employees. FedSource guidelines also state that the government customer is responsible for verifying contract employee hours worked by signing the contractor’s weekly timesheet. Further, a FedSource internal review found that statements of work contained “personal services-type language like ‘under the direction of’ or ‘oversee’ or ‘duties’ or ‘job description.’” Our review also found documents that had been edited to revise similar language. FedSource officials were aware of the potential that these contracts might be used for personal services and took various steps to clarify that personal services were not to be provided. For example, FedSource officials provided training for DOD customers on how to avoid creating a situation that had the appearance of personal services. Although this training is a positive step, poorly defined statements of work provided the opportunity for situations to arise in which personal services relationships could develop. FedSource relied on administrative staff, not contracting officers, to work with the customer to define and assign the specific tasks to be performed or the positions to be filled. A FedSource review found that trained contracting staff was needed for developing task order requirements and warranted contracting officers were required for issuing task orders. The FedSource administrative employees do not have the same level of expertise as contracting officers, who have specialized knowledge to ensure compliance with federal regulations and guidelines. Inadequacies we found in FedSource’s contracting practices pointed to the challenges of relying on administrative personnel rather than contracting experts to review statements of work, choose appropriate contracting vehicles, ensure adequate competition, and sign off on assignments of specific work. DOD customers, GovWorks, and FedSource often relied on methods of contract oversight that lacked performance measures to ensure that contractors provided quality goods and services in a timely manner. Typically, the franchise funds failed to include an oversight plan that contained specific quality criteria in their contracts or orders. Without this critical information, neither DOD nor the franchise funds could effectively measure contractor performance. The FAR and DOD’s procurement regulations require contract surveillance and documentation that it occurred. Contract surveillance, also referred to as oversight, is a contracting officer’s responsibility, and DOD pays the franchise fund to assume the responsibilities of contracting officers. The Office of Management and Budget’s Office of Federal Procurement Policy has issued policy stating that contract oversight begins with the assignment of trained personnel who conduct surveillance throughout the performance period of the contract to ensure the government receives the services required by the contract. DOD guidance states that documentation constitutes an official record and the surveillance personnel assessing performance are to use a checklist to record their observations of the contractor’s performance. The guidance also states that all performance should be documented whether it is acceptable or not. The GovWorks contract files we reviewed generally did not include contractor monitoring plans, quality assurance surveillance plans, test and acceptance plans, or other evidence of monitoring activities. However, the files did contain evidence that a contracting officer’s representative from the DOD program office had been appointed to assist in performing contractor oversight. Although ensuring that contract oversight occurs is a contracting officer responsibility, GovWorks officials told us that surveillance plans were not usually kept in the GovWorks contracting officers’ contract files. Instead, these plans were maintained by the contracting officer’s representative at the DOD customer agency. When we asked about contract oversight, we found that in the absence of an agreed upon oversight plan, DOD customers generally ensured that there was some process in place for monitoring performance. Some customers described status meetings and regular progress reports, but generally told us that they had no specific criteria for monitoring contractor performance or established measures for determining the quality of services. Although GovWorks officials told us that their contracting officers did assist customers in measuring quality services from the acquisition planning stages through contract completion, we found little evidence that this actually took place. We found that FedSource generally did not ensure that contractor oversight occurred. As was the case with GovWorks, FedSource officials told us that they encouraged DOD to develop criteria for quality. However, FedSource allowed general information—such as job descriptions—to serve as requirements, even though the job descriptions contained no criteria for measuring quality. These descriptions did not provide sufficient information to establish an oversight plan. FedSource did not appoint trained contracting officers’ representatives from DOD to conduct on-site monitoring. Instead, FedSource relied on its own administrative personnel, who had been trained as contracting officers’ technical representatives but were not located on-site with the customer, to assess contractor performance. Because they were not on-site, they could not observe the quality of the contractors’ work, and FedSource generally took the absence of complaints from DOD customers as an indication that the contractor was performing satisfactorily. A FedSource official explained that FedSource guidelines state that the customer agency’s acceptance of the contract employee’s time sheet indicates agreement that services have met quality standards and requirements. This policy lacks clear criteria and measures to determine whether the contractor has provided quality services. In place of criteria, we found DOD customers said they generally evaluated performance of contractor staff based on informal observation and customer satisfaction. The lack of adequate oversight is consistent with what we have reported in our recent work on contractor oversight for DOD service contracts, where we found that almost all of those that had insufficient oversight were interagency contracts. DOD explained that contractor oversight is not as important to contracting officials as awarding contracts and does not receive the priority needed to ensure that oversight occurs. DOD concurred with our recommendations to develop guidance on contractor oversight of services procured from other agencies’ contracts, to ensure that proper personnel be assigned to perform contractor oversight in a timely manner no later than the date of contract award, and that DOD’s service contract review process and associated data collection requirements provide information that will provide management visibility over contract oversight. Aside from monitoring the contractors’ performance, we also found that the departments of the Interior and the Treasury, which operate GovWorks and FedSource, respectively, and the Office of Management and Budget have conducted infrequent reviews of franchise funds’ procurement activities. GovWorks and FedSource have recently conducted internal reviews of their operations that have identified concerns similar to those we found. A GovWorks’ 2004 Management Review identified such issues as lack of acquisition planning for work added to existing awards, unanticipated increases in the amounts of orders, and inadequate documentation of many requirements such as competitive procedures, determinations that changes were within the scope of the contract, the basis of award decisions, and that prices were fair and reasonable. FedSource officials recently started conducting “office assistance reviews.” A June 2004 FedSource review identified lack of documentation, use of purchasing agreements beyond their intended parameters and dollar limits, lack of price analysis, lack of quality assurance plans, and the need for warranted contracting officers rather than administrative personnel to perform much of the work. While the operating principles for franchise funds require the funds to have comprehensive performance measures, these measures do not emphasize compliance with contracting regulations and generally focus on customer satisfaction, financial performance, and generating revenues to cover operating costs. Several customers we interviewed were unaware of compliance problems and told us that they believed the franchise funds placed orders on a competitive basis, analyzed prices, or otherwise sought to ensure the best deal for the government when the funds, in fact, did not. GovWorks has taken steps that address concerns raised in its own reviews, such as increased training for contracting officers, developing a written acquisition procedures manual, and creating a uniform system of contract file maintenance and sample documents to ensure adequate documentation. GovWorks officials also told us they are trying to improve competitive procedures by requiring all solicitations for DOD work to be posted on e-Buy, an online system to request quotes for products and services. FedSource also has taken steps toward addressing concerns raised in this report, such as quality assurance planning, hiring contracting officers, and restructuring its operations. These initiatives are underway, and it is too early to tell whether they will improve contracting operations at the franchise funds. The Office of Management and Budget’s oversight of franchise funds has been limited. The Office of Management and Budget and the Chief Financial Officers Council established business-operating principles as a foundation for effective franchise fund management and, as required by the Government Management Reform Act, submitted an interim report on the franchise fund pilot program to Congress in 1998. Among other efforts, the report recommended that the franchise funds should continue to seek opportunities to provide services at the least cost to the taxpayer, contributing to reducing duplicative administrative functions and consequently to the costs of those functions. The report noted that the franchise funds’ performance measures were in varying stages of development. The report recommended that the Office of Management and Budget should report to Congress on franchise fund activity prior to the expiration of the pilot authority and that the office should continue to develop and implement operating guidance for the franchise fund program. Although the Office of Management and Budget’s budget examiners conduct some monitoring of franchise funds as part of their general oversight responsibilities, Office of Management and Budget representatives said they have not conducted any comprehensive reviews of franchise funds since they submitted the required report to Congress. Neither have they reviewed the funds’ contracting practices. GovWorks and FedSource, created as a result of governmentwide initiatives to improve efficiency, have streamlined contracting processes to provide customers with greater flexibility and convenience. However, GovWorks and FedSource have not always adhered to competitive procedures and other sound contracting practices. They have paid insufficient attention to basic tenets of the federal procurement system— taxpayers’ dollars should be spent wisely, steps should be taken to ensure fair and reasonable prices, and purchases should be made in the best interest of the government. One factor contributing to these deficiencies is that the departments of the Interior and the Treasury have not ensured that the franchise funds’ contracting services follow the FAR and other procurement policies. The franchise funds need to develop clear, consistent, and enforceable policies and processes that comply with contracting regulations while maintaining good customer service. Another contributing factor is that the roles and responsibilities of the parties involved in the interagency contracting process are not always clearly defined. GovWorks and FedSource are ultimately accountable for compliance with procurement regulations when they assume the role of the contracting officer. However, they often depend on the customer for detailed information about the customer’s needs. To facilitate effective purchasing and to help obtain the best value of goods and services, all parties involved in the use of interagency contracts have a stake in clarifying roles and responsibilities. Additionally, franchise funds sometimes face incentives to provide good customer service at the expense of proper use of contracts and good value. These pressures are inherent in the fee-for-service contracting arrangement. Because the franchise funds have not always adhered to sound contracting practices, DOD customers must be cautious when deciding whether franchise fund contracting services are the best available alternative. In addition to convenience and flexibility, decisions to use franchise funds should be grounded in analysis of factors such as price and fees. Further, to enhance DOD’s ability to develop sound policies related to the use of franchise funds, DOD needs measurable data that would allow it to assess whether franchise funds’ contracting services help lower contract prices, reduce administrative costs, and improve the delivery of goods and services. This information would also be useful in leveraging DOD’s overall buying power through strategic acquisition planning. No one knows the total cost of using other agencies’ contracting services. Without understanding total cost, value is elusive. In addition, DOD customers should ensure that taxpayers’ dollars are spent wisely by sharing in the responsibilities for developing clear contract requirements and oversight mechanisms. DOD customers are the best source of information about their specific needs and are also best positioned to oversee the delivery of goods and services. Given the incentive to focus on sustaining the franchise funds’ operations and the many service providers from which customers like DOD may choose, objective oversight would help to ensure that franchise funds adhere to procurement regulations and operate as intended. The Office of Management and Budget, which designated and has previously evaluated the franchise funds, is well positioned to periodically evaluate, monitor, and develop guidance to improve the franchise funds’ contracting activities. While a number of actions to improve DOD’s use of other agencies’ contracting services are already underway, to enhance these initiatives, we make the following eight recommendations to DOD, the Interior, the Treasury, and the Office of Management and Budget. To ensure that DOD customers analyze alternatives when choosing franchise funds and to provide DOD with the measurable data it needs to assess the value of the franchise funds’ contracting services, we recommend that the Secretary of Defense take the following three actions: Develop a methodology to help DOD customers determine whether use of franchise funds’ contracting services is in the best interest of the government. The methodology should include analysis of tradeoffs. Reinforce DOD customers’ ability to define their needs and desired contract outcomes clearly. This skill includes working with franchise fund contracting officers to translate their needs into contract requirements and to develop oversight plans that ensure adequate contract monitoring. monitor and evaluate DOD customers’ use of franchise funds’ contracting services, prices paid, and types of goods and services purchased. Prices include franchise fund fees and fees for use of other interagency contracts. To ensure that GovWorks and FedSource adhere to sound contracting practices, we recommend that the Secretaries of the Interior and the Treasury take the following two actions: develop procedures and performance measures for franchise fund contracting operations to demonstrate compliance with federal procurement regulations and policies while maintaining focus on customer service and develop procedures for franchise fund contracting officers to work closely with DOD customers to define contract outcomes and effective oversight methods. To ensure that the FedSource workforce has the skills to carry out contracting responsibilities, we recommend that the Secretary of the Treasury take the following action: assign warranted contracting officers to positions responsible for performing contracting officer functions. In order to provide incentives for the franchise funds to adhere to procurement regulations and to ensure that franchise funds operate as intended, we recommend that the Director of the Office of Management and Budget take the following two actions: Expand monitoring to include franchise funds contracting operations’ compliance with procurement regulations and policies. These findings should be available to customers to ensure transparency and accountability to customers and the Congress. Develop guidance to clarify the roles and responsibilities of the parties involved in interagency contracting through franchise funds. We provided a draft of this report to DOD, the departments of the Interior and the Treasury, and the Office of Management and Budget for review and comment. We received written comments from DOD and the Department of the Treasury, which are reprinted in appendices IV and V respectively. The Department of the Interior and the Office of Management and Budget provided comments via e-mail. DOD concurred with our recommendations and identified actions it has taken or plans to take to address them. In response to our recommendation that the Secretary of Defense develop a methodology to help DOD customers determine whether the use of franchise funds’ contracting services is in the best interest of the government, DOD indicated that action had been taken through the issuance of a policy memo titled Proper Use of Non-DOD Contracts and subsequent policies issued by the military departments. We acknowledge the DOD policy memo in our report and note that this guidance describes general factors to consider but does not provide specific criteria for how to make this determination. The policies issued by the military departments establish procedures for review and approval of the use of non-DOD contract vehicles, but do not address methods of determining whether this is in the best interest of the government. Our recommendation takes these actions into account and encourages DOD to go further by developing a methodology to help customers assess contracting alternatives. In response to our recommendation that DOD reinforce DOD customers’ ability to define their needs and desired contract outcomes clearly, DOD maintained that it is the responsibility of the franchise fund contracting officer to decide whether or not the requirement is described accurately. Nonetheless, DOD committed to issue a memo by August 31, 2005, reinforcing the need for DOD customers to define clearly their requirements and articulate clearly their desired outcomes in the acquisition process. We believe that this memo, coupled with DOD’s ongoing efforts to educate DOD customers about the use of interagency acquisitions, are steps in the right direction. Finally, in response to our recommendation that DOD monitor and evaluate DOD customers’ use of franchise funds’ contracting services, DOD concurred but explained that the data capture systems that would provide this information are not yet in place. DOD stated that the Federal Procurement Data System-Next Generation would provide this capability in fiscal year 2006. However, data collection is just one step in the evaluation process. In addition to collecting data, DOD will also need to compare alternatives and prices in order to make more informed choices. Further, the accuracy and reliability of interagency contracting data in the Federal Procurement Data System-Next Generation will depend heavily on accurate reporting by franchise funds. The Department of the Interior concurred with our recommendations and identified actions it has taken or plans to take to address them. The Interior highlighted 2004 accomplishments and acknowledged a need for better documentation to demonstrate compliance and value provided. The Interior also committed to ensuring an adequate contracting staff and to publishing information to help DOD determine the value of using the franchise fund. In response to our recommendation that the Department of the Interior develop procedures and performance measures for franchise fund contracting operations to demonstrate compliance with federal procurement regulations, the Interior highlighted a number of recent efforts to improve performance, including its 2004 management control review and performance improvement plan that will monitor compliance with federal procurement regulations. This plan establishes a goal of 75 percent reduction in reportable findings. Interior also stated that it had revised its acquisition review process, awarded a contract for a third party acquisition review, and provided additional training to its staff. Interior committed to continue monitoring performance and creating guidance as needed. In response to our recommendation that the Interior develop procedures for franchise fund contracting officers to work more closely with DOD customers, the Interior highlighted efforts to train its contracting officers and develop policies for working with DOD customers. The Department of the Treasury concurred with our recommendations and identified actions it has taken or plans to take to address them, including centralization of FedSource’s acquisition workforce under one line of authority to allow for standardization and consistency. In response to our recommendation that FedSource develop procedures and performance measures for franchise fund contracting operations to demonstrate compliance with federal procurement regulations, the Treasury committed to continue to conduct reviews to measure and evaluate compliance with federal procurement regulations and policies. This is a positive step toward ensuring compliance. The Treasury also said that FedSource had instituted performance-based statements of work for its acquisitions. While this initiative focuses on some aspects of compliance and is important in managing contractor performance, our recommendation addresses the performance of the franchise fund. Developing performance measures related to compliance with procurement regulations would reinforce the agency’s commitment to compliance and provide a means to monitor and demonstrate progress. In response to our recommendation that FedSource develop procedures for franchise fund contracting officers to work more closely with DOD customers, the Treasury indicated that FedSource will also develop procedures to provide its customers with clear guidance for defining contract outcomes. In response to our recommendation that FedSource assign warranted contracting officers to positions responsible for performing contracting officer functions, Treasury stated that FedSource has hired contracting officers to perform all contracting officer functions. OMB concurred with our recommendations that OMB expand its monitoring to include franchise funds contracting operations’ compliance with procurement regulations and policies and develop guidance to clarify the roles and responsibilities of the parties involved in interagency contracting through franchise funds. OMB stated that its Office of Federal Procurement Policy (OFPP) proposed to include the implementation of our recommendations in an undertaking pertaining to governmentwide acquisition contracts and incorporate franchise funds into that project. As part of that project, OMB/OFPP is asking the designated agencies to develop plans to ensure cost-effective and responsible contracting. The plans will address (1) training to contracting staff; (2) customer staff training; (3) management controls to ensure contracts are awarded in accordance with applicable laws, regulations, and policies; (4) contract administration; and (5) periodic management reviews. OMB acknowledged that this was only a part of the solution. We encourage OMB to give additional consideration to providing guidance that would clarify roles and responsibilities of the parties involved in interagency contracting through franchise funds. We are sending copies of this report to the Secretaries of Defense, the Interior, and the Treasury; the Director of the Office of Management and Budget; and interested congressional committees. We will provide copies to others on request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report or need additional information, please call me at (202) 512-4841 ([email protected]). Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other staff making key contributions to this report were Amelia Shachoy, Assistant Director; Lily Chin; Lara Laufer; Janet McKelvey; Kenneth Patton; Monty Peters; and Ralph Roffo. In memory of Monty Peters (1948-2005), under whose skilled leadership this review was conducted. We reviewed legislation establishing the franchise fund pilot program, governmentwide guidance relating to the program, and reports summarizing program outcomes. We held discussions with Office of Management and Budget representatives responsible for overseeing and providing guidance for the program and with Department of Defense (DOD) officials responsible for oversight of procurement issues. We performed work at the franchise funds managed by the departments of the Interior and the Treasury and interviewed officials and reviewed records relating to Interior’s GovWorks and Treasury’s FedSource programs. The Interior and Treasury franchise funds accounted for about 76 percent of total revenues for the six franchise funds during fiscal year 2003 (the most recently completed fiscal year at the time we were planning our field work) and about 95 percent of all services the six funds provided DOD. Contracting services the GovWorks and FedSource programs provided accounted for over 95 percent of total revenues at the Interior and Treasury franchise funds. To gain insight into how DOD customers were using franchise funds and into franchise fund contracting processes, we reviewed documentation relating to 17 selected customer projects totaling $249 million in funding provided and interviewed GovWorks and FedSource contracting personnel responsible for these projects and representatives of the DOD customers. To determine how DOD customers determined whether franchise funds provided a good value, we interviewed representatives of DOD customers for the selected projects and reviewed available documentation relating to decisions to use franchise fund contracts. We also reviewed information available from the franchise funds that would indicate whether the franchise funds provided a good value, and interviewed franchise fund officials. To determine how franchise fund contracting officers worked with DOD customers to define measurable quality standards for goods and services and develop effective oversight mechanisms, we reviewed contract documentation for selected customer projects that would establish quality standards, and documentation relating to contract oversight. We also discussed these issues with franchise fund contracting personnel. In addition, we discussed these issues with representatives of DOD customers and reviewed available documentation. To determine whether franchise funds followed the contracting practices needed to ensure fair and reasonable prices, we reviewed contract documentation for selected customer projects to assess the extent to which contracting personnel sought competition for work and analyzed proposed prices to determine whether they were fair and reasonable, and discussed these issues with contracting personnel. In addition, we discussed these issues with representatives of DOD customers and reviewed available documentation. To select customer projects for review, we obtained data files from the Department of the Interior’s GovWorks and the Department of the Treasury’s FedSource contracting programs that reflected customer projects active during fiscal year 2003, and the dollar value of customer funding provided for these projects during the year. We ranked these projects in terms of funding provided and selected projects representing the greatest dollar value of customer funding provided—10 GovWorks projects accounting for $164 million and 7 FedSource projects accounting for $85 million. Table 5 summarizes GovWorks projects, and table 6 summarizes FedSource projects. GovWorks contracting personnel fulfilled the requirements of each project selected by award of a single order, and we reviewed contract documentation related to the relevant order. FedSource contracting personnel, in contrast, fulfilled the requirements of customer projects by award of one or more contracts or orders. Further, FedSource personnel initiated multiple work assignments—in some cases several hundred—to define specific work what would be performed under each of the contracts awarded or orders placed. Accordingly, we reviewed all contracts awarded or orders placed to fulfill the requirements of the selected customer projects and a sample of work assignments initiated under these contracts or orders. To select sample work assignments for review, we first ranked the work assignments in terms of dollar value of the work to be performed. For those projects where a relatively small number of work assignments accounted for a significant share of total project value, we selected the highest dollar value assignments representing at least 50 percent of total project value. For those projects where most individual work assignments represented only a small fraction of total project value, we selected all assignments valued at $150,000 or more and a sample— selected at random—of the remaining work assignments. We conducted our review between June 2004 and June 2005 in accordance with generally accepted government auditing standards. Appendix II: Franchise Fund Operating Principles The enterprise should only provide common administrative support services. The organization would have a clearly defined organizational structure including readily identifiable delineation of responsibilities and functions and separately identifiable units for the purpose of accumulating and reporting revenues and costs. The funds of the organization must be separate and identifiable and not commingled with another organization. The provision of services should be on a fully competitive basis. The organization’s operation should not be “sheltered” or be a monopoly. The operation should be self-sustaining. Fees will be established to recover the “full costs,” as defined by standards issued in accordance with the Federal Accounting Standards Advisory Board. The organization must have a comprehensive set of performance measures to assess each service that is being offered. Cost and performance benchmarks against other “competitors” are maintained and evaluated. The ability to adjust capacity and resources up or down as business rises or falls, or as other conditions dictate, if necessary. Resources to provide for “surge” capacity and peak business periods, capital investments, and new starts should be available. The organization should specify that prior to curtailing or eliminating a service, the provider will give notice within a reasonable and mutually agreed time frame so the customer may obtain services elsewhere. Notice will also be given within a reasonable and mutually agreeable time frame to the provider when the customer elects to obtain services elsewhere. Customers should be able to “exit” and go elsewhere for services after appropriate notification to the service provider and be permitted to choose other providers to obtain needed service. Full-time equivalents would be accounted for in a manner consistent with the Federal Workforce Restructuring Act and Office of Management and Budget requirements, such as Circular A-11. Capitalization of franchises, administrative service, or other cross-servicing operations should include the appropriate full-time equivalents commensurate with the level of effort the operation has committed to perform.

The Department of Defense (DOD) is the largest user of other federal agencies' contracting services. The availability of these contracting services has enabled DOD and other departments to save time by paying other agencies to award and administer contracts for goods and services on their behalf. DOD can access these contracting services a number of ways, such as ordering directly from interagency contracts for commonly needed items. DOD also can pay someone else to do the work. For example, DOD uses franchise funds, which are government-run, fee-for-service organizations that provide a portfolio of services, including contracting services. As part of a congressional mandate, GAO assessed whether franchise funds ensured fair and reasonable prices for goods and services, whether DOD analyzed purchasing alternatives, and whether DOD and franchise funds ensured value by defining contract outcomes and overseeing contractor performance. GovWorks and FedSource, two of the franchise funds that DOD has relied on for contracting services, have not always ensured fair and reasonable prices while purchasing goods and services. The franchise funds also may have missed opportunities to achieve savings from millions of dollars in purchases, including engineering, telecommunications, or construction services. In the course of its review, GAO examined $249 million worth of orders and work assignments from the contracts the franchise funds used to make purchases on DOD's behalf. In many cases, GovWorks sought but did not receive competing proposals. GovWorks added substantial work--as much as 20 times above the original value of a particular order--without determining that prices were fair and reasonable. FedSource generally did not ensure competition for work, did not conduct price analyses, and sometimes paid contractors higher prices for services than established in contracts with no justification provided in the contract files. For its part, DOD--in the absence of clear guidance on the proper use of other agencies' contracting services--chose to use franchise funds on the basis of convenience without analyzing whether using franchise funds' contracting services was the best method for meeting purchasing needs. DOD also lacks information about purchases made through other agencies contracts, including franchise funds, which makes it difficult to make informed decisions about the use of these types of contracts. The franchise funds' business-operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors. However, the franchise funds did not perform analyses that DOD could have used to assess whether the funds deliver good value. The funds' performance measures generally focus on customer satisfaction and generating revenues. These measures create an incentive to increase sales volume and meet customer demands at the expense of ensuring proper use of contracts and good value. DOD and the franchise funds--which share responsibility for ensuring value through sound contracting practices such as defining contract outcomes and overseeing contractor performance--did not adequately define requirements. Without well-defined requirements, DOD and the franchise funds lacked criteria to measure contractor performance effectively. On a separate oversight-related issue, GAO found that the departments of the Interior and the Treasury--each of which has responsibility in the successful operation of the respective franchise funds--and the Office of Management of Budget have performed little oversight of GovWorks and FedSource.

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Wildland fires play an important ecological role on the nation’s landscapes. Fires have long shaped the composition of forests and grasslands across every region of the United States, including ponderosa pine forests in the Northwest and the Rocky Mountain West, chaparral in the Southwest, sagebrush steppe in the Great Basin, tallgrass prairies in the Midwest, longleaf pine forests in the South, and the pine barrens of the Atlantic Coast. Fires periodically reduce vegetation densities and stimulate seedling regeneration and growth in some species. Wildland fires can be ignited by lightning or by humans, either accidentally or intentionally. As we have described in previous reports from our body of work on wildland fire management, however, various land use and management practices over the past century—including fire suppression, grazing, and timber harvesting—have reduced the normal frequency of fires in many forest and rangeland ecosystems and have reduced these ecosystems’ resiliency to fire. We have reported that these practices contributed to abnormally dense, continuous accumulations of vegetation, which not only can fuel uncharacteristically large or severe wildland fires but also—with more homes and communities built in or near areas at risk from wildland fire—threaten lives, health, property, and infrastructure. In addition, changing climate conditions, including drier conditions in certain parts of the country, have increased the length and severity of wildfire seasons, according to many scientists and researchers. For example, in the western United States, the average number of days in the fire season increased from approximately 200 in 1980 to approximately 300 in 2013, according to the 2014 Quadrennial Fire Review. In Texas and Oklahoma, the average fire season increased from fewer than 100 days to more than 300 during this time frame. According to the U.S. Global Change Research Program’s 2014 National Climate Assessment, projected climate changes suggest that western forests in the United States will be increasingly affected by large and intense fires that occur more frequently. Figure 1 shows the Forest Service’s assessment of wildfire hazard potential across the country as of 2014. Working collaboratively across federal-nonfederal boundaries to address the wildland fire issue can involve any mix of the nation’s 2.3 billion acres of federal, state, local, private, or tribal lands. Historical settlement and development of the nation resulted in the intermingling of lands among these different entities. As we reported in 2008, about 60 percent of the nation’s land is privately owned and managed, and about 30 percent is managed by five federal land management agencies, with the Forest Service and BLM managing the majority of those lands. Of the remainder, about 8 percent of the nation’s land is owned and managed by state and local governments, and about 2 percent is owned and managed by the federal government for purposes such as military installations and water infrastructure. Under the National Forest Management Act and the Federal Land Policy and Management Act of 1976, respectively, the Forest Service and BLM manage lands for various uses such as protection of fish and wildlife habitat, forage for livestock, recreation, timber harvesting, and mineral production. FWS and NPS manage federal lands under legislation that primarily calls for conservation; activities such as harvesting timber for commercial use are generally precluded. As noted, BIA is responsible for the administration and management of lands held in trust by the United States for Indian tribes, individuals, and Alaska Natives. Each of the five agencies has regional or state offices that oversee individual field units. State forestry agencies and other nonfederal entities—including tribal, county, city, and rural fire departments—have primary responsibility for managing wildland fires on nonfederal lands, and share responsibility for protecting homes and other private structures. State and local governments can also adopt laws requiring homeowners and homebuilders to take measures to help protect structures from wildland fires. Regulating land use on nonfederal and nontribal lands is primarily a state and local responsibility. The challenge of balancing the benefits of periodic fires with fire’s negative effects on communities is particularly difficult in the WUI. Development in the WUI increased over the last several decades, in turn increasing the risk to life and property from wildland fire. According to the 2014 Quadrennial Fire Review, 60 percent of new homes built in the United States since 1990 were built in the WUI, which contains 46 million single-family homes, representing about 40 percent of single-family homes in the United States. Most development in the WUI occurs on nonfederal lands, and, according to the National Association of State Foresters, approximately 76,000 communities nationwide are considered to be at risk from wildland fire. According to the National Interagency Fire Center, the average number of structures burned by wildfire each year from 1999 through 2015 was 2,750; in 2015 alone, the total number of structures destroyed by wildfire was 4,636, of which 2,638 were residences. In addition to residential development, other assets that support communities can be located in the WUI, including power lines, highways, and resources that provide economic benefits to communities, such as timber, oil and gas wells, and recreational opportunities. WUI communities can be very different from each other—for example, seasonal resort towns located in valleys, with homes in close proximity and surrounded by fire-prone vegetation, or major suburban or metropolitan areas adjacent to wildlands. The risk each community faces also varies depending on such things as the flammability of the vegetation in and around the community, structure location and building materials, and local land use decisions. While the degree of risk can vary from one place to another, under specific conditions, wildfire can affect people and their homes in almost any location where vegetation is found. Even structures not immediately adjacent to wildland vegetation can be vulnerable because wind can transport embers and ignite homes more than a mile from a fire. Figure 2 provides examples of variation across communities by showing characteristics of the communities included in our review. See appendix II for the full text of this graphic. Federal agencies and nonfederal entities collaborate in a variety of ways to reduce the risk of wildland fire before a potential wildland fire incident occurs, through fuel reduction, fire preparedness, prevention, and education activities. In addition, individuals and communities may take action to mitigate fire risk by, for example, using fire-resistant building materials or building in low-risk areas. Collectively, these activities are generally intended to contribute to helping communities become more fire adapted. Fuel reduction—the removal of flammable vegetation that can fuel fires— can reduce the severity of wildland fires that occur, slow fire spread, or otherwise make fires more manageable. Fuel reduction can occur through mechanical treatment (i.e., thinning of trees and underbrush) or planned ignitions (known as prescribed fires), which often replicate the positive effects of naturally occurring wildfire. Federal agencies have collaborated with nonfederal entities to prioritize, plan, and conduct fuel reduction activities. For example, federal agencies have assisted local communities or counties in developing Community Wildfire Protection Plans— documents that outline ways individual communities plan to reduce their risk from wildland fire, such as by identifying priority areas for fuel reduction. Federal agencies have also funded landscape-scale fuel reduction projects that span multiple jurisdictions and include multiple partners. Federal initiatives involving such projects include the Collaborative Forest Landscape Restoration Program and the Reserved Treaty Rights Lands Program. Preparedness activities can help communities protect themselves during a wildland fire by ensuring they have access to fire suppression equipment, personnel, and emergency dispatch services. To prepare for wildfire seasons, federal agencies, states, and others sign agreements— such as State Cooperative Wildland Fire Management and Stafford Act Response Agreements—to document their commitment to coordinate and exchange personnel, equipment, supplies, services, and funds among the agencies for responding to wildland fires. At the local level, federal land management officials may meet with nonfederal entities, such as local fire department officials, ahead of the wildland fire season to discuss roles and responsibilities for wildland fire response and to train together by simulating incident responses. Prevention activities can reduce the likelihood of fires caused by humans. From 2001 through 2011, approximately 85 percent of wildfires in the United States were human-caused, according to the National Interagency Fire Center. Such fires can occur unintentionally—for example, when people burn leaves or trash or leave campfires unattended—or they may be deliberately set. According to research, communities with effective wildfire prevention programs are likely to have fewer human-caused fire starts. To help provide information about fire prevention, federal agencies work with nonfederal entities. For example, under the Cooperative Forest Fire Prevention program, established under the Smokey Bear Act of 1952, the Forest Service works with the National Association of State Foresters and the Ad Council to develop and distribute materials for the Smokey Bear campaign. Education activities can help reduce risk by helping homeowners and communities understand actions they can take to reduce risk. For example, communities may help minimize their risk by reducing vegetation and flammable objects around structures—an activity often called creating defensible space. They also may help minimize their risk by using fire-resistant building materials in construction and building in low-risk areas. To help provide information about these activities, federal agencies worked with stakeholder groups to develop a guide “designed to help leaders, planners, emergency professionals, and citizens learn the best approaches and programs to help their community become more fire adapted.” Some communities have encouraged the use of voluntary programs aimed at improving fire risk awareness and promoting steps to reduce their risk, such as the Firewise Communities program. In addition, some states have adopted legislation to encourage or require wildfire mitigation in high-risk areas. For example, some state and local governments have adopted laws and ordinances requiring property owners to establish and maintain defensible space. Figure 3 shows various actions federal agencies and nonfederal entities may take to reduce wildfire risk in and around communities. Some federal-nonfederal collaboration at the national level encompasses all types of risk-reduction efforts. For example, federal agencies and nonfederal entities participate in the Wildland Fire Leadership Council (WFLC), an intergovernmental committee of federal, tribal, state, county, and municipal government officials. The WFLC is to provide strategic oversight to help ensure policy coordination, accountability, and effective implementation of long-term strategies to address wildfire preparedness and suppression, hazardous fuel reduction, restoration and rehabilitation of the nation’s wildlands, and assistance to communities. After emphasizing the need to suppress all fires for much of the 20th century, federal agencies in recent decades reassessed their approach to wildland fire management. As part of this reassessment, and as a result of several wildfires and associated firefighter fatalities, the agencies developed the Federal Wildland Fire Management Policy of 1995. Under this policy, the agencies sought to make communities and resources less susceptible to damage from wildland fires and to respond to fires to protect communities and important resources at risk while considering the cost and long-term effects of that response. The policy was reaffirmed and updated in 2001, and guidance for its implementation was issued in 2003 and 2009. To address the increase in wildland fires threatening communities, over the past 2 decades, federal land management agencies have also placed greater emphasis on coordinating efforts with nonfederal entities to reduce the risk of fire. For example, in 2000, the President asked the Secretaries of Agriculture and the Interior to submit a report on managing the impact of wildland fires on communities and the environment. The report, along with congressional approval of increased appropriations for wildland fire management for fiscal year 2001, as well as other related activities, formed the basis of what is known as the National Fire Plan. As part of this effort, Congress directed the Secretaries of Agriculture and the Interior to work with state governors to develop a strategy. The resulting strategy—the 10-Year Comprehensive Strategy—was developed by federal, state, tribal, and local government and nongovernmental representatives and outlined a collaborative framework to facilitate implementation of proactive and protective measures to reduce the risk of wildland fire to communities and the environment. For example, the strategy recognized that while suppressing fires—especially near homes and communities—is important, a continued shift in fire management emphasis from reactive to proactive is also important in order to address the root of the problem rather than react only when faced with costly emergencies. Specifically, the strategy emphasized, among other things, the importance of reducing human-caused fires through fire-prevention education, increasing incentives for private landowners to address defensible space and fuel reduction on private property through local land use policies, promoting local government initiatives to implement fire- sensitive land use planning, and prioritizing fuel reduction where the negative impacts of wildland fire are greatest. As noted, in 2014, the federal agencies, in collaboration with partners from multiple jurisdictions, issued the Cohesive Strategy. The vision of the Cohesive Strategy is “to safely and effectively extinguish fire, when needed; use fire where allowable; manage our natural resources; and as a nation, live with wildland fire.” The Cohesive Strategy identified three goals: (1) landscapes across all jurisdictions are resilient to fire-related disturbances in accordance with management objectives, (2) human populations and infrastructure can withstand wildfire without loss of life or property, and (3) all jurisdictions participate in developing and implementing safe, effective, and efficient risk-based wildfire management decisions. The Cohesive Strategy calls for a set of national outcome measures to assess progress in meeting these goals. Since 2003, Congress has passed several laws aimed at actions federal agencies can take to reduce wildland fire risk across federal and nonfederal jurisdictions. For example, the Good Neighbor Authority contained in the Consolidated Appropriations Act, 2014, authorizes the Forest Service and BLM to enter into agreements allowing states to perform watershed restoration activities, including hazardous fuel reduction projects, on federal lands when the state is performing similar activities on adjacent state or private lands. In addition, the Tribal Forest Protection Act of 2004 authorizes the Secretaries of Agriculture and the Interior to enter into agreements or contracts with Indian tribes to carry out projects to protect Indian forest lands. See appendix III for additional details about these and other relevant laws. Federal officials and stakeholders we interviewed identified federal authorities, agency initiatives, joint community-level planning, leadership, community engagement, and agency resources for collaboration as directly affecting federal-nonfederal collaboration aimed at reducing wildland fire risk to communities. In some cases these factors enhanced collaboration, according to officials, while in other cases they hindered collaboration. Federal officials and stakeholders also identified factors that indirectly affect federal and nonfederal collaboration to reduce wildland fire risk in the WUI. These included community education, fire prevention messaging, and state and local requirements for private property owners to reduce risk. Many federal officials and stakeholders said that certain federal legal authorities that allow federal agencies to work across jurisdictions with nonfederal entities facilitate federal-nonfederal collaboration to reduce wildland fire risk. Among the specific authorities they mentioned were the Good Neighbor Authority and the Tribal Forest Protection Act of 2004. For example, under the Good Neighbor Authority, the Forest Service and BLM may enter into cooperative agreements or contracts with states to allow the parties to conduct restoration and forest management activities across jurisdictional boundaries. Using this authority, the Forest Service’s Eldorado National Forest and the California Department of Forestry and Fire Protection signed an agreement in 2016 allowing the agencies to work together on large-scale fuel reduction projects that both entities identified as critical to meeting fire protection objectives. The agreement is to allow the agencies to complete treatment on 500 acres located in the WUI along a major highway corridor between Sacramento and Lake Tahoe where five major wildfires have burned in the last 40 years. According to Forest Service officials, as of October 2016, the agency had executed 54 agreements using the Good Neighbor Authority in 20 states. The Tribal Forest Protection Act of 2004 authorizes the Secretaries of Agriculture and the Interior to enter into agreements or contracts with Indian tribes that meet certain criteria in order to carry out projects to protect Indian forest lands. Using this authority, the White Mountain Apache Tribe and the Forest Service’s Apache-Sitgreaves National Forest in Arizona completed the Los Burros Project on the national forest, which borders the Fort Apache Indian Reservation. According to BIA’s Fort Apache Agency officials, the project was important for reducing the risk of fire spreading onto the reservation from adjacent national forest land. According to Forest Service officials, as of November 2016, six projects had been completed using this authority, and at least six more were ongoing. Some federal officials and stakeholders said that federal and nonfederal entities are reluctant to use the Good Neighbor Authority and the Tribal Forest Protection Act of 2004 because the authorities are unclear or because not all agency staff are aware of how to use them. Forest Service headquarters officials said that since 2015, they have taken steps to provide greater clarity about using the authorities. For example, they said that Forest Service staff hosted webinars in 2015 about resources available to facilitate the use of the Good Neighbor Authority and that the agency’s website provides links to agreement templates, agency contacts, and training materials for federal and nonfederal employees working to develop agreements under this authority. Regarding the use of the Tribal Forest Protection Act of 2004, Forest Service officials said they partnered with the Intertribal Timber Council to improve working relationships with tribes and accomplish more cross-boundary landscape level restoration. According to Forest Service officials, they conducted workshops on the use of this authority in three forest service regions in 2015 and 2016, which they said contributed to six new projects pursued using the authority. Federal officials and stakeholders identified other federal and state environmental laws, including the National Environmental Policy Act (NEPA) and the Clean Air Act, as affecting their efforts to collaborate to reduce risk. For example, some federal officials and stakeholders said that the time it takes federal agencies to complete the NEPA process can hamper joint efforts. As we have previously reported, NEPA environmental reviews have been identified by critics as a cause of delay for projects due to time-consuming environmental analysis requirements, while they have been praised by proponents for, among other things, bringing public participation into government decision making. We also found that little data exist on the costs and benefits of NEPA analysis. With respect to the Clean Air Act, see appendix IV for additional information about the act and its effect on risk-reducing activities. Several federal officials and stakeholders identified landscape-scale restoration efforts and other programs that cross jurisdictional boundaries as helpful in bolstering collaboration to reduce wildland fire risk to communities. Among the efforts mentioned were the Department of Agriculture’s Joint Chiefs’ Landscape Restoration Partnership and BIA’s Reserved Treaty Rights Lands Program. In addition, many federal officials and stakeholders identified the Cohesive Strategy as enhancing federal-nonfederal collaboration to reduce wildland fire risk to communities. The Forest Service and the Natural Resources Conservation Service (NRCS) within the Department of Agriculture initiated the Joint Chiefs’ Landscape Restoration Partnership program in 2014 to improve the health and resilience of forest ecosystems where public and private lands meet. The program’s objectives include reducing wildfire threats to communities and landowners. In 2017, the Department of Agriculture is to invest in 10 new projects under the program while providing funding to 26 existing projects. The projects are located in 29 states across the country. For example, in 2016, the Forest Service and NRCS selected the Greater La Pine Basin project in Central Oregon as a recipient of funding under the program. The project is to take place over 3 years and is to target restoration on nearly 345,000 acres of federal, state, and private land. NRCS is to offer assistance to private landowners conducting fuel reduction treatments, while the Forest Service is to perform similar treatments on the project area located within the Deschutes National Forest. Figure 4 shows an example of tree thinning in the Greater La Pine Basin in Oregon. In 2015, BIA initiated the Reserved Treaty Rights Lands Program to treat and restore tribal landscapes within and adjacent to reserved treaty rights lands. Through this program, tribes may participate in and leverage funding for collaborative projects with nontribal landowners to enhance the health of priority tribal natural resources at high risk from wildland fire and move tribal landscapes toward long-term resilience to wildland fire. In fiscal year 2016, Interior directed $10 million toward the program, which funded 21 projects. In addition, many officials and stakeholders said that the Cohesive Strategy, issued in 2014, enhances collaboration because it emphasizes the importance of coordination across multiple agencies through an “all lands approach” and frames comprehensive goals that, taken together, may mitigate wildland fire risk. As noted, the Cohesive Strategy identified three goals: (1) landscapes across all jurisdictions are resilient to fire- related disturbances in accordance with management objectives, (2) human populations and infrastructure can withstand wildfire without loss of life or property, and (3) all jurisdictions participate in developing and implementing safe, effective, and efficient risk-based wildfire management decisions. Unlike the other initiatives described above, implementation of the Cohesive Strategy is not separately funded because the agencies do not consider it a program. One stakeholder involved in its implementation described the Cohesive Strategy as a framework designed to be applied differently in various locations and scales to best suit a particular circumstance or address a need or opportunity, rather than a one-size-fits-all approach. Even with these officials and stakeholders citing the Cohesive Strategy as enhancing collaboration, however, many officials and stakeholders also stated that improvements could be made to its implementation, as we discuss later in this report. Many federal officials and stakeholders said that joint planning, including prioritizing and developing community plans and regularly sharing information regarding wildland fire issues in person, has enhanced collaboration to reduce wildland fire risk to communities. For example, several federal officials and stakeholders said that developing annual operating plans—which outline roles, responsibilities, and resources involved in wildland fire management—between federal and nonfederal entities has been helpful for collaborating on fire preparedness activities. In addition, many federal officials and stakeholders said developing Community Wildfire Protection Plans (CWPP)—which outline ways communities aim to reduce their risk from wildland fire by, for example, prioritizing areas for fuel reduction in or near the community—enhances collaboration. Communities are not required to develop CWPPs, but when they do, the Healthy Forests Restoration Act of 2003 directs that CWPPs be developed collaboratively by local and state government representatives, in consultation with federal agencies and other interested parties. Under the act, agencies can prioritize funding for fuel reduction projects that implement CWPPs. Communities may benefit from CWPPs in several ways. For example, according to a 2015 Forest Stewards Guild report, CWPPs provide a structure for collaboration and building community capacity. The report also suggested that fuel reduction treatments completed in New Mexico communities with CWPPs have changed fire behavior, and that projects identified in CWPPs are less likely to be canceled or postponed compared to projects conducted in areas without CWPPs. Eldorado National Forest officials said that a CWPP completed in 2016 that covers an area managed by state, federal, and private landowners has helped enhance collaboration with community members to reduce risk because participants came together to jointly determine priority projects, including the placement of fuel reduction treatments. In addition, Florida state forestry officials said they used information from CWPPs to develop their statewide wildland fire risk assessment. According to these officials, the assessment helps identify communities at high risk and inform state land management decisions. Some federal officials and stakeholders also said that regularly sharing information about wildland fire issues in person can enhance collaboration to reduce wildland fire risk. For example, community members near the Eldorado National Forest said that pre-season wildland fire response training simulations, which included approximately 15 federal and nonfederal entities, helped participants develop relationships and gain a better understanding of each stakeholder’s responsibilities and concerns ahead of a potential wildland fire. These community members said that after participating in one such simulation, the state highway patrol agency began to understand the community’s concerns about impediments to safe evacuation. In addition, meeting regularly to discuss wildland fire risk reduction also helps create and facilitate collaboration, according to some officials from federal and nonfederal entities. For example, a Deschutes County official in Oregon said he participates in monthly meetings with BLM officials and community members to exchange information about upcoming activities, including efforts to reduce risk from wildland fire. He also said such meetings help develop and maintain trust between federal and nonfederal entities. Similarly, a study titled Fighting Fires with Education reported that in-person communication can increase community mitigation efforts. Many federal officials and stakeholders said that dedicated federal agency and community leadership enhances collaboration to reduce wildland fire risk to communities. Federal officials and stakeholders characterized leadership as seeking input from others, providing encouragement and support, committing, and collaborating. For example, according to Eldorado National Forest officials, leaders who actively seek input from multiple perspectives, including those with whom they may not agree, help strengthen relationships. Merritt Island National Wildlife Refuge officials said agency management’s encouragement to engage in partnerships helps employees initiate collaboration with nonfederal entities. Some Forest Service officials said that committed leaders who stay in their positions over a long period can help sustain relationships, which in turn help partners accomplish their goals of reducing wildland fire risk. For example, an Apache-Sitgreaves National Forest official said the length of time he has been at the forest—about 30 years—has helped him develop strong relationships with community members. In addition, federal officials and community members said that engaged leaders enhance federal- nonfederal collaboration. For example, Eldorado National Forest officials said that the forest supervisor, who respects community members with differing views, has helped the forest successfully complete NEPA requirements for fuel reduction projects. A National Association of Counties representative said that having federal officials who are willing to engage with communities by providing frequent updates about agency risk reduction efforts shows people that federal officials consider themselves part of the community; in doing so, they can help reduce communities’ risk of wildland fire. Similarly, a Forest Service official said that in cases in which federal, state, and local representatives work together, mitigation actions are more likely to occur and be sustained. Community members in Southern California cited an example of leadership they said enhanced collaboration. These community members said officials from NPS’ Santa Monica Mountains National Recreation Area initiated a meeting with local agencies in early 2016 to address public concern regarding standing dead oak trees in the area. Some of these characteristics align with a set of leading practices we previously identified as enhancing collaboration. For example, we previously found that, while collaborative mechanisms differ in complexity and scope, they all benefit from certain key features, including leadership. Many federal officials and stakeholders said an engaged community— that is, a community that understands the issues associated with wildland fire and is willing to take action to reduce risk—enhances federal- nonfederal collaboration to reduce wildland fire risk. According to federal officials and stakeholders, communities tend to be more engaged in wildland fire risk reduction activities if they have experienced recent fires, have resources to carry out risk reduction projects, and have a group of stakeholders from multiple jurisdictions dedicated to working collaboratively on wildland fire risk reduction. According to a 2013 Forest Service report, efforts to create and maintain fire-adapted communities must involve the entire community—including residents, government agencies, emergency responders, businesses, land managers, and others—if these efforts are to succeed. Officials and stakeholders provided examples of actions on the part of engaged communities, including working to identify priority locations and actions for reducing risk, creating defensible space on properties, and establishing WUI codes and ordinances aimed at reducing risk. Several federal officials and community members said that communities that have recently experienced nearby wildfires are often more eager to take action and work with federal agencies to reduce risk. For example, community members in Calabasas, California, and Topanga, California, said they created a multiagency fire council after the Old Topanga Fire in 1993, which burned about 18,000 acres, destroyed 359 homes, and resulted in three deaths. The community members said that working together through the council has helped them provide wildland fire education to community members and implement fuel reduction projects. FWS officials said that agencies and others should harness this interest in reducing risk because once a fire ends and time has passed, some community members may no longer feel the same urgency to reduce risk. In 2015, the Forest Service started a pilot program that officials said tries to take advantage of the “teachable moment” in communities recently affected by wildfires by deploying a “Community Mitigation Assistance Team” to these communities. Forest Service officials said the team focuses on, among other things, risk mitigation education and building local capacity to undertake mitigation actions. Some federal officials and stakeholders also said communities that have access to financial or other resources tend to be more engaged in carrying out risk-reduction projects. For example, Oregon Department of Forestry officials said state funding has helped establish collaborative groups, consisting of diverse stakeholders, that focus on forest-related issues around the state. California officials said federal grant funds aimed at community risk reduction help communities purchase equipment for fuel reduction projects, thereby keeping these communities engaged in mitigation efforts. Some officials and stakeholders also said it can be helpful when communities have a designated person assigned to work on wildland fire mitigation by facilitating coordination, communication, activities, and projects aimed at reducing risk. For example, Deschutes County in Oregon hired a forester who is dedicated to collaborating with the community to reduce risk, providing education about risk reduction, and initiating and implementing fuel reduction projects, among other duties. Similarly, the Forest Stewards Guild reported in 2015 that having dedicated WUI specialists helped accelerate fuel reduction work and expand public outreach in a county in New Mexico. In addition, community engagement increases when groups of stakeholders from multiple jurisdictions are involved, according to BIA headquarters officials we interviewed. For example, 27 states have prescribed fire councils, in which federal agencies, nonfederal entities, and others gather to discuss priority areas for fuel reduction treatments and adopting building codes to mitigate wildfire risk, among other issues. In contrast, some federal officials and stakeholders identified several potential impediments to community engagement. For example, some federal officials in certain areas said that residents are resistant to government intervention, including requirements that they take steps to reduce their risk on their own properties. On the other hand, an NPS official and stakeholders from western Colorado said some people expect firefighters to intervene and save their homes, and as a result these residents are not interested in taking steps to reduce risk. Furthermore, other stakeholders said that some residents resist fuel reduction treatments because they perceive the treatments as damaging the environment or because they want the privacy provided by the vegetation near their homes. Additionally, some federal officials and stakeholders said the public’s tolerance of smoke from prescribed burns can be limited, which results in fewer prescribed fire treatments. Many federal officials and stakeholders said that the availability of agency resources, including funds provided to states and localities as well as funding for agency activities, affects federal-nonfederal collaboration to reduce wildland fire risk to communities and federal efforts to reduce wildland fire risk more broadly. Regarding funding for states and localities, federal officials and stakeholders cited cooperative agreements and grants provided under the Forest Service’s State Fire Assistance (SFA) and Volunteer Fire Assistance (VFA) programs, and Interior’s assistance aimed at rural fire districts and communities, as helping communities in their efforts to reduce risk. For example, the Forest Service’s SFA program provides financial assistance through partnership agreements with state foresters for fire management activities, including helping communities become fire adapted. According to the Forest Service’s fiscal year 2017 budget justification, SFA is a critical part of the agency’s efforts to reduce wildland fire risk to communities, residents, property, and firefighters, because the program helps ensure that state, local, and private landowners have the capacity and tools they need to prepare for, respond to, and mitigate fire risk in the WUI and other critical areas. (See app. V for descriptions of selected federal programs that provide risk- reduction funding to states and localities.) Several federal officials and stakeholders said the uncertainty of federal funding through grants and assistance makes some nonfederal entities reluctant to undertake joint efforts to reduce risk. For example, California state officials said that landowners and other nonfederal entities may be reluctant to commit to joint efforts because federal funding may decrease, resulting in incomplete projects. In addition, several federal officials and stakeholders said that, in contrast to the cost-sharing mechanisms available for fire suppression activities, leveraging dollars for fuel reduction projects can be difficult because no standard procedures or agreements exist for sharing costs for such projects. According to a senior official from the National Association of State Foresters, state and federal agencies drafted a new “Supplemental Project Agreement” appendix for the Master Cooperative Wildland Fire Management and Stafford Act Response Agreement template that includes standard procedures and agreements for sharing costs associated with non- suppression projects, such as fuel reduction projects. As of February 2017, the updated Master Agreement template was undergoing review and awaiting final approval from the Departments of Agriculture and the Interior. Many federal officials and stakeholders expressed concern about the amount of funding available for risk-reducing activities carried out by the agencies. Some federal officials and stakeholders said the growing percentage of Forest Service funding spent to suppress fire has hampered the agencies’ ability to invest in activities on federally managed lands that may reduce risk. Similarly, several Interior officials said that Interior’s funding reductions, and shifts in wildland fire management priorities over the past 2 years to include a greater emphasis on sagebrush steppe ecosystems, have affected their ability to carry out wildland fire risk reduction activities. The officials also said that proposed changes to the department’s process for determining funding distribution to its four agencies may have similar effects. Funding constraints can have various effects, according to officials and stakeholders. For example, Forest Service officials said that limiting agency travel can reduce the agency’s ability to establish or maintain collaborative relationships with nonfederal entities. Forest Service officials also said that fire prevention efforts have been diminished in cases in which the agency has eliminated fire prevention positions or not filled them when they became vacant. A BIA official said that decreased fuel reduction funding reduced the number of acres the agency could treat on the Warm Springs Indian Reservation. Many federal officials and stakeholders identified other factors that indirectly affect federal-nonfederal collaboration to reduce wildland fire risk in the WUI. These include community education, fire prevention messaging, and state and local requirements for private property owners to take steps to reduce risk. Many federal officials and stakeholders identified community education efforts, such as the Firewise program and individual home risk assessments, as helping reduce community wildland fire risk. Some federal officials and stakeholders said Firewise, which encourages homeowners to take responsibility for their own properties by using fire resistant building materials and establishing defensible space, has helped reduce risk through community education. For example, a Florida Forest Service official said the Firewise program helped communicate to communities across the state the importance of reducing wildland fire risk. This official said the Firewise program works well in the state because it primarily relies on voluntary action rather than regulations. Figure 5 shows an example of a Firewise presentation at a community event and an advertisement for a Firewise event. Federal officials also said they have used the Ready, Set, Go! program to educate the public. For example, officials from the Apache-Sitgreaves National Forest in Arizona said they use this program to help members of the public understand actions they can take to prepare for a wildland fire incident, such as making sure car gas tanks are at least half full so that homeowners can evacuate quickly in case of a wildfire. Some federal officials said that conducting property risk assessments has been helpful to educate property owners about the steps they can take to reduce their risk of wildland fire. For example, BIA officials said fire managers at the Fort Apache Indian Reservation reach out to homeowners individually to teach them about risk-reducing actions they could take based on their home’s characteristics; these actions could include clearing vegetation or relocating firewood to a spot away from their home. BIA officials said that because they make the effort to reach people at home, rather than provide general information to the broader public, homeowners are more likely to undertake risk-reducing activities pertinent to their homes. However, some officials said homeowners are not always receptive to having their properties evaluated, and some stakeholders said not all counties can afford to conduct risk assessments and not all homeowners want to pay to create defensible space. More broadly, a Forest Service headquarters official said that, while community education has been successful in increasing awareness about reducing risk, it does not necessarily result in individuals or communities taking action. In addition, this official said programs such as Firewise have increased risk awareness, but the extent of the risk reduction is unclear. To help address this, the official said the agency expects to complete a study in late 2017 that examines mitigation actions resulting from the Firewise program; the Forest Service is conducting this study in partnership with the National Wildfire Coordinating Group, the Wildland Urban Interface Mitigation Committee, and the National Association of State Foresters. Also, this Forest Service official said the agency and the National Fire Protection Association are discussing making changes to the Firewise program to emphasize mitigation actions. Another factor that several federal officials and stakeholders identified as helping reduce wildland fire risk to communities is providing both consistent and targeted messaging to prevent human-caused wildfires. Regarding consistent prevention messaging, Forest Service officials said that numerous federal and state agencies in the western United States have used the One Less Spark–One Less Wildfire campaign, which started in California in 2012 and has since been used in other states. In addition, some federal officials we spoke with said they use the Smokey Bear campaign and materials as part of fire prevention efforts in their communities. A community in Arizona, which attracts recreation visitors but is prone to fires, created a working group to improve the consistency of local fire prevention messages. Specifically, officials from the Apache-Sitgreaves National Forest, the BIA Fort Apache Agency, surrounding counties, the Pinetop-Lakeside community, and other entities formed the White Mountain Fire Restrictions Working Group. Working group members said they issue unified, cross-jurisdictional fire restrictions (i.e., limitations on activities such as building campfires or using fireworks) to help ensure the consistency of information provided to the public. According to working group members, before they formed this group, the area was at greater risk of human-caused fire because each jurisdiction issued its own level of fire restriction, which led to public confusion because the fire restrictions often differed across jurisdictions. Working group members said that as a result of their efforts, the risk of fire has decreased because the public is less confused about where and when fire-related activities can be conducted. Regarding targeted fire prevention messaging, Forest Service officials cited National Fire Prevention Education Teams as an example of federal-nonfederal efforts to provide targeted fire prevention information. These officials said the National Wildfire Coordinating Group sends teams—which may include members from the Departments of Agriculture and the Interior, states, and others—to areas at high risk of wildland fire to raise awareness of actions communities can take to reduce their risk. According to the National Interagency Fire Center, these teams can help reduce the loss of human life, property, and resources. They can also improve interagency relations. BIA officials said that, in part because of targeted efforts aimed at reducing arson, the number of human-caused fires on the Fort Apache Indian Reservation in Arizona decreased from several hundred in 2004 to 40 in 2016. BIA officials estimated that these types of efforts also helped reduce the number of fires caused by youths on the Warm Springs Indian Reservation in Oregon from 17 in 2009 to 2 in 2016. A study conducted by the Forest Service and Interior agencies found that large-scale wildfire prevention programs on tribal lands are highly effective and such programs have reduced the number of wildfire ignitions caused by campfire escapes, arson, and youth-ignited wildfires, among others. Several federal officials and stakeholders noted that state and local laws governing home location, construction, and landscaping can reduce wildland fire risk to communities. Some states and local governments require homeowners in certain locations to use fire-resistant building materials or to create a certain amount of “defensible space” around structures on their properties by removing or reducing potentially flammable vegetation. For example, under Oregon’s Forestland-Urban Interface Fire Protection Act, property owners in identified forestland- urban interface areas must reduce excess vegetation around structures and along driveways that can fuel a fire. According to Oregon state officials, the law, at the time of our review, was applicable to 17 of Oregon’s 36 counties identified as having a higher wildland fire risk. Oregon state officials said it is helpful that the state legislature recognizes the need for individual homeowner action in risk mitigation, and they said they are reviewing the law to determine ways it could be improved. California state law also requires property owners in certain areas to maintain a specified amount of defensible space around structures. Local governments in several states have codes or ordinances aimed at wildland fire risk reduction by requiring fire resistant building materials, requiring the creation of defensible space, or limiting where homes can be built. For example, the San Diego, California, municipal code’s Landscape Regulations aim to reduce the risk of fire through site design and management of flammable vegetation. An official from the National Association of Counties said that local policies promoting resiliency and fire readiness through building codes and zoning ordinances can be helpful but also resource intensive. As a result, this official said, county decision-makers should weigh the costs of requiring such actions against the benefits gained through reduced risk. Forest Service headquarters officials said codes and ordinances can help reduce wildland fire risk in some circumstances, but they said no data are available to show what type of community planning is instrumental in reducing risk. These officials also noted that taking action does not guarantee that a home will be spared, given the conditions and severity of a fire. According to a nonfederal researcher we interviewed, it is also helpful when communities integrate actions or requirements to reduce risk into comprehensive county land-use plans. For example, the Community Planning Assistance for Wildfire program, established in 2015 by Headwaters Economics and Wildfire Planning International, is a grant program that works with communities to help reduce wildfire risk through improved land-use planning. In Wenatchee, Washington, the program developed recommendations to help the community improve its land-use plans specific to its wildland fire risk. While the community has high- frequency fires, they are not high intensity and most are grass fires, though many buildings have been lost in recent fires. Through the program, community planners determined that it was unnecessary to require the entire community to use fire-resistant building materials and create defensible space; instead, they decided to place such requirements on homes located in the community’s highest risk areas. Federal officials and stakeholders we interviewed said that improving implementation of the Cohesive Strategy, increasing collaborative planning, expanding education, increasing prevention efforts, and improving local timber-processing capabilities could improve federal agencies’ and nonfederal entities’ ability to reduce wildland fire risk to communities. Officials and stakeholders also identified actions that, while not necessarily within federal agencies’ control, could help reduce wildland fire risk to communities. These include increasing state and local adoption of laws and ordinances that encourage fire-resistant building and landscaping and that limit development in certain areas, and providing insurance incentives to encourage property owners and communities to adopt risk-reducing measures. Many federal officials and stakeholders said that improving the implementation of the Cohesive Strategy could help reduce wildland fire risk to communities. For example, some stakeholders said that federal agencies could improve communication about the Cohesive Strategy, which could further its implementation. One such stakeholder said that he believes some federal land management officials still have not heard of the Cohesive Strategy (issued in 2014), and that roles and responsibilities for implementing the strategy are not well defined at the national level. Some officials and stakeholders said it is important to increase accountability for implementing the Cohesive Strategy, such as through the use of performance measures as part of implementing the strategy. The Cohesive Strategy states that its successful implementation depends in part on monitoring and accountability, noting that “A set of national outcome performance measures will allow Congress, the national wildland fire management community, and other stakeholders to monitor and assess progress toward achieving the results for each of the three national goals.” This emphasis on monitoring and accountability is consistent with key characteristics we have described for developing and implementing effective national strategies. Likewise, one of the key collaboration practices we have identified is that federal agencies engaged in collaborative efforts should develop mechanisms to monitor, evaluate, and report on results. We found that reporting on these activities can help key decision makers within the agencies, as well as clients and stakeholders, obtain feedback for improving both policy and operational effectiveness. The agencies use “success stories” to share what they consider successful or effective efforts at implementing the Cohesive Strategy. However, the success stories we reviewed focus on individual projects or efforts and do not generally indicate the role, if any, that the Cohesive Strategy played or describe the extent to which the projects or efforts have individually or cumulatively contributed to achieving the strategy’s goals. More broadly, the Wildland Fire Leadership Council (WFLC)—the interagency organization responsible for oversight and leadership in implementing the Cohesive Strategy (and which includes the Forest Service and Interior as members)—has not developed measures to assess progress on the part of federal and nonfederal participants in meeting the national goals of the Cohesive Strategy. According to a December 2016 WFLC report, a performance measure task group was convened in January 2013 and proposed several performance measures that could be used to track progress in achieving the broad goals of the Cohesive Strategy. One such measure was the percentage of communities at risk with a high probability of withstanding wildfire without loss of life and infrastructure; this measure was intended to assess the extent to which the threat to communities at risk from wildfire had decreased. However, the Wildland Fire Executive Council, a former advisory council to WFLC, concluded that, while performance information for many of the 2013 task group’s proposed measures could be collected using reporting measures the agencies already had in place, fully implementing the proposed performance measures would likely place undue burden on the agencies and nonfederal partners. The Forest Service and Interior each have performance measures to monitor and assess their wildland fire management efforts. For example, one of Interior’s performance measures is the amount of fuel reduction conducted in the WUI, which is consistent with the Cohesive Strategy’s emphasis on resilient landscapes. However, these agency measures are intended to separately assess each agency’s performance—or, in some cases the performance of specific programs—and do not represent the set of measures to assess national progress toward meeting the Cohesive Strategy’s goals, as called for in the strategy. The 2016 WFLC report states that the use of research findings, remote sensing, and modelling can help quantify the effects of activities over time and can contribute to showing accountability and success in meeting the goals of the Cohesive Strategy. Because the report was issued in December 2016, Forest Service and Interior officials said they have not had sufficient time to determine which, if any, research findings can be useful in this effort. By working with their WFLC partners to develop measures, the Forest Service and Interior could better assess national progress toward achieving the goals of the Cohesive Strategy. Many federal officials and stakeholders said increasing collaborative planning could help reduce fire risk to communities. Several federal officials and stakeholders said such planning could occur by developing or improving CWPPs, and some said increasing the frequency of collaborative in-person meetings ahead of fire seasons could help reduce risk. These suggested actions align with a 2013 Forest Service study that found that, while individual homeowner actions are essential to reduce the potential for wildfire damage to property, it is also critical for entire communities to work together on a broader planning and development scale. Regarding CWPPs, some officials and stakeholders said that more communities developing CWPPs and taking steps to improve their usefulness could enhance collaborative efforts to reduce wildland fire risk to communities. The National Association of State Foresters estimates that, as of fiscal year 2015, about 20 percent of the approximately 76,000 communities identified as being at risk from fire were covered by a CWPP. Because it is helpful to collaboratively plan, a stakeholder with the Northeast Regional Cohesive Strategy Committee said the committee is encouraging more communities to develop CWPPs or equivalent plans and to make collaborative planning a priority. In addition, some stakeholders said that updating and assessing CWPPs is important to maintaining their usefulness because some are outdated and many are not comprehensive, suggesting that the plans do not reflect changing circumstances such as increased housing development or altered landscape conditions. Community members in Southern California said their CWPP states that the plan should be updated every 5 years, or sooner if social, political, or economic factors warrant. This language aligns with the Forest Service’s Best Management Practices for Creating a Community Wildfire Protection Plan, which includes as a best practice to “quickly identify changes affecting the CWPP and adapt the plan to new conditions as they arise.” In some locations we visited, we found that CWPPs outlined communities’ plans to monitor and evaluate their risk-reduction efforts every 5 years or on an annual basis, such as in Central Oregon’s Greater La Pine CWPP. Forest Service and Interior officials said they participate in community efforts to develop and implement CWPPs, but they said it is not their role to direct communities about how and when to develop and maintain CWPPs or to oversee their implementation. As another way to improve collaborative planning, a senior NPS official and community members in California said the frequency of collaborative in-person meetings ahead of fire seasons should increase. For example, these community members said it would be beneficial to resume pre-fire season meetings that the community formerly held with local fire chiefs, state and county officials, and Eldorado National Forest officials, during which participants discussed issues such as resources and evacuation plans in the event of a wildfire. These community members said these meetings were a good way to foster trust and develop relationships, thereby increasing the chances of a successful response in the event of a wildland fire. Many federal officials and stakeholders said that expanding the amount of education provided to communities about the benefits of wildland fire and the steps individuals can take to reduce their risk could help reduce wildland fire risk to communities. Some stakeholders said it is important to provide more education on the ecological role of fire and the benefits it can provide. For example, a representative of the Southern Group of State Foresters said it would be helpful for private landowners across the United States to understand the benefits of prescribed burning because this could help landowners reduce risk on their properties and become more accepting of prescribed burning as a treatment on adjacent public lands. Some federal officials and stakeholders also said that expanding education about mitigation steps communities and individuals can take can help reduce risk. For example, some federal officials and stakeholders said sharing success stories about ways communities have reduced their wildland fire risk could help increase awareness about actions other communities could take. Some community members also said that tailored and more creative public education materials (i.e., those that reflect the unique topography, vegetation, culture, and building type of a particular community) describing steps individuals can take to reduce their wildland fire risk could prompt homeowners to act. For example, community members in Estes Park, Colorado, said that their county’s Firewise materials were tailored to reflect the community’s characteristics. These community members said the Colorado State Forest Service has provided such materials to counties in Colorado for approximately 20 years. According to 2006 and 2013 Forest Service reports, among the key ingredients for successful educational programs are publications that are geared toward specific geographic areas, as well as varied educational approaches and information pathways that meet differing learning styles. Some federal officials and stakeholders said that a clearinghouse that provides information about resources could help communities better understand actions they could take to reduce their risk. Interior Office of Wildland Fire officials said that a cooperative effort between the Forest Service and the Interior agencies resulted in a website, www.forestsandrangelands.gov, that provides fire, fuels, and land management information to government officials, land and fire management professionals, businesses, communities, and other interested organizations and individuals. Many federal officials and stakeholders said that increasing fire prevention efforts could help reduce wildland fire risk to communities, because many wildland fires are caused by humans. According to the National Interagency Fire Center, from 2001 to 2011, approximately 85 percent of wildland fires in the United States were caused by humans. Some federal officials we interviewed said consistent prevention messaging across locations, such as through the nationwide Smokey Bear campaign, is important; this is because it helps the public identify with the message no matter where they travel. Federal officials said that, in addition, targeting prevention messages to specific groups is important because the origin of human-caused fires varies depending on the location and characteristics of the community. For example, some areas may have more instances of juvenile arson, while other areas may have more instances of campers not fully extinguishing their campfires. A senior Forest Service official said that communities can benefit from developing prevention plans that identify a targeted prevention audience. Otherwise, this official said, communities and federal officials “throw darts at a board” rather than targeting prevention efforts at specific fire-causing activities unique to a particular area. Similarly, Oregon Department of Forestry officials said that better studies and analyses on how human- caused fires start could help target prevention efforts. Both Forest Service and Interior officials, however, said limited resources affect their ability to take additional steps to increase targeted prevention messaging. Many community and tribal members said that improving their timber- processing capability could help reduce wildland fire risk. Some said that their community’s timber-processing capability no longer exists, thereby affecting the market for timber or other materials removed as part of fuel reduction projects. Community members in northern California said limited timber-processing capability affects their ability to process the vegetation removed as part of fuel reduction efforts. Because timber is valuable to some communities, the ability to process it can help support jobs and the local economy. Apache-Sitgreaves National Forest officials in Arizona cited the usefulness of establishing biomass processing facilities near communities, noting that such facilities located near the neighboring community of Snowflake have helped facilitate a local timber- processing market. One stakeholder said a more developed biomass industry could help reduce wildland fire risk by providing an outlet for removed vegetation but noted that it is a more localized solution that may not work in every community. The Forest Service has multiple efforts aimed at maintaining and spurring the timber industry. For example, through its Wood Innovations grant program, formerly known as the “Woody Biomass Utilization Grant” program, the Forest Service has awarded grants to stimulate widespread use of forest byproducts for renewable energy, wood products, and innovative wood building materials. From fiscal years 2005 through 2016, the program awarded more than $54 million to more than 200 grant recipients, including small businesses, non-profit organizations, tribes, and state agencies. Many federal officials and stakeholders said that increased state and local adoption of laws and ordinances that encourage fire-resistant building and the removal of potentially flammable vegetation around structures could help reduce wildland fire risk. Some stakeholders also said that local nonfederal land-use plans should discourage development in areas at high risk from wildland fire. A 2013 Forest Service study found that 91 percent of WUI residents interviewed in California, where defensible space ordinances are in place, have lowered fire risk by removing flammable vegetation from their properties. Community members in western Colorado said it would be helpful if communities that develop such ordinances track their effectiveness in reducing wildland fire risk and publicize the results to help other communities make informed decisions about implementing their own ordinances. Community members in central Florida said that without such ordinances, homeowners and developers are less likely to take steps to reduce their risk. Some stakeholders said that increasing communities’ responsibility for the costs of suppressing fires could create an incentive for communities to take actions to reduce their wildland fire risk. One state recently took action to create such an incentive. In 2016, the Utah state legislature passed a law under which the state will assume certain wildland fire suppression costs for local governments that implement prevention, preparedness, and mitigation actions to reduce the risk and cost of wildfire. Local governments that do not implement such actions will be responsible for wildland fire costs within their jurisdictions. This new law was developed with the involvement of the Utah Association of Counties, the Utah League of Cities and Towns, the Utah State Fire Chiefs Association, local fire departments, various policy workgroups, and others. Many federal officials and stakeholders said that it can be helpful for insurance companies to provide incentives such as discounts or lower rates on insurance premiums for actions homeowners take to reduce their vulnerability to wildfire. Such discounts are provided in some areas; for example, according to the National Fire Protection Association, one insurance company provides homeowners in Arizona, California, Colorado, New Mexico, Oregon, Texas, and Utah with a discount on their insurance premiums if they are located in a Firewise-designated community. Stakeholders in Southern California also said some insurance companies have refused to provide homeowner’s insurance to property owners unless they undertake risk-reducing actions. For example, these stakeholders said that property owners in a community identified as being at particularly high wildland fire risk successfully obtained insurance only after using fire-safe building materials on their homes and other structures and clearing their properties of vegetation within 200 feet of their structures. Some federal officials and stakeholders, however, suggested that the effects of such insurance incentives may be limited. For example, a senior Forest Service official said insurance discounts may not be large enough to incentivize property owners to make risk-reducing changes. This official also noted that providing discounts to homeowners in Firewise communities does not guarantee that every homeowner within the community has taken action to reduce risk. Similarly, a 2016 review by Headwaters Economics reported, based in part on conversations with insurance industry experts, that it is unlikely that insurance rates and policies alone will determine whether a landowner decides to build a new home on wildfire-prone land. The 2015 Forest Stewards Guild report stated that some residents see insurance as a substitute for risk-reducing efforts, and that insurance therefore becomes a disincentive to such efforts. Abnormally dense accumulations of vegetation, combined with drought and other climate stressors, have contributed to larger and more severe wildland fires; at the same time, more people are choosing to live in fire- prone locations. Because fire can cross jurisdictions, efforts to reduce the risk of fire to communities involve a multitude of entities working together, including federal land management agencies, state and local governments, Indian tribes, and others. One area of focus for both federal and nonfederal entities has been the development of the Cohesive Strategy, which emphasizes the importance of coordination across entities and frames comprehensive national goals for mitigating the risk of wildland fire. However, WFLC has not developed performance measures to assess the combined efforts of federal and nonfederal participants in meeting the goals of the Cohesive Strategy. The Forest Service and Interior each have performance measures to monitor and assess their wildland fire management efforts, but those measures apply to the agencies individually and do not represent the set of national measures called for in the Cohesive Strategy. By working with the interagency body WFLC to establish such measures, the Forest Service and Interior, together with federal and nonfederal partners, could better assess national progress toward achieving the goals of the Cohesive Strategy. To help determine the extent to which the goals of the Cohesive Strategy are being met, we recommend that the Secretaries of Agriculture and the Interior direct the Chief of the Forest Service and the Director of the Office of Wildland Fire, respectively, to work with WFLC to develop measures to assess national progress toward achieving the strategy’s goals. We provided a draft of this report for review and comment to the Departments of Agriculture and the Interior. We received written comments from the Forest Service (responding on behalf of the Department of Agriculture), which are reproduced in appendix VII. In its letter, and in a subsequent discussion with the Forest Service audit liaison, the Forest Service stated that it generally agreed with our findings and recommendation, and that it is committed to implementing the Cohesive Strategy and will continue to work with WFLC and other entities towards reducing the risk of wildland fire on all lands in the United States. We also received written comments from Interior, which are reproduced in appendix VIII. Interior did not concur with our recommendation, citing three primary areas of disagreement. First, while acknowledging that measures to assess national progress toward achieving the goals of the Cohesive Strategy could be beneficial, Interior noted in its letter that the Wildland Fire Executive Council had previously determined that instituting the measures that had been presented to it would place undue burden on the agencies and nonfederal partners. Interior also stated that assessing national progress toward achieving the Cohesive Strategy’s goals would cost taxpayers more than it would save, and cited a 2013 study that noted the challenging nature of efforts to assess the effectiveness of fuel reduction and restoration treatments. More recently, however, as we note in our report, a December 2016 WFLC report stated that the use of research findings, remote sensing, and modelling can help quantify the effects of activities over time and can contribute to showing accountability and success in meeting the goals of the Cohesive Strategy. During our review, Interior officials said they had not had sufficient time to determine which, if any, research findings could be useful in this effort, and Interior’s letter does not refer to this aspect of the 2016 WFLC report. As a result, it is not clear whether Interior has fully considered the potential for using research findings or other tools described in the 2016 report to measure national progress in a cost-effective way. Second, Interior stated that in 2014 it changed its strategic performance metrics to demonstrate departmental progress toward meeting the strategy’s goals. Our report describes an example of one such departmental measure that is consistent with the Cohesive Strategy’s emphasis on resilient landscapes. However, as we note in our report, agency performance measures are intended to separately assess each agency’s performance—or, in some cases the performance of specific programs—and do not represent a set of measures to assess national progress toward meeting the Cohesive Strategy’s goals, as called for in the strategy. Such measures could, as noted in the Cohesive Strategy, allow Congress and other stakeholders to monitor and assess progress toward achieving the strategy’s goals. Interior did not indicate any steps it would take to meet the Cohesive Strategy’s call for measuring national, rather than departmental, progress in meeting the strategy’s goals. Third, Interior noted that federal entities cannot control or mandate response or participation from non-federal partners. However, given the Cohesive Strategy’s emphasis on collaboration between federal and nonfederal entities to achieve its goals, the WFLC—as the interagency body charged with implementing the strategy—is an appropriate forum for working to develop measures. While we understand that federal entities cannot control or mandate response or participation from non-federal partners, we believe that, as members of WFLC, Interior and other federal agencies can provide leadership in helping ensure accountability for the mutually agreed upon goals of the Cohesive Strategy. Interior also provided technical comments regarding the Cohesive Strategy. In response, we incorporated additional information to note that implementation of the Cohesive Strategy is not separately funded. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of Agriculture and the Interior, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions regarding this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to the report are listed in appendix IX. This report examines (1) factors federal officials and nonfederal stakeholders cited as affecting federal-nonfederal collaboration aimed at reducing wildland fire risk to communities and (2) actions federal officials and nonfederal stakeholders said could help improve their ability to reduce wildland fire risk to communities. To perform this work, we reviewed various laws, policies, guidance, state and local zoning codes and ordinances, agency budget justifications, academic literature, and reviews related to federal wildland fire management. Among the laws we reviewed were the Federal Land Assistance, Management, and Enhancement Act; Healthy Forests Restoration Act of 2003; Good Neighbor Authority; Wyden Amendment; and Tribal Forest Protection Act of 2004. In addition, we reviewed policy documents and agency budget justifications, such as the 2009 Guidance for Implementation of Federal Wildland Fire Management Policy, the National Cohesive Wildland Fire Management Strategy, and the Forest Service fiscal year 2017 budget justification. We also reviewed other documents such as the 2014 Quadrennial Fire Review Final Report, the U.S. Global Change Research Program’s 2014 National Climate Assessment, Headwaters Economics’ paper Do Insurance Policies and Rates Influence Home Development on Fire-Prone Lands?, and the Forest Stewards Guild report Evaluating the Effectiveness of Wildfire Mitigation Activities in the Wildland-Urban Interface. We conducted a basic assessment of these studies’ methodologies, assumptions, and limitations and determined them to be sufficiently credible for our purposes. We also interviewed headquarters officials from each of the five federal land management agencies responsible for wildland fire management—the Forest Service in the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service in the Department of the Interior—as well as Interior’s Office of Wildland Fire. Because our report addresses reducing risk to communities, we focused our review on federal wildland fire management activities intended to reduce risk before a potential wildland fire occurs, through fire preparedness, fuel reduction, prevention, and education. To address our first objective, we interviewed fire management officials from 10 federal land management units, such as national forests and national parks, as well as representatives of communities near these lands. We selected land management units from each of the five federal agencies using the following criteria: the size of the estimated population in nearby wildland-urban interface areas, as defined by the Forest Service, with high wildland fire hazard potential; the size in acres of the land management unit; input from regional land management agency officials; and the geographic location of the land management unit, with units selected to provide geographic diversity. We then selected communities adjacent to the federal land management units by considering input from local land management agency officials. For each community selected, we interviewed representatives from nonfederal entities with which land management unit officials interacted; these representatives included county officials, local fire department officials, and homeowners. Using these criteria, we selected land management units and adjacent communities in five states: Arizona, California, Colorado, Florida, and Oregon. During our interviews with federal officials and community representatives, we asked about ways in which federal and nonfederal entities collaborated and factors that enhanced or hindered their ability to collaborate. In addition, for the five states we selected, we interviewed officials with state wildland fire and forestry agencies. To gain a wider range of perspectives from states that were not included in our site selection, we interviewed officials with the National Association of State Foresters, the Southern Group of State Foresters, and the Northeastern Area Association of State Foresters, which represent states across the country. In addition, to gain a better perspective on the Cohesive Strategy, we interviewed members of the Wildland Fire Leadership Council (WFLC) and the three regional committees—Northeast, Southeast, and West—responsible for overseeing the Cohesive Strategy’s implementation. We also interviewed representatives of nongovernmental organizations that were identified by federal officials we interviewed or in reports we reviewed as being involved in federal- nonfederal efforts to reduce wildland fire risk. During these interviews we asked about ways in which they collaborated with federal land management agencies and factors that enhanced or hindered their ability to collaborate. Table 2 provides a list of nonfederal associations, organizations, and committees included in our review. We reviewed and analyzed interviewees’ responses and identified broad categories of factors they said enhance or hinder federal-nonfederal collaboration to reduce fire risk to communities and actions they said could improve their ability to reduce such risk. In response to our interview questions about factors that affect collaboration efforts aimed at reducing risk to communities, officials and stakeholders described factors that we defined as having affected direct collaboration and indirect collaboration. For example, direct collaboration (i.e., situations involving a tangible relationship between two or more parties) includes federal policies and authorities that require or enable collaboration. Factors that affect indirect collaboration (i.e., situations in which actions by one entity may affect other entities attempting to achieve a similar outcome) include community education, which can affect communities’ ability to take risk reduction actions that may or may not include collaboration with others. We include both types of factors in our report, distinguishing between direct and indirect collaboration as appropriate. Based on the frequency of factors identified, as well as information we obtained through our review of documents mentioned above related to this topic, we reported on factors associated with nine categories. The list of factors and associated definitions we used for analytical purposes were: Federal authorities: laws that authorize federal and nonfederal entities to conduct risk-reducing efforts across jurisdictions. State and local authorities: state and local laws or ordinances that may require homeowners, businesses, or communities to conduct certain risk-reducing actions or meet specified building requirements. Initiatives: federal efforts aimed at conducting cross-jurisdictional projects to reduce risk. Joint planning: federal-nonfederal efforts to discuss and document future risk reduction activities. Agency resources for collaboration: the ability of federal and nonfederal entities to share staff or funding and the presence of staff or funding to engage in collaborative activities. Leadership: efforts to collaborate, communicate, and seek input from others, among other characteristics. Education: efforts to educate individuals about steps they can take to reduce risk. Wildfire prevention messaging: efforts to provide prevention information or materials. Community engagement: the extent to which communities are aware of and engaged in taking actions to reduce risk, such as establishing defensible space. Two analysts coded each response into these categories. Because many of the responses were broad in nature and could be categorized into multiple categories, analysts verified each other’s categorizations. After completing the categorization of responses, we assessed the frequency with which responses occurred in each category to help identify factors to discuss in our report. Our report generally does not discuss infrequently identified factors. To address our second objective, we interviewed federal officials and nonfederal entities described above to obtain information about actions they said could reduce risk to communities from wildland fire. We categorized and coded their responses using the method described above. Based on the frequency of solutions identified, as well as information we obtained through our review of documents mentioned above related to this topic, we reported on solutions associated with seven categories: improving implementation of the Cohesive Strategy, increasing collaborative planning, expanding education, increasing prevention efforts, improving timber-processing capability, adopting state and local ordinances, and providing insurance incentives. To increase our understanding of the actions identified, we reviewed information about related programs and initiatives, including information about the Forest Service’s Wood Innovations grant program, documents such as Best Management Practices for Creating a Community Wildfire Protection Plan, and information about the Smokey Bear campaign. We reviewed the Cohesive Strategy and action plans for implementing it, various “success story” project descriptions, guiding documents for WFLC and its regional committees, and other relevant documents. We also reviewed Cohesive Strategy implementation guidance and a 2016 report on the Cohesive Strategy by WFLC’s National Strategic Committee. We then compared agency efforts to assess progress toward achieving the Cohesive Strategy’s goals against guidance contained in the strategy and associated action plans. To obtain additional insight into the use of performance information on the part of federal agencies, we reviewed our previous reports related to interagency strategies and agencies’ efforts to collaborate. We also reviewed various state and local ordinances that encourage fire-resistant building and the removal of potentially flammable vegetation around structures and that discourage development in areas at high risk from wildland fire. In addition, upon completing our analysis of interviewee responses, we followed up with Forest Service and Interior headquarters officials to learn the extent to which the agencies were implementing or considering the actions the interviewees suggested. For both objectives, when providing general statements to describe factors that affect collaboration and actions to reduce risk, we use the term stakeholders to refer to representatives of the nonfederal entities listed above. When describing individual examples, we often refer to the specific type of stakeholder, such as community members. In addition, because this is a nonprobability sample, the information we report is not generalizable to all land management units and communities. It does not represent a comprehensive list of collaborative programs or efforts nationwide or in these states but, rather, provides illustrative examples from a geographically diverse range of land management units and communities that are at high risk of experiencing wildland fire. We conducted this performance audit from October 2015 to May 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 3 shows various characteristics of the communities included in our review. Table 4 describes several federal laws aimed at reducing wildland fire risk through collaboration. Several federal officials and stakeholders we interviewed said that some national and state air quality standards under the Clean Air Act have the effect of limiting fuel reduction treatments that rely on prescribed burning. Under the act, the Environmental Protection Agency (EPA) establishes standards for controlling air pollution. Pollutants in smoke, including those emitted from prescribed fires, can cause health issues and also cause air quality to exceed EPA’s health standards for fine particulate matter and ozone. Wildfire smoke can reach hazardous levels in downwind communities for long periods of time, while prescribed fire can cause nuisance and shorter but still significant smoke impacts. To help ensure that EPA’s standards are met, state officials responsible for enforcing the act might not in all cases provide land managers with the permits necessary to conduct prescribed burns. Federal agencies have taken steps to address the issue of balancing the need to protect public health with conducting prescribed burns as a method of fuel reduction. Specifically, since 2015, the Wildland Fire Leadership Council’s priorities have included smoke and air quality, and in January 2016, EPA and the Departments of Agriculture and the Interior issued a joint Wildland Fire and Air Quality summary. Among other things, the summary describes EPA’s commitment to working with land managers to effectively use prescribed fire to reduce the effects of wildfire-related emissions. EPA’s Exceptional Events Rule provides regulatory relief for states that exceed national air quality standards because of emissions from certain sources of pollution, including wildfires and certain prescribed fires. EPA finalized updates to the rule in October 2016 intended to simplify and shorten the process for state air quality agencies to address the impacts of wildfire smoke in their air quality plans. EPA also released a guidance document in 2016 intended to help state air quality agencies develop supporting information for wildfires that affect monitored ozone concentrations. This appendix provides information about selected federal programs that provide risk-reduction funding to states and localities. The Forest Service’s State Fire Assistance (SFA) program provides financial assistance through partnership agreements with state foresters for fire management activities, including helping communities become fire adapted. According to the Forest Service’s fiscal year 2017 budget justification, SFA is a critical part of the agency’s efforts to reduce wildland fire risk to communities, residents, property, and firefighters because it helps ensure that state, local, and private landowners have the capacity and tools they need to prepare for, respond to, and mitigate fire risk in the wildland-urban interface (WUI) and other critical areas. In each fiscal year from 2014 through 2016, approximately $78 million was enacted for the program. Of the total $78 million enacted for SFA in fiscal year 2015, $15.9 million was spent on hazardous fuel reduction treatments in the WUI, directly paying for the treatment of 148,020 acres of hazardous fuel and contributing to the treatment of another 126,368 acres with in-kind partner support, according to the Forest Service’s fiscal year 2017 budget justification. In addition, SFA funding supports national partnerships and agreements, including, among others, the National Fire Protection Association’s Firewise program, the wildfire prevention campaign with the Ad Council, and The Nature Conservancy Fire Learning Network. The Forest Service’s Volunteer Fire Assistance (VFA) program provides technical and financial assistance to local volunteer fire departments serving rural communities with a population of 10,000 or fewer. According to the Forest Service’s fiscal year 2017 budget justification, rural fire departments represent the first line of defense in addressing fires and other emergencies, and without the cooperation of rural fire departments, the agency would be unable to provide the level of fire response needed to keep fires near communities small. In each fiscal year from 2014 through 2016, $13 million was enacted for the program. In 2015, this funding helped 9,318 communities to train 22,272 firefighters and purchase, rehabilitate, and maintain $8.1 million in equipment, according to the 2017 budget justification. The Department of the Interior’s Rural Fire Assistance program (RFA) provided assistance in education and training, as well as supplies and equipment, to rural fire districts. However, funding for this program ended in fiscal year 2012 because of the increased availability of other fire assistance grant programs outside of Interior, according to officials with Interior’s Office of Wildland Fire. Interior’s Community Assistance is intended to support activities that improve and sustain community and individual responsibilities to adapt to, prepare for, and respond to wildfire. Unlike the Forest Service’s VFA or Interior’s now-expired RFA, Interior does not manage Community Assistance as a grant program, but as an activity under the existing wildland fire management programs of fuel reduction and preparedness, with funding levels determined by each Interior agency. Interior officials estimated that overall Community Assistance funding decreased from fiscal year 2009 through fiscal year 2013. For example, during this period, funding for Community Assistance decreased from an estimated $4.5 million to $2.1 million for BLM and from an estimated $1.2 million to $355,000 for Bureau of Indian Affairs, according to these officials. Since 2014, the Department of the Interior’s Office of Wildland Fire has been developing a Risk-Based Wildland Fire Management model, which it plans to use to help support decisions about how to distribute funding for preparedness and fuel reduction to four Interior agencies: Bureau of Indian Affairs (BIA), Bureau of Land Management (BLM), Fish and Wildlife Service, and National Park Service. The proposed system is to assess the probability and likely intensity of wildland fire, values at risk, and the expected value of acres likely to burn. Several Interior officials we interviewed raised concerns about the equity of the model because it makes determinations based on priority values at risk across the four Interior agencies, which can be challenging given the variation in agency missions and types of land they manage. For example, a threatened species located primarily on BLM lands may be among that agency’s highest priorities, but a forested area relied upon by an Indian tribe for its livelihood may be among BIA’s highest priorities. We found in 2015 that Interior officials said they expected to identify the prioritized values and issue guidance on the proposed system by the end of calendar year 2015 and use its results to inform their fiscal year 2016 funding distributions to the four agencies. As of February 2017, officials with Interior’s Office of Wildland Fire said they had not completed final revisions to the model but planned to do so in 2017. In addition to the individual named above, Steve Gaty (Assistant Director), Ulana M. Bihun, Mark Braza, Richard P. Johnson, and Keesha Luebke made key contributions to this report. Important contributions were also made by Martin (Greg) Campbell, William Carrigg, Lee Carroll, Charles Culverwell, Christopher P. Currie, Dan Royer, and Sarah Veale.

Dense vegetation, drought, and other factors have resulted in more severe wildland fires in recent years. At the same time, development in and around wildlands continues to increase, with some communities experiencing devastating effects from wildland fire. To reduce risk to communities, federal agencies and nonfederal stakeholders can collaborate in various ways. GAO was asked to review collaboration to reduce wildland fire risk to communities. This report examines federal officials' and stakeholders' views on (1) factors that affect federal-nonfederal collaboration aimed at reducing wildland fire risk to communities and (2) actions that could improve their ability to reduce risk to communities. GAO reviewed laws and documents about collaboration on wildland fire management; compared agency efforts with guidance; and interviewed officials from a nongeneralizable sample of 10 federal land management units selected based on wildland fire potential, geographic diversity, and other factors. GAO also interviewed stakeholders including community members near the selected units and representatives of nonfederal entities involved in fire risk-reduction efforts. Officials GAO interviewed from the five federal agencies responsible for wildland fire management—the Forest Service within the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service within the Department of the Interior—and nonfederal stakeholders, including state and local officials, homeowners, and representatives of nongovernmental organizations, identified several factors as affecting federal-nonfederal collaboration aimed at reducing wildland fire risk to communities. In some cases these factors were cited as enhancing collaboration, while in other cases they were cited as hindering it. Among the factors identified were federal authorities, agency initiatives, joint community-level planning, and others. For example, several officials and stakeholders cited laws such as the Good Neighbor Authority and Tribal Forest Protection Act of 2004 as enhancing collaboration because they provide federal and nonfederal entities the authority to work across jurisdictions on projects to reduce risk. In addition, several officials and stakeholders cited the 2014 National Cohesive Wildland Fire Management Strategy (Cohesive Strategy) as helpful for collaboration because it emphasizes the importance of coordination across multiple agencies and includes comprehensive fire management goals. In contrast, some officials and stakeholders said collaboration on certain types of projects was hindered by the difficulty in sharing project costs between federal and nonfederal entities. Federal officials and nonfederal stakeholders also identified several actions they said could improve federal agencies' and nonfederal entities' ability to reduce wildland fire risk to communities. Among the actions cited was improving the implementation of the Cohesive Strategy. Some agency officials and stakeholders noted the importance of increasing accountability for implementing the Cohesive Strategy, such as through the use of performance measures. The strategy states that its success depends in part on monitoring and accountability, and calls for national outcome measures. This is consistent with previous GAO findings regarding national strategies. However, GAO found that the Wildland Fire Leadership Council (WFLC)—the interagency body charged with overseeing and implementing the Cohesive Strategy and which includes the Forest Service and Interior as members—has not developed measures to assess progress on the part of federal and nonfederal participants in meeting the national goals of the Cohesive Strategy. In 2013, WFLC proposed several measures but concluded that implementing them could place undue burden on the agencies and nonfederal partners. In 2016, however, WFLC reported that recent research findings could help quantify the strategy's effects over time. By working with WFLC to develop such measures, the Forest Service and Interior, together with federal and nonfederal partners, could better assess national progress toward achieving the goals of the Cohesive Strategy. Federal officials and nonfederal stakeholders also identified actions that, while not necessarily within the federal agencies' control, could be taken to reduce wildland fire risk to communities. For example, these actions include adopting state laws that require property owners to take risk-reducing actions such as using fire-resistant building materials or reducing vegetation around their homes. Some states have adopted laws to promote such actions. GAO recommends that the Forest Service and Interior work with WFLC to develop measures to assess progress toward achieving the Cohesive Strategy's goals. The Forest Service agreed with GAO's recommendation, while Interior did not. GAO believes the recommendation is valid, as discussed in the report.

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The Foundation, originally incorporated in Washington, D.C., in 1985 as the U.S. Committee for the Battle of Normandy Museum, is a private nonprofit organization, tax-exempt under section 501(c)(3) of the Internal Revenue Code and is not part of the U.S. government. In published literature, the Foundation has described the purposes of its programs to be (1) honoring America’s World War II veterans and (2) teaching future generations the causes and consequences of World War II. The Foundation’s activities, which center around promoting public awareness of the historical significance of America’s participation in the liberation of Europe, have included building and promoting the Memorial Garden to commemorate D-Day and the Battle of Normandy; providing financial support for a French-owned and operated World War II memorial museum in the city of Caen, France; circulating newsletters to contributing members of the Foundation; sponsoring a Normandy scholar program, which educates university students in the history of World War II and the Battle of Normandy; and planning and promoting a Wall of Liberty in Normandy to honor World War II veterans involved in the European theater of operations. On October 14, 1992, the World War II 50th Anniversary Commemorative Coins Act was passed, directing the Secretary of the U.S. Treasury to mint and issue commemorative World War II coins with specified denominations and metallic content. It also directed the Treasury to sell the coins at a price equal to the sum of (1) the face value of the coins, (2) the cost of designing and issuing the coins, and (3) surcharges. The Coins Act specified that the first $3 million in surcharges received by the Treasury from the sale of coins be transferred to the Battle of Normandy Foundation and used by the Foundation to create, endow, and dedicate, on the 50th Anniversary of D-Day, a United States D-Day and Battle of Normandy Memorial in Normandy. The Coins Act also specified that the next $7 million in surcharges received from the sale of coins be made available to the American Battle Monuments Commission for the purpose of establishing a World War II memorial in or around Washington, D.C. Any amounts received by the Treasury in excess of $10 million were to be distributed to the two entities in the same 30 percent to 70 percent ratio. The coins were minted and sold by the Treasury and $3 million was transferred to the Foundation in 1993. In March 1994, the U.S. Mint reported to the Congress that, through February 1994, $7.6 million in surcharges had been generated and that it would continue coin sales through June 1994 but was not expecting any significant increase to the overall total. Therefore, additional funds are not expected to be available to the Foundation under the Coins Act. The Coins Act stipulated that the funds were also to be used by the Foundation to encourage and support visits to the memorial by United States citizens, especially students. We are required by the act to audit the Foundation’s use of any Treasury funds it receives under the act. In September 1993, the Foundation obtained approximately 2.5 acres of land adjacent to the World War II memorial museum in Caen, under a 99-year lease with the local government, and the Foundation constructed the Memorial Garden on this land. While the lease calls for a nominal annual rental payment of one French franc, it requires the Foundation to fund the costs of operating and maintaining the Memorial Garden and land for the entire lease term. In 1993, the Foundation began promoting a Wall of Liberty, which it planned to build in Normandy. For a fee of $40, the name of an American who served in the European theater of operations (which included Europe, North Africa, and the Mediterranean) is registered for inscription on the still-to-be constructed wall. The Foundation stated that it requested additional financial support for the wall from individuals, corporations, and other foundations in order to register veterans who may be unable to contribute the $40. The Foundation has employed independent certified public accountants (CPA) to perform annual audits of its financial statements. The Foundation’s independent CPA firm issued its most recent audit report on the Foundation’s calendar year 1993 financial statements in late August 1994. In the summer of 1993, allegations of financial impropriety were made against the Foundation and its then president, Anthony C. Stout, in a series of articles which appeared in a Washington, D.C., newspaper. These, and certain other allegations which focused on the viability of the Wall of Liberty project, subsequently appeared in the national media. On July 30, 1993, the Foundation’s Board of Directors appointed a special committee to investigate certain allegations, and the committee employed another public accounting firm to assist it by reviewing certain aspects of the Foundation’s financial management. In January 1994, the special committee concluded its investigation and reported that the Foundation had met its stated corporate goals and that accusations against Mr. Stout were unsupported. Under the Coins Act, we are required to audit the transfer of surcharge coin proceeds—and any interest earned thereon—from the Treasury to the Foundation and determine if these funds were used for the design and construction of the Memorial Garden in Normandy. During our audit of the Memorial Garden, we noted significant financial problems at the Foundation and received congressional inquiries regarding the Wall of Liberty and the Foundation’s finances. We, therefore, made additional inquiries regarding the current overall financial condition of the Foundation and the financial condition’s impact on operations, including the current and future maintenance of the Memorial Garden and the progress of the wall project. Also, we were asked by congressional committees to follow up on three specific media allegations involving the Foundation. In carrying out our work, we reviewed historical and current Foundation financial information, including audited financial statements, federal income tax returns, minutes of Board of Directors’ meetings, pertinent agreements, and other financial reports; interviewed current and former Foundation officials regarding financial matters, including management’s plans for current and future financial operations; obtained from the U.S. Mint, Department of the Treasury, documentation on the payment of surcharge coin proceeds to the Foundation; verified selected interest income payments to Foundation bank accounts and performed analytical reviews of selected interest payments through June 30, 1994; traced a sample representing over 95 percent of Memorial Garden design and construction costs through June 30, 1994, to payment vouchers, invoices, and construction manager approvals; traced selected accounting, legal, and consulting costs for the Memorial Garden through June 30, 1994, to payment vouchers and invoices; reviewed the computations and reasonableness of the Foundation’s general and administrative overhead allocation rates and selected salary allocations charged to the Memorial Garden project through June 30, 1994; examined progress and final construction photographs of the Memorial Garden and interviewed officials at the office of the construction manager in New York City who were responsible for the Memorial Garden construction; read the Independent Review Committee’s January 7, 1994, report on its investigation and reviewed the work performed by the public accounting firm which assisted the committee; interviewed a U.S. Department of Defense official who was referred to in a newspaper article as implying that the Foundation had acted improperly in promoting tours to Normandy; and read the travel brochure published by the tour company that contracted with the Foundation. Since the Foundation received a $3 million federal award in 1993 for the Memorial Garden, the Foundation’s independent CPA firm, in accordance with Office of Management and Budget Circular A-133, reported on the Foundation’s internal control structure and its compliance with applicable laws and regulations. We relied on these reports and the work of the CPA firm, and did not perform an independent comprehensive review of the Foundation’s overall accounting system or internal controls. We performed our work primarily in Washington, D.C., from September 1993 through August 1994. Our audit was performed in accordance with generally accepted government auditing standards. The Foundation has experienced significant managerial, financial, and internal control problems, and its liabilities substantially exceed its assets. The Foundation’s precarious financial condition casts doubt on whether it can continue its operations. Financial management problems at the Foundation were acknowledged in the January 1994 report of the special committee which investigated media allegations against the Foundation and Mr. Stout. In a November 1993 report, the public accounting firm which assisted the Foundation’s special committee, identified internal control weaknesses and recommended improving the Foundation’s internal controls governing financial management. Financial management problems included weak internal controls over transactions between the Foundation and its now former president, Anthony C. Stout, and a lack of formal written policies and procedures for travel and expense reimbursements. The committee report recommended specific management changes including that a full-time chief executive be employed as president in place of Mr. Stout, who had generally held the position on a part-time, unsalaried basis, and that Mr. Stout be elected Chairman of the Foundation’s Board of Directors or its Executive Committee. The Foundation announced 26 steps to resolve identified problems, including plans to require formal Board approval of all related party transactions, the adoption of formal written travel and expense reimbursement policies, and the hiring of a full-time president. Following the committee’s report, the Foundation experienced turnover in its management and leadership. Mr. Stout resigned as president in February 1994 and was elected by the Board as Chairman of the Foundation’s Executive Committee. The Foundation hired a new full-time president; however, he resigned the position after 3 months and another new president was hired. The Foundation’s executive director resigned in April 1994. In June 1994, about the time of the D-Day commemoration and the dedication of the Memorial Garden, several Foundation staff members were suspended after publicly attributing Foundation financial difficulties to Mr. Stout’s interference and financial mismanagement. At the same time, the Foundation’s recently-hired president also resigned. Mr. Stout resigned as Chairman of the Executive Committee in late June, but remained on the Board of Directors. In July 1994, the Foundation announced a major management restructuring which included electing two new co-chairmen of the Board of Directors, appointing a new president (the Foundation’s fourth since February) and a new chief financial officer, and rehiring of the executive director who had resigned in April. In addition, the Foundation announced that Mr. Stout had resigned from the Board of Directors. Foundation management told us that it had formulated a business plan designed to place the Foundation on a financially viable course and that it had developed a list of operational reforms to correct deficiencies in the Foundation’s corporate governance and financial management. The Foundation’s recently issued 1993 audited financial statements show that as of December 31, 1993, it had accumulated a financial deficit of about $727,000. The notes to the financial statements stated that the Foundation has been the subject of controversy in certain newspaper articles and that this has affected fund-raising. In July 1994, Foundation officials gave us a document which disclosed that the Foundation’s liabilities continued to substantially exceed its assets. The document also showed that of the approximately $2.5 million in contributions it had received for its Wall of Liberty project, about $1.1 million had been used by the Foundation to pay for other projects’ costs and operating expenses. Based on the information contained in Foundation financial records and reports, and interviews with Foundation officials, it appears that unless the Foundation obtains significant amounts of new donations or other sources of funding, now and in the future, the Foundation will not be able to meet its financial and operational responsibilities related to the Memorial Garden. Also, the precarious financial condition casts doubt on whether other projects, such as the Wall of Liberty, will proceed. Our audit showed that the Treasury transferred $3 million in surcharge coin proceeds to the Foundation on June 21, 1993. These funds were deposited in Foundation bank accounts, and as of June 30, 1994, interest of $73,152 had been earned. Our audit also showed that total design, construction, and other costs of the Memorial Garden recorded by the Foundation through June 30, 1994, were $3.6 million, and the $3.0 million received from the U.S. Treasury in Coins Act surcharge proceeds, plus interest earned thereon, were used toward funding these costs. As of June 30, 1994, the Foundation’s recorded cost included about $400,000 still owed to Memorial Garden contractors. In September 1993, the Foundation began construction of the Memorial Garden and dedicated it in a D-Day commemoration ceremony on June 5, 1994. The Memorial Garden is located in the city of Caen, adjacent to a World War II museum known as Le Memorial. The museum is operated by a French nonprofit organization whose majority shareholder is the city of Caen, and one of the Foundation’s projects has been to provide financial support to the museum. The Memorial Garden occupies approximately 2.5 acres and consists of a granite fountain shaped like a pair of hands, symbolizing the giving of American lives to save the European allies. The fountain contains a “Wall of States,” which is a display of stones native to the 50 states and several U.S. territories. On the stones are engraved seals, flags, or military emblems. A waterfall flows from the fountain into a pond. The stone walkway approach to the Memorial Garden winds through a grove of trees and is bordered by flowering shrubs and ornamental grasses. The Foundation’s direct and indirect costs for the Memorial Garden recorded as of June 30, 1994, are shown in table 1. Construction costs include the (1) cost and sculpturing of granite, (2) material and labor for concrete and forms for the fountain and other structures, and (3) landscaping. Design costs consist of the services provided by American and French architects. Accounting and legal costs include legal services from a French law firm, and consultants’ costs include those for photographs and security of the construction site. General and administrative costs consist primarily of travel costs and Foundation overhead charged to the project. The costs of the Memorial Garden have exceeded the amounts provided by the Coins Act, and additional Memorial Garden funding came, or needs to come, from other sources. Because of the Foundation’s current financial condition, it is uncertain whether the Foundation will be able to fund future costs of operating and maintaining the Memorial Garden. Congressional requesters asked us to follow up on three of the several allegations which initially appeared in a Washington, D.C., newspaper. Allegation one: The Foundation spent most of its revenues from 1986 to 1992 for purposes not related to its stated program activities. The Foundation, as a private, nonprofit corporation chartered in the District of Columbia, is required to conduct its activities in accordance with the District of Columbia Nonprofit Corporation Act and the Internal Revenue Code for tax exempt organizations. However, the Internal Revenue Service and the District of Columbia do not specify spending criteria for nonprofit organizations. The Council of Better Business Bureaus, which promotes ethical practices and promulgates operating standards for charitable organizations, suggests that organizations such as the Foundation annually spend at least 50 percent of their revenues on program activities directly related to their stated purpose. The National Charities Information Bureau, which promotes informed giving and a vigorous and responsive philanthropic sector, suggests in its standards that a charitable organization spend at least 60 percent of its annual expenses for program activities. The Foundation’s audited financial statements for 1986 through 1992, the period covered by the allegation, and other financial records, such as tax returns, showed that the Foundation had spent approximately 63 percent of its revenues—61 percent of its expenses—for its stated program activities, such as member services, museum support, and the Normandy scholar program. For 1993, the Foundation’s financial statements showed that the cost of program activities were about 83 percent of its revenues or 76 percent of its expenses. Allegation two: The Foundation inappropriately promoted tours to Normandy in 1993. It was alleged that the Foundation had inappropriately engaged a private tour company to assist it in promoting tours to Normandy in connection with the commemoration of the 50th anniversary of D-Day. Specifically, the allegation stated that the Foundation had been engaging in unethical and possibly illegal activities to promote the tours. The Coins Act, under which the Foundation received $3 million in surcharge coin funds, specifically called on the Foundation to create and dedicate a Normandy memorial and to encourage and support visits to the memorial by U.S. citizens, especially students. The Foundation, through competitive means, contracted with a travel agency for the purpose of facilitating travel services for Foundation members and others who planned to attend the commemorative events for the 50th anniversary of D-Day. At the request of the Department of Defense’s 50th Anniversary of World War II Commemoration Committee, the Army’s Office of General Counsel provided an opinion regarding the Foundation’s tour promotion activities. That opinion stated that the Foundation may designate whomever it wishes as its tour company, so long as the Foundation does not imply that the U.S. Government has made the designation. The travel brochure published by the tour company engaged by the Foundation makes no such implications and refers to the Battle of Normandy Foundation, indicating that the Foundation is a nonprofit organization coordinating a private-sector initiative for the 50th anniversary of D-Day. Allegation three: Anthony C. Stout’s private company, GIM Corp., owed rent to the Foundation for space it occupied under a sublease and in 1991, while Foundation president, Mr. Stout had the Foundation’s records altered to substitute the rent receivable with a GIM Corp. pledge for contributions that would not be honored. Foundation records show that while he was the Foundation’s president, Anthony C. Stout controlled a company, Government Investment Management Corporation (GIM Corp.), which periodically shared the cost of office space and certain personnel, including a chief financial officer, with the Foundation. Also, at various times, the Foundation and GIM Corp. each paid for expenses incurred by the other and the Foundation recorded receivables or payables to reflect these arrangements, commonly referred to as related party transactions. It was alleged that in 1991 Anthony C. Stout had the Foundation’s records altered to replace a $108,000 receivable from GIM Corp. with a promise from GIM Corp. to donate $30,000 a year for 4 years. It was further alleged that the amount of the pledge was subsequently reduced to an insignificant amount, implying that Mr. Stout did not intend to honor it. Foundation records show that in August 1989, GIM Corp. entered into a sublease agreement with the Foundation, to pay a portion of the Foundation’s rent. During the term of the sublease with GIM Corp., the Foundation recorded rental charges to GIM Corp. in its accounting records; however, these charges exceeded the amounts that were to be charged under the sublease. Certain of these charges were not paid and, therefore, contributed to the receivable from GIM Corp. reflected in Foundation accounting records. Foundation Board minutes indicate that GIM Corp. moved out of the Foundation’s offices in July 1991 and that the Foundation’s Treasurer adjusted the Foundation’s books to reduce the rent due from GIM Corp. Board minutes also reflect the unanimous Board approval of both the Treasurer’s adjustments and the cancellation of the sublease with GIM Corp. Our review confirmed that adjustments made to Foundation records to reduce amounts due from GIM Corp. brought rent charges more in line with the Foundation’s sublease agreement with GIM Corp. Foundation records also showed that the reduced receivable amount was subsequently paid by GIM Corp. In October 1991, Mr. Stout, acting on behalf of GIM Corp., pledged to the Foundation contributions totaling $120,000 over a 4-year period. In an October 1991 memorandum to the then chief financial officer, Mr. Stout stated that the pledge was made to provide the Foundation with an insurance policy against insufficient income and to accurately portray GIM Corp.’s future financial support to the Foundation. Through December 1993, Foundation records indicate that $90,000 of the $120,000 pledge had been paid. Foundation officials, commenting on a draft of this report, stated that it reflects accurately the decisions and actions which brought the Foundation to its present condition. (See appendix I.) We are sending copies of this report to the Ranking Minority Members of the House and Senate Committees on Veterans’ Affairs and other interested parties. Copies will be made available to others upon request. Please contact me at (202) 512-9489 if you or your staffs have any questions concerning this report. Major contributors to this report are listed in appendix II. Alan Mandell, Assistant Director Robert Coufal, Project Manager The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a legislative requirement, GAO reviewed the Battle of Normandy Foundation's use of coin surcharge proceeds for the creation of the United States Armed Forces Memorial Garden in Normandy, France. GAO found that: (1) the Foundation has experienced significant managerial, financial, and internal control problems; (2) it is uncertain whether the Foundation will be able to pay current and future operating costs for the Memorial Garden or fund other projects such as the Wall of Liberty, since its liabilities substantially exceed its assets and its management structure is unstable; (3) the Foundation spent $3 million in surcharge coin proceeds it received in 1993 for the design and construction of the United States Armed Forces Memorial Garden in accordance with the Commemorative Coins Act; (4) as of June 1994, the total recorded cost of the Memorial Garden was $3.6 million and the Foundation owed $400,000 to Memorial Garden contractors; (5) between 1986 and 1992, the Foundation spent 63 percent of its revenues on program activities; (6) in 1993, the Foundation spent 83 percent of its revenues on program activities; (7) the Foundation properly contracted with a private tour company to promote the Memorial's tour activities; (8) the Foundation recovered $90,000 of the $120,000 a private contractor owed the Foundation; and (9) Battle of Normandy Foundation officials concurred with the findings presented in the report.

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Millions of current and future retirees rely on private or public DB pension plans, which promise to pay retirement benefits that are generally based on an employee’s salary and years of service. The financial condition of these plans—and hence their ability to pay promised retirement benefits when such benefits are due—depends on adequate contributions from employers and, in some cases, employees, as well as prudent investments that preserve principal and yield an adequate rate of return over time. The plan sponsor must make required contributions to the plan that are intended to ensure it is adequately funded to pay promised benefits. To maintain and increase plan assets, fiduciaries of public and private sector pension plans invest in assets that are expected to grow in value or yield income. In making investments, DB plan managers consider a plan’s benefit payment requirements and balance the desire to maximize return on investment and the desire to limit the overall risk to the investment portfolio to an acceptable level. In doing so, plan fiduciaries invest in various categories of assets classes, which traditionally have consisted mainly of stocks and bonds. Stocks offer relatively high expected long- term returns at the risk of considerable volatility, that is, the likelihood of significant short-term losses or gains. On the other hand, bonds and other fixed income investments offer a steady income stream and relatively low volatility, but lower expected long-term returns. Different proportions of these two asset classes will, therefore, provide different degrees of risk and expected return on investment. Pension fiduciaries may also invest in other asset classes or trading strategies, such as hedge funds and private equity, which are generally considered to be riskier investments, so long as such investments are prudent. Private sector pension plan investment decisions must comply with the provisions of ERISA, which stipulates fiduciary standards based on the principle of a prudent man standard. Under ERISA, plan sponsors and other fiduciaries must (1) act solely in the interest of the plan participants and beneficiaries and in accordance with plan documents; (2) invest with the care, skill, and diligence of a prudent person with knowledge of such matters; and (3) diversify plan investments to minimize the risk of large losses. Under ERISA, the prudence of any individual investment is considered in the context of the total plan portfolio, rather than in isolation. Hence, a relatively risky investment may be considered prudent, if it is part of a broader strategy to balance the risk and expected return to the portfolio. In addition to plan sponsors, under the ERISA definition of a fiduciary, any other person that has discretionary authority or control over a plan asset is subject to ERISA’s fiduciary standards. The Employee Benefit Security Administration (EBSA) at Labor is responsible for enforcing these provisions of ERISA, as well as educating and assisting retired workers and plan sponsors. Another federal agency, the Pension Benefit Guaranty Corporation (PBGC), collects premiums from federally insured plans in order to insure the benefits of retirees if a plan terminates without sufficient assets to pay promised benefits. In the public sector, governments have established pension plans at state, county, and municipal levels, as well as for particular categories of employees, such as police officers, fire fighters, and teachers. The structure of public pension plan systems can differ considerably from state to state. In some states, most or all public employees are covered by a single consolidated DB retirement plan, while in other states many retirement plans exist for various units of government and employee groups. Public sector DB plans are not subject to funding, vesting and most other requirements applicable to private sector DB plans under ERISA, but must follow requirements established for them under applicable state law. While states generally have adopted standards essentially identical to the ERISA prudent man standard, specific provisions of law and regulation vary from state to state. Public plans are also not insured by the PBGC, but could call upon state or local taxpayers in the event of a funding shortfall. Although there is no statutory or universally accepted definition of hedge funds, the term is commonly used to describe pooled investment vehicles that are privately organized and administered by professional managers and that often engage in active trading of various types of securities, commodity futures, options contracts, and other investment vehicles. In recent years, hedge funds have grown rapidly. As we reported in January 2008, according to industry estimates, from 1998 to early 2007, the number of funds grew from more than 3,000 to more than 9,000 and assets under management from more than $200 billion to more than $2 trillion globally. Hedge funds also have received considerable media attention as a result of the high-profile collapse of several hedge funds, and consequent losses suffered by investors in these funds. Although hedge funds have the reputation of being risky investment vehicles that seek exceptional returns on investment, this was not their original purpose, and is not true of all hedge funds today. Founded in the 1940s, one of the first hedge funds invested in equities and used leverage and short selling to protect or “hedge” the portfolio from its exposure to movements in the stock market. Over time, hedge funds diversified their investment portfolios and engaged in a wider variety of investment strategies. Because hedge funds are typically exempt from registration under the Investment Company Act of 1940, they are generally not subject to the same federal securities regulations as mutual funds. They may invest in a wide variety of financial instruments, including stocks and bonds, currencies, futures contracts, and other assets. Hedge funds tend to be opportunistic in seeking positive returns while avoiding loss of principal, and retaining considerable strategic flexibility. Unlike a mutual fund, which must strictly abide by the detailed investment policy and other limitations specified in its prospectus, most hedge funds specify broad objectives and authorize multiple strategies. As a result, most hedge fund trading strategies are dynamic, often changing rapidly to adjust to market conditions. Hedge funds are typically structured and operated as limited partnerships or limited liability companies exempt from certain registration, disclosure and other requirements under the Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, and Investment Advisers Act of 1940 that apply in connection to other investment pools, such as mutual funds. For example, to allow them to qualify for various exemptions under such laws, hedge funds usually limit the number of investors, refrain from advertising to the general public, and solicit fund participation only from large institutions and wealthy individuals. The presumption is that investors in hedge funds have the sophistication to understand the risks involved in investing in them and the resources to absorb any losses they may suffer. Although many workers may be impacted by any losses resulting from pension fund investment in hedge funds, a pension plan counts as a single investor that does not prevent a hedge fund from qualifying for the various statutory exemptions. Individuals and institutions may also invest in hedge funds through funds of hedge funds, which are investment funds that buy shares of multiple underlying hedge funds. Fund of funds managers invest in other hedge funds rather than trade directly in the financial markets, and thus offer investors broader exposure to different hedge fund managers and strategies. Like hedge funds, funds of funds may be exempt from various aspects of federal securities and investment law and regulation. Like hedge funds, there is no legal or commonly accepted definition of private equity funds, but the term generally includes privately managed pools of capital that invest in companies, many of which are not listed on a stock exchange. Although there are some similarities in the structure of hedge funds and private equity funds, the investment strategies employed are different. Unlike many hedge funds, private equity funds typically make longer-term investments in private companies and seek to obtain financial returns not through particular trading strategies and techniques, but through long-term appreciation based on corporate stewardship, improved operating processes and financial restructuring of those companies, which may involve a merger or acquisition of companies. Private equity is generally considered to involve a substantially higher degree of risk than traditional investments, such as stocks and bonds, for a higher return. While strategies of private equity funds vary, most funds target either venture capital or buy-out opportunities. Venture capital funds invest in young companies often developing a new product or technology. Private equity fund managers may provide expertise to a fledgling company to help it advance toward a position suitable for an initial public offering. Buyout funds generally invest in larger established companies in order to add value, in part, by increasing efficiencies and, in some cases, consolidating resources by merging complementary businesses or technologies. For both venture capital and buy-out strategies, investors hope to profit when the company is eventually sold, either when offered to the public or when sold to another investor or company. Each private equity fund generally focuses on only one type of investment opportunity, usually specializing in either venture capital or buyout and often specializing further in terms of industry or geographical area. Investment in private equity has grown considerably over recent decades. According to a venture capital industry organization, the amount of capital raised by private equity funds grew from just over $2 billion in 1980 to about $207 billion in 2007; while the number of private equity funds grew from 56 to 432 funds over the same time period. As with hedge funds, private equity funds operate as privately managed investment pools and have generally not been subject to Securities and Exchange Commission (SEC) examinations. Pension plans typically invest in private equity through limited partnerships in which the general partner develops an investment strategy and limited partners provide the large majority of the capital. After creating a new fund and raising capital from the limited partners, the general partner begins to invest in companies that will make up the fund portfolio (see fig. 1). Limited partners have both limited control over the underlying investments and also limited liability for potential debts incurred by the general partners through the fund. Similar to hedge funds, private equity funds may be structured to qualify for exemptions from certain registration and disclosure requirements of federal securities laws; for example, by refraining from advertising to the general public. The majority of investments in private equity funds come from wealthy individuals and institutional investors, such as endowments, banks, corporations, and pension plans. According to several recent surveys, investments in hedge funds and private equity are typically a small portion of total plan assets—about 4 to 5 percent on average—but a considerable and growing number of plans invest in them. While investment in hedge funds is less common than private equity, the number of plans with investments in hedge funds has experienced greater growth in recent years. Furthermore, survey data show that larger plans, measured by total plan assets, are more likely to invest in hedge funds and private equity compared to mid-size plans. Survey data on plans with less than $200 million in assets are unavailable and, thus, the extent to which small plans invest in hedge funds and private equity is unknown. Individual plans’ hedge fund or private equity investments typically comprise a small share of total plan assets. According to a Pensions & Investments survey of large plans (as measured by total plan assets), the average allocation to hedge funds among plans with such investments was about 4 percent in 2007. Similarly, among plans with investments in private equity, the average allocation was about 5 percent. An earlier survey by Pyramis Global Advisors, which included mid- to large-size plans, found an average allocation of 7 percent for hedge funds and 5 percent for private equity in 2006. Although the majority of plans with investments in hedge funds or private equity have small allocations to these assets, a few plans have relatively large allocations, according to the Pensions & Investments survey (see fig. 2). Of the 62 plans that reported investments in hedge funds in 2007, 12 plans had allocations of 10 percent or more and, of those, 3 plans had allocations of 20 percent or more. The highest reported hedge fund allocation was 30 percent of total assets. Large allocations to private equity were even less common. A total of 106 surveyed plans reported investments in private equity in 2007, of which 11 plans had allocations of 10 percent or more and, of those, 1 plan had an allocation of about 20 percent. Two recent surveys of pension plans indicate that a considerable number of plans invest in hedge funds or private equity. As seen in table 1, from about 21 to 27 percent of all plans surveyed, which included mid- to large- size plans, held investments in hedge funds as of 2006, according to data from Greenwich Associates and Pyramis. Both surveys reveal that a greater share of private sector plans invested in hedge funds compared to public sector plans. The Greenwich survey also found that hedge fund investment was most common among collectively bargained plans, although the number of these plans surveyed was substantially smaller as there are relatively few of these plans in operation. Nearly half—8 out of 17—of collectively bargained plans surveyed invested in hedge funds. Investment in private equity is much more prevalent than investment in hedge funds, among plans surveyed. The Greenwich survey found that about 43 percent of plans held investments in private equity in 2006, while the Pyramis survey found that 41 percent of plans had such investments. Both surveys also show that a larger percentage of public sector plans are invested in private equity compared to private sector plans. As with hedge funds, the Greenwich survey found that investment in private equity was most common among collectively bargained plans. More than two-thirds— 12 out of 17—of collectively bargained plans surveyed invested in private equity. While pension plan investment in hedge funds is less prevalent than investment in private equity, hedge fund investment has increased much more in recent years. According to Greenwich Associates, from 2004 to 2006, the percent of plans with investments in hedge funds grew from just under 20 percent to almost 27 percent. Meanwhile, the percent of plans with investments in private equity increased at a lesser rate, from about 39 percent in 2004 to 43 percent in 2006. A survey by Pensions & Investments found that this comparison was more pronounced over a 6-year period (see fig. 3). Among larger plans surveyed by Pensions & Investments, the percent of plans with investments in hedge funds grew from about 11 percent in 2001 to nearly 47 percent in 2007. Over the same time period, investments in private equity remained more prevalent, but grew much more slowly. While pension plan investment in hedge funds has experienced greater growth in recent years, pension plan investment in private equity increased markedly following a 1979 Labor clarification that plans may make some investments in riskier assets, such as venture capital and buyout funds. Prior to 1979, such investments were generally viewed as a potential violation of ERISA. Labor clarified that ERISA’s prudent man standard applies to investment decisions in the context of the entire portfolio rather than in isolation. Following the Labor guidance, pension plan investments in venture capital and buy-out funds experienced rapid growth. One study reported that pension plans’ share of venture capital investments grew from 15 percent in 1978 to 50 percent in 1986, during which time overall investment in venture capital increased more than 10- fold from $427 million to $4.4 billion. More recently, the National Venture Capital Association estimates that pension plans held 42 percent of the approximately $20 billion invested in domestic venture capital funds in 2004. Survey data show that larger plans, measured by total plan assets, are more likely to invest in hedge funds and private equity compared to mid- size plans. Greenwich found that only 16 percent of mid-size plans—those with $250 to $500 million in total assets—were invested in hedge funds, compared to about 31 percent of the largest plans—those with $5 billion or more in assets (see fig. 4). Similarly, only about 16 percent of mid-size plans held investments in private equity, whereas slightly over 71 percent of the largest plans held such investments. Pensions & Investments survey of large plans corroborates this pattern—about 47 percent of plans held investments in hedge funds and nearly 80 percent held investments in private equity in 2007 (see fig. 3). Survey data on plans with less than $200 million in assets are unavailable and, in the absence of this information, it is unclear to what extent these plans invest in hedge funds and private equity. Representatives of investment consulting firms and industry experts told us that they suspect few small plans have such investments, but they could not provide data to confirm this. A representative of a large investment consulting firm explained that smaller plans face inherent restrictions on investing in hedge funds and private equity funds because the required minimum investments for these funds are often too high to allow small plans to make such investments while remaining sufficiently diversified. While pension plans seek important benefits through investments in hedge funds, hedge funds also pose challenges that demand greater expertise and effort than investments in more traditional assets. Pension plans told us that they invest in hedge funds to achieve one or more of several goals, including lessening the volatility of returns, obtaining returns greater than those expected in the stock market, and/or diversifying the portfolio by investing in a vehicle that will not be correlated with other asset classes in the portfolio. While all the pension plans we contacted that had invested in hedge funds expressed general satisfaction with these investments, hedge fund investments nonetheless pose significant challenges to pension plan fiduciaries, beyond the inherent challenges of investing in more familiar asset classes such as stocks and bonds. Plan officials and others outlined steps to limit these and other challenges, such as conducting in-depth due diligence reviews or investing through funds of funds, which can mitigate some of the main difficulties of hedge funds. Such steps entail greater expense, effort, or expertise than is required for more traditional investments, and some pension plans may not be equipped to meet these demands. Pension plans’ investments in hedge funds resulted in part from stock market declines and disenchantment with traditional investment management in recent years. Most pension plan officials we contacted cited the steep declines in the public equity market early in this decade as a reason for initiating or expanding hedge fund investments. From August 2000 to February 2003, the stock market, as measured by the Standard and Poor’s 500 index, declined in value by about 45 percent, and according to plan sponsors and others, this massive market decline severely affected pension plans that were deeply invested in the U.S. stock market. For example, representatives of one public pension plan told us that this market decline led to largest annual loss in its history and resulted in the plan’s first hedge fund investments 2003. A representative of another large public pension plan told us that the main motive for initially investing in hedge funds was the weak equity markets early in this decade, and the perceived need for greater exposure to alternative assets that relied less on the stock market for returns. At the same time, some plan officials also cited disenchantment with traditional “long-only” investment managers, and questioned whether such managers delivered returns that justified the fees the managers’ charge. Officials with most of the plans we contacted indicated that they invested in hedge funds, at least in part, to reduce the volatility of returns. According to a representative of an investment consulting firm, this is a common objective of pension plans that invest in hedge funds. One plan official explained the importance of reducing volatility by noting that even in periods of relatively good stock returns, volatility can eat away at the compounding effect of returns over time, and substantially reduce long- term growth. Another plan official said that in trying to reduce volatility through hedge funds, the plan expected that certain hedge fund returns may lag behind stock market indices during bull (rising) markets, but also expected that it would not suffer nearly the same declines during bear (falling) markets. Officials of several pension plans told us that they sought to obtain returns greater than the returns of the overall stock market through at least some of their hedge fund investments. For example, officials of one pension plan explained that one of the overall goals of its hedge fund portfolio strategy was to obtain an annual return of 2.5 percentage points greater than returns in the stock market, as measured by the S&P 500 stock index. Officials of pension plans that we contacted also stated that hedge funds are used to help diversify their overall portfolio and provide a vehicle that will, to some degree, be uncorrelated with the other investments in their portfolio. This reduced correlation has a number of benefits, including reduction in overall portfolio volatility and risk. For example, officials of one pension plan told us that hedge funds are attractive because they are not solely dependent on equity and fixed income markets for their returns, thus reduce the overall risk of the investment portfolio. At the time of our contacts with pension plans in 2007, the 15 pension plans with hedge fund investments indicated mixed but generally positive results. Among officials of these plans, all said that their hedge fund investments had generally met or exceeded expectations, although some noted mixed experiences. For example, one plan explained that it had dropped some hedge fund investments because they had not performed at or above the S&P 500 benchmark. Also, this plan redeemed its investment from other funds because they began to deviate from their initial trading strategy. Further, officials of several plans noted that their venture into hedge funds was only a few years old, and, at the time of our contact, their investment had not yet been tested by trying economic conditions or financial events, such as a significant stock market decline. Nonetheless, representatives of all of the plans with hedge fund investments indicated that they planned to maintain or increase their portfolio allocation to hedge funds in the foreseeable future. Pension plans face a number of challenges in hedge fund investing beyond those of more traditional investing, including specific investment risks, limited transparency and liquidity, and risks related to the operations of the hedge fund. While any plan investment may fail to deliver expected returns over time, hedge fund investments pose investment challenges beyond those posed by traditional investments. These include (1) reliance on the skill of hedge fund managers, who often have broad latitude to engage in complex investment techniques that can involve various financial instruments in various financial markets; (2) use of leverage, which amplifies both potential gains and losses; and (3) higher fees, which require a plan to earn a higher gross return to achieve a higher net return. Hedge funds are among the most actively managed investments, and thus returns are often dependent not on broad market movements, but on smaller moves in the markets they invest in and the skills and abilities of the hedge fund manager. For example, hedge fund managers may seek to profit through complex and simultaneous positions in stocks, bonds, options contracts, futures contracts, currencies, and other vehicles, and can abruptly change their positions and trading tactics in order to achieve desired return as changing market conditions warrant. Representatives of some pension plans that had not invested in hedge funds, cited concerns about the ability of hedge fund managers to accomplish this over the long- term. One plan official said the plan had avoided hedge funds in part because of doubt that the managers’ skills could generate an acceptable return over time. Instead, this plan seeks to capture the increase in the overall stock market. Regulatory officials and plan sponsors also said that, given the growth of the hedge fund industry in recent years, the market inefficiencies from which hedge funds profit may diminish. For example, SEC noted in a 2004 regulatory proposal that the capacity of hedge fund advisers to generate large returns is limited because the use of similar financial strategies by other hedge funds narrows spreads and decreases profitability. Hedge fund managers may use leverage—that is, use borrowed money or other techniques—to potentially increase an investments value or return without increasing the amount invested. While registered investment companies are subject to leverage limits, hedge funds can make relatively unrestricted use of leverage to magnify the expected returns of an investment. At the same time that leverage can magnify profits, it can also magnify losses to the hedge fund if the market goes against the fund’s expectations. Concerns about leverage were cited by several pension plans either as an important consideration in selecting a hedge fund, or as a reason for avoiding them altogether. For example, one public pension plan told us that it has avoided hedge funds because when hedge funds hit “potholes,” the potholes are deep because of high amounts of leverage used. The challenge of relying on manager skill for a desired rate of return is compounded by the costly fee structure that is typical of the hedge fund industry. Whereas mutual fund managers reportedly charge a fee of about 1 percent of assets under management, hedge fund managers often charge a flat fee of 2 percent of total assets under management, plus a performance fee, of about 20 percent of the fund’s annual profits. The impact of such fees can be considerable. As figure 5 illustrates, an annual return of 12 percent falls to about 7.6 percent after fees are deducted. Several pension plans cited the costly fee structure fees as a major drawback to hedge fund investing. For example, representatives of one plan that had not invested in hedge funds said that they are focused on minimizing transaction costs of their investment program, and the hedge fund fee structure would likely not be worth the expense. On the other hand, an official of another plan noted that, as long as hedge funds add value net of fees, they found the higher fees acceptable. Because many hedge funds may own thinly traded securities and derivatives whose valuation can be complex, and in some cases subjective, a plan may not be able to obtain timely information on the value of assets owned by a hedge fund. Further, hedge fund managers may decline to disclose information on asset holdings and the net value of individual assets largely because release of such information could compromise their trading advantage. In addition, even if hedge fund managers were to provide detailed positions, plan sponsors might be unable to fully analyze and assess the prospective return and risk of a hedge fund. As a consequence, a plan may not be able to independently ascertain the value of its hedge fund investment or fully assess the degree of investment risk posed by its hedge fund investment. Although we noted in January 2008 that hedge funds have improved disclosure and transparency about their operations due to the demands of institutional investors, several pension plans cited limited transparency as a prime reason they had chosen not to invest in hedge funds. For example, representatives of one plan told us that they had considered investing in hedge funds several years ago, but that most of the hedge funds it contacted would not provide position-level information, and that they were reluctant to make such an investment without this information. Hedge funds offer investors relatively limited liquidity, that is, investors may not be able to redeem a hedge fund investment on demand because of a hedge fund’s redemption policy. Hedge funds often require an initial “lockup” of a year or more, during which an investor cannot cash out of the hedge fund. After the initial lockup period, hedge funds offer only occasional liquidity, sometimes with a pre-notification requirement. While some pension plans told us that liquidity limitations are not a significant concern because the plan has other liquid assets to pay benefits, they nonetheless can pose certain disadvantages. For example, liquidity limitations can inhibit a plan’s ability to minimize a hedge fund investment loss. As one state official noted after a state fund had suffered losses in the wake of the 2006 collapse of Amaranth, even when a plan learns that a hedge fund is losing value, various lockup provisions often make it difficult to promptly withdraw from the investment. Further, an investor’s rights with regard to cashing out may not be entirely clear from the written contract. According to an investigative study by a Grand Jury of one pension plan’s experience with a failed hedge fund, the contracts can be dense with legal language, which may make understanding of basic terms and conditions difficult, especially with regard to withdrawal provisions. Further, the study noted that contracts can delegate immense discretionary authority to the hedge fund manager to change conditions and rules. Pension plans investing in hedge funds are also exposed to operational risk—that is, the risk of investment loss due not to a faulty investment strategy, but from inadequate or failed internal processes, people, and systems, or problems with external service providers. Operational problems can arise from a number of sources, including inexperienced operations personnel, inadequate internal controls, lack of compliance standards and enforcement, errors in analyzing, trading, or recording positions, or outright fraud. According to a report by an investment consulting firm, because many hedge funds engage in active, complex, and sometimes heavily leveraged trading, a failure of operational functions such as processing or clearing one or more trades may have grave consequences for the overall position of the hedge fund. Concerns about some operational issues were noted by SEC in a 2003 report on the implications of the growth of hedge funds. For example, the 2003 report noted that SEC had instituted a significant and growing number of enforcement actions involving hedge fund fraud in the preceding 5 years. Further, SEC noted that while some hedge funds had adopted sound internal controls and compliance practices, in many other cases, controls may be very informal, and may not be adequate for the amount of assets under management. Similarly, a recent Bank of New York paper noted that the type and quality of operational environments can vary widely among hedge funds, and investors cannot simply assume that a hedge fund has an operational infrastructure sufficient to protect shareholder assets. Several pension plans we contacted also expressed concerns about operational risk. For example, one plan official noted that the consequences of operational failure are larger in hedge fund investing than in conventional investing. For example, the official said a failed long trade in conventional investing has relatively limited consequences, but a failed trade that is leveraged five times is much more consequential. Representatives of another plan noted that back office and operational issues became deal breakers in some cases. For example, they said one fund of funds looked like a very good investment, but concerns were raised during the due diligence process. These officials noted, for example, the importance of a clear separation of the investment functions and the operations and compliance functions of the fund. One official added that some hedge funds and funds of funds are focused on investment ideas at the expense of important operations components of the fund. Pension plans that invest in hedge funds take various steps to mitigate the risks and challenges posed by hedge fund investing, including developing a specific investment purpose and strategy, negotiating important investment terms, conducting due diligence, and investing through funds of funds. Such steps require greater effort, expertise and expense than required for more traditional investments. As a result, some plans, especially smaller plans, may not have the resources to take the steps necessary to address these challenges. Discussions with pension plan officials revealed the importance of defining a clear purpose and strategy for their hedge fund investments. As one pension fiduciary noted, plan managers should define exactly why they want to invest in hedge funds. He added that there are many different possible hedge fund strategies, and wanting to invest in hedge funds to obtain the large returns that other investors have reportedly obtained is not a sufficient reason. Most of the 15 pension plans with hedge fund investments that we contacted described one or more strategies for their hedge funds investments. For example, an official of one state plan told us that the plan invested only in long-short hedge fund strategies while other plans use multiple strategies. Our contacts with plan officials and others also highlighted the importance of diversification. All of the plans having hedge fund investments that we contacted invested in either multiple individual hedge funds, or through funds of funds, which are designed to provide diversification across many underlying funds. Some plans described specific diversification requirements, and spread their hedge fund investment across many funds to limit exposure to one or a small number of hedge funds. For example, one plan determined that no more than 15 percent of its hedge fund portfolio would be with a single hedge fund manager and that no more than 40 percent in a particular hedge fund investment strategy. Our contacts with plan officials and others also highlighted the importance of identifying specific investment terms to guide hedge fund investing and ensuring that the hedge fund investment contract complies with these criteria. These can include fee structure and conditions, degree of transparency, valuation procedures, redemption provisions, and degree of leverage employed. For example, pension plans may want to ensure that they will not pay a performance fee unless the value of the investment passes a previous peak value of the fund shares—known as a high water mark. Some plans we contacted also specified leverage limits for their hedge funds. For example, one public plan that we contacted has established specific leverage limits for each of 10 hedge fund strategies employed by its funds of funds—ranging from an upper limit of 2 times invested capital for one strategy, to 20 times invested capital for another. Once decided upon, these and other terms of the investment can be used as criteria in the hedge fund search, and if necessary, negotiated with the hedge fund or fund of funds manager. Pension plans take steps to mitigate the challenges of hedge fund investing through an in-depth due diligence and ongoing monitoring process. While plans conduct due diligence reviews of other investments as well, such reviews are especially important when making hedge fund investments, because of hedge funds’ complex investment strategies, the often small size of hedge funds, and their more lightly regulated nature, among other reasons. Due diligence can be a wide-ranging process that includes a review and study of the hedge fund’s investment process, valuation, and risk management. The due diligence process can also include a review of back office operations, including a review of key staff roles and responsibilities, the background of operations staff, the adequacy of computer and telecommunications systems, and a review of compliance policies and procedures. Representatives of several plans told us they mitigate several of the major hedge fund challenges by investing through funds of funds, which are investment funds that buy shares of multiple underlying hedge funds. Funds of hedge funds provide plan investors diversification across multiple hedge funds, thereby having the potential to mitigate investment risk. For example, one plan fiduciary told us the plan reduces investment risk by investing in a fund of funds that diversifies their hedge fund investments into at least 40 underlying hedge funds. Further, by investing in a fund of funds, a pension plan relies on the fund of funds’ manager to conduct negotiations, due diligence, and monitoring of the underlying hedge funds. According to pension plan officials, funds of funds can be appropriate if a plan does not have the necessary skills to manage its own portfolio of hedge funds. According to a hedge fund industry organization, investing through a fund of funds may provide a plan better access to hedge funds than a plan would be able to obtain directly. Nonetheless, investing through funds of funds has some drawbacks. Funds of funds’ managers also charge fees—for example, they may charge a 1 percent flat fee and a performance fee of between 5 and 10 percent of profits—on top of the substantial fees that the fund of funds manager pays to the underlying hedge funds. Funds of funds also pose some of the same challenges as hedge funds, such as limited transparency and liquidity, and the need for a due diligence review of the fund of funds firm. According to plan officials, state and federal regulators, and others, some pension plans, especially smaller plans, may not be equipped to address the various demands of hedge fund investing. For example, an official of a national organization representing state securities regulators told us that medium- and small-size plans are probably not equipped with the expertise to oversee the trading and investment practices of hedge funds. This official said that smaller plans may have only one or two person staff, or may lack the resources to hire outside consulting expertise. A labor union official made similar comments, noting that smaller pension plans lack the internal capacity to assess hedge fund investments, and noted that such plans may be locked out of top-performing hedge funds. Some plans may also lack the ability to conduct the necessary due diligence and monitoring of hedge fund investments. One hedge fund consultant told us that certain types of plans, such as plans that are not actively overseen by an investment committee and plans that do not have a sufficient in-house dedicated staff, should not invest in hedge funds. Similarly, a representative of a firm specializing in fiduciary education and support noted the special relationship of trust and legal responsibility that plan fiduciaries carry and concluded that the challenges of hedge fund investing are too high for most pension plans. While such plans might often be smaller plans, larger plans may also lack sufficient expertise. A representative of one pension plan with more than $32 billion in total assets noted that before investing in hedge funds, the plan would have to build up its staff in order to conduct the necessary due diligence during the fund selection process. According to plan representatives, investment consultants, and other experts we interviewed, pension plans invest in private equity primarily to attain returns superior to those attained in the stock market in exchange for greater risk, but such investments pose several distinct challenges. Generally, these plan representatives based their comments on significant experience investing in private equity—in some cases over 20 years—and said they had experienced returns in excess of the stock market. Nonetheless, private equity funds can require longer-term commitments of 10 years or more, and during that time, a plan may not be able to redeem its investments. In addition, plan representatives described extensive and ongoing management of private equity investments beyond that required for traditional investments and that, like hedge fund investments, may be difficult for plans with relatively limited resources. Unlike hedge funds, pension plan investment in private equity is not a recent phenomenon. The majority of plans included in our review began investing in private equity more than 5 years before the economic downturn of 2000 to 2001, and some of these plans have been investing in private equity for 20 years or more. According to a pension investment consultant we interviewed, due to the longer history of pensions’ investment in private equity, it is generally regarded as a more well- established and proven asset class compared to other alternative investments, such as hedge funds. Pension plans invest in private equity primarily to attain returns in excess of returns from the stock market over time in exchange for the greater risk associated with these investments. Officials of each plan we interviewed said these investments had provided the expected returns. Plan representatives and investment consultants said that attaining returns superior to stocks was a primary reason for investing in private equity. Among the plan representatives we interviewed the most commonly reported benchmark for private equity funds ranged from 3 to 5 percentage points above the S&P 500 stock index, net of fees. At the time of our interviews with plans about private equity investments, between October 2007 and January 2008, plan representatives indicated their private equity investments had met their expectations for relatively high returns and many said they planned to maintain or increase their allocation in the future. Further, representatives of some plans told us that private equity has been their best performing asset class over time despite some individual investments that resulted in considerable losses. For example, according to documentation provided by one private sector plan, the plan had earned a net return of slightly more than 16 percent on its private equity investments over the 10-year period ending September 30, 2007, which was their highest return for any asset class over that time period. To a lesser degree, pension plans also invest in private equity to further diversify their portfolios. To the extent that private equity is not closely correlated with the stock market, these investments can reduce the volatility of the overall portfolio. However, some plan representatives cautioned that the diversification benefits are limited because the performance of private equity funds is still strongly, although not perfectly, linked to the stock market. Pension plans investing in private equity face several challenges and risks, which include the concentration of underlying holdings, use of leverage, and wide variation in performance among funds. In addition, the value of the underlying holdings is difficult to estimate prior to their sale and private equity investments entail long-term commitments, often of 10 years or more. Pension plans that invest in private equity funds face a number of investment risks, beyond the risks of traditional investments. Unlike a traditional fund manager who diversifies by investing in many stocks or bonds, a private equity fund manager’s strategy typically involves holding a limited number of underlying companies in their portfolio. A single private equity fund generally invests in only about 10 to 15 companies, often in the same sector. The risks associated with such concentrated, undiversified funds may be compounded by particular aspects of the buyout and venture capital sectors. Fund managers in the buyout sector generally invest using leverage to seek greater returns but such investments also increase investment risks. In the venture capital sector, fund managers typically make smaller investments in companies that may have a limited track record and rely on technological development and growing the company’s commercial capacity for success. In light of this, some plan officials noted that some of these companies will fail, but the success of one or more of the portfolio firms is often large enough to more than compensate for the losses of other investments. Like other investments, the returns to private equity funds are susceptible to market conditions when investments are bought or sold. When competition among private equity fund managers is intense, research has shown that a fund manager may pay more for an investment opportunity that leads to lower net returns. In addition, the returns of a private equity fund are also affected by the condition of the market when the underlying investments are sold. For example, a private equity fund may have lower returns if its underlying holdings are sold through an initial public offering made during a period of low stock values. An official from one plan told us that private equity funds that sold investments around 2000 had lower returns because of the overall decline in the stock market. However, a representative of another plan noted that, while market conditions have some effect on the performance of a private equity fund, the effect may be mitigated by the ability of the fund managers to enact sound business plans and thereby add value to the underlying companies. Further, the challenge of meeting the high performance goals for private equity investments is compounded by the relatively high fees that private equity funds charge. Similar to hedge funds, private equity funds typically charge an annual fee of 2 percent of invested capital and 20 percent of returns, whereas mutual fund managers typically charge a fee of about 1 percent or less of assets under management. If the gross returns from a private equity fund are not sufficiently high, net returns to investors will not meet the commonly cited goal of exceeding the return of the stock market. Another risk from investing in private equity is the variation of performance among private equity funds. Officials of an investment consulting firm, a state regulatory agency, and several pension plans noted that, compared to other asset classes, private equity has greater variation in performance among funds and cited research to support this view. For example, one study found that the difference in returns between the median and top quartile funds is much greater for private equity, particularly among venture capital investments, than it is for domestic stocks. Another study found that returns of private equity funds at the 75th percentile were more than seven times greater than the returns of funds at the 25th percentile. A further challenge of investing with private equity funds—regardless of how they perform—is that they often require commitments of 10 years or more during which a plan may not be able to redeem its investment. The longer-term commitment of private equity funds contrasts with stock and bond investments, which can be bought and sold daily, and hedge fund investments, which can be redeemed episodically. Plans must provide committed capital when called upon by the fund manager, and may not redeem invested capital or typically see any return on the investment, for at least several years. However, several plan representatives and other experts we interviewed stated that the nature of private equity funds necessitates long commitments as returns are generated through longer- term growth strategies, rather than short-term gains. A private equity fund cycle typically follows a pattern known as the “J-curve,” which reflects an initial period of negative returns during which investors provide the fund with capital and then obtain returns over time as investments mature (see fig. 6). Representatives of several plans noted that they expect higher returns from private equity in exchange for the long-term commitment. An additional challenge of private equity investments is the uncertain valuation during the fund cycle. Unlike stocks and bonds, which are traded and priced in public markets, plans have limited information on the value of private equity investments until the underlying holdings are sold. Some plan representatives we interviewed explained that fund managers often value underlying holdings at their initial cost until they are sold through an initial public offering or other type of sale. In some cases private equity funds estimate the value of the fund by comparing companies in their portfolio to the value of comparable publicly-traded assets. However, an investment consultant explained that such periodic valuations have limited utility. Prior to the sale of underlying investments, it is difficult to assess the value a private equity fund manager has generated. While plan officials we interviewed acknowledged the difficulty of valuing private equity investments, they generally accepted it as a trade-off for the potential benefits of the investment. Plan representatives said that they take several key steps to address the challenges of investing in private equity funds. Plan representatives and industry experts emphasized the importance of investing with top- performing funds to mitigate the wide variation in fund performance; however, they noted that access to these top-performing funds is very limited, particularly for new investors. Furthermore, due diligence and ongoing monitoring of private equity investments requires substantial effort and expertise, which may be too complex or costly for plans with more limited resources. The majority of plan representatives we interviewed told us that, because of the wide variation in performance among private equity funds, they must invest with top-performing funds in order to achieve long-term returns in excess of the stock market. In addition to identifying the top- performing fund managers, plan officials explained that the selection process involves a thorough assessment of the fund manager’s investment strategy. For example, an official from one state plan told us that their assessment includes a review of a fund manager’s strategy for improving the operations and efficiency of its proposed investments and they invest with managers that have a persuasive business model. Plan officials stressed the importance of these steps, and some noted that investing in private equity is only worthwhile if they can invest with funds in the top quartile of performance. For example, one plan official said that if a plan does not invest with a top quartile fund, it may not obtain returns in excess of stock market returns and, thus, will not have earned a premium for assuming the risks and fees inherent in private equity fund investments. While many plans we interviewed noted the importance of investing with top-performing funds, the competition to gain access to these funds may make it difficult or impossible for some plans, especially smaller plans, to do so. Several of the plan representatives we interviewed noted that investment opportunities with top-performing funds are limited, and the demand for such opportunities is high. According to representatives of a venture capital trade association, there is greater demand to invest in venture capital funds than can be absorbed, because the venture capital sector is relatively small in size. Plan officials also noted that access to private equity funds can be limited, because fund managers prefer to deal with larger, more sophisticated investors or investors who have invested in the fund manager’s previous private equity funds. For example, one state official told us that the largest public plan in the state has the clout to gain access to top-performing funds, but smaller public funds in the state do not. He added that top-performing funds are very selective, and generally will not respond to solicitation by smaller public funds. Plan representatives told us they further mitigate the challenges of investing in private equity funds by diversifying their investments. Plan representatives we interviewed said they invest with multiple fund managers to mitigate the risk that some managers may have mediocre or poor performance. For example, a representative of one plan said they would be comfortable investing about 5 percent of their private equity allocation with one carefully vetted fund manager, but investing 20 percent with one manager would be overly risky. The director of another plan told us the plan aims to ensure diversification by investing with over 130 different private equity funds, encompassing more than 80 fund managers. Plans also stagger investments over several years to ensure their private equity fund investments are ready to sell their underlying investments at different times. Staggering investments over time helps mitigate the risk of fund managers selling funds’ underlying holdings during a time of poor market conditions, which may reduce the funds’ returns to investors. For example, one plan official noted they have investments in funds that were established in many different years, dating back to 1994. In addition, some plan officials told us they further diversify their private equity investments among funds concentrated in different industries and regions. Plan representatives said that they mitigate the long-term commitments of private equity investments by limiting the size their allocation. Officials we interviewed at several plans noted that their allocation to private equity is only about 5 percent of the portfolio and benefit obligations can be paid from more liquid assets. They said it is important to estimate a plan’s benefit obligations and determine the need for liquid investments to ensure the plan can pay benefits when they are due. They also noted that once liquidity needs are determined, a plan can more safely invest in an illiquid asset that cannot be used to pay benefits in the near term. Plans attempt to negotiate key terms of the investment contract to further manage the risks of investing in private equity, but, as one large public plan noted, their ability to negotiate favorable contract provisions is limited when investing with top-performing funds because investing in these funds is highly competitive. Like hedge fund investments, these contract terms may include the fee structure and valuation procedures of the fund. In addition, many plan representatives we interviewed said they can redeem their investments before the end of the originally agreed investment period if staff that are considered key to the success of the fund leave prematurely. Similar to hedge fund investments, plans take additional steps to mitigate challenges of investing in private equity through extensive and ongoing management, beyond those required for traditional investments. Plan representatives we interviewed said these steps include regularly reviewing reports on the performance of the underlying investments of the private equity fund and having periodic meetings with fund managers. In some cases, plans participate on the advisory board of a private equity fund, which provides a greater opportunity for oversight of the fund’s operations and new investments; however this involves a significant time commitment and may not be feasible for every private equity fund investment. Plan representatives and investment consultants noted that, as with hedge funds, private equity investments entail considerably greater due diligence and ongoing monitoring than traditional investments and some plan representatives said they needed to hire an external investment consultant because the plan lacked sufficient internal resources. Funds of private equity funds, like funds of hedge funds, enable plans to address several challenges of investing in private equity, for an additional cost. Benefits of investing in funds of funds can include diversification across fund managers, industry, geographic region, and year of initial investment. Through funds of funds, plans can also gain access to top- performing fund managers that may otherwise be unavailable to them. One plan representative stated that, due to the competition among investors, funds of funds are their best option for accessing top-performing funds. In addition, several plan representatives said that they invest in funds of funds to benefit from the expertise of the fund manager. For example, officials of two large plans said they generally limit their use of funds of funds to private equity investments in emerging markets and small funds because the plan prefers not to devote resources to maintaining expertise in these areas. Nonetheless, fund of funds’ managers charge their own fees in addition to the fees the fund of funds pays the underlying private equity fund managers. According to a plan official and an investment consulting firm, a fund of funds manager typically charges a fee of 1 percent of invested capital over the fees it pays to the underlying funds. The federal government does not specifically limit or monitor private sector pension investments in hedge funds or private equity, and state approaches for public plans vary. ERISA requires that plan fiduciaries meet general standards of prudent investing but does not impose specific limits on investments in hedge funds or private equity. Further, while Labor has conducted enforcement actions that have involved hedge fund or private equity funds, it does not specifically monitor these investments. While states generally impose a prudent man standard, similar to ERISA’s, on plan fiduciaries, some states still have policies that restrict or prohibit pension plan investment in hedge funds or private equity. Although ERISA governs the investment practices of private sector pension plans, neither federal law nor regulation specifically limit pension investment in hedge funds or private equity. Instead, ERISA requires that plan fiduciaries apply a prudent man standard, including diversifying assets and minimizing the risk of large losses. The prudent man standard does not explicitly prohibit investment in any specific category of investment. Further, an unsuccessful individual investment is not considered a per se violation of the prudent man standard, as it is the plan fiduciary’s overall management of the plan’s portfolio that is evaluated under the standard. In addition, the standard focuses on the process for making investment decisions, requiring documentation of the investment decisions, due diligence, and ongoing monitoring of any managers hired to invest plan assets. Although there are no specific federal limitations on pension plan investments in hedge funds, two federal advisory committees have, in recent years, highlighted the importance of developing best practices in hedge fund investing. In November 2006, the ERISA Advisory Council recommended that Labor publish guidance describing the unique features of hedge funds, and matters for consideration in their adoption for use by qualified pension plans. To date, Labor has not acted on this recommendation. According to Labor officials, an effort to address these recommendations was postponed while Labor focused on implementing various aspects of the Pension Protection Act of 2006. However, in April 2008, the Investors’ Committee established by the President’s Working Group on Financial Markets, composed of representatives of public and private pension plans, endowments and foundations, organized labor, non- U.S. institutions, funds of hedge funds, and the consulting community, released draft best practices for investors in hedge funds. These best practices discuss the major challenges of hedge fund investing, and provide an in-depth discussion of specific considerations and practices that investors in hedge funds should take. While this guidance should serve as an additional tool for pension plan fiduciaries and investors to use when assessing whether and to what degree hedge funds would be a wise investment, it may not fully address the investing challenges unique to pension plans leaving some vulnerable to inappropriate investments in hedge funds. Although many private sector plans are insured by the PBGC, which guarantees most benefits when an underfunded plan terminates, public sector plans are not insured and may call upon state or local taxpayers to overcome funding shortfalls. Labor does not specifically monitor pension investment in hedge funds or private equity. Labor annually collects information on private sector pension plan investments via the Form 5500, on which plan sponsors report information such as the plan’s operation, funding, assets, and investments. However, the Form 5500 includes no category for hedge funds or private equity funds, and plan sponsors may record these investments in various categories on the form’s Schedule H. In addition, because there is no universal definition of hedge funds or private equity and their strategies vary, their holdings can fall within many asset classes. While EBSA officials analyze Form 5500 data for reporting compliance issues—including looking for assets that are “hard to value”—they have not focused on hedge fund or private equity investments specifically. According to EBSA officials, there have been several investigations and enforcement actions in recent years that involved investments in hedge funds and private equity, but these investments have not raised significant concerns. Our state pension plan contacts indicated that, in recent years, state regulation of public pension plan investments has become generally more flexible. According to a NASRA official, state regulation of public pension plan investments has gradually become less restrictive and more reliant on fiduciary prudence standards. This official noted that, for example, blanket prohibitions on investments such as international stocks or real estate have given way to permission for a wider range of investments. Some of our state contacts described this shift over time from a prescriptive list of authorized investments (“legal lists”) and asset allocation limits to a more flexible approach, such as adoption of the prudent man standard. Of the state pension plan officials we contacted in 11 states, officials in 7 states indicated that applicable state law imposes restrictions on the ability of public pension plans to invest in hedge funds and/or private equity, as seen in table 2. Among these seven states, the restriction may be in the form of (i) a provision applicable to investments in hedge funds or private equity funds specifically, (ii) an exclusive list of permissible of investments that is not likely to capture hedge funds or private equity investments, or (iii) a provision that restricts investments in certain categories of assets that, because of the typical structure or investment strategy of hedge funds or private equity funds, are likely to apply to investments in such funds. Some of the selected states have, through statute or regulation, established explicit limitations on the amount that pension plans can invest in hedge funds or private equity. For example, under Texas law, the Teacher Retirement System of Texas (TRS)—the largest public pension plan in Texas—is statutorily limited to investing no more than 5 percent of the plan’s total assets in hedge funds. According to a Texas Pension Review Board official, the statute codified TRS’s ability to invest in hedge funds while at the same time limiting the amount TRS can invest in hedge funds. According to a TRS official, this law was a compromise between TRS’s desire to invest more broadly in hedge funds and some state legislators who were concerned about the possible risks of hedge funds. Other states we reviewed have comparable limitations for public plans. The Commonwealth of Massachusetts’ Public Employee Retirement Administration Commission (PERAC) has established a detailed set of limitations and guidance, with particular limitations on smaller public plans. In Massachusetts, public plans with less than $250 million in assets may not invest in hedge funds directly, but they may invest through a state- managed hedge fund investment pool (see table 3). According to a PERAC official, this limitation exists because hedge funds are relatively new investments for pension plans and because they require high levels of due diligence and expertise that may be excessive for smaller plans. PERAC also limits and offers guidance to larger public plans, emphasizing diversification, to help limit a plan’s exposure to potential losses from hedge fund failures. According to a PERAC official, the group is less strict about private equity investments because private equity is a more familiar asset class among the state’s public plans. Public plans with less than $25 million in assets may invest up to three percent of assets in private equity and plans with more than $25 million may invest up to 5 percent of assets in private equity. PERAC requires plans of either size to obtain PERAC permission before investing in private equity above those levels. Some of the selected states have instituted “legal lists” of authorized investments for pension plans that do not specifically include investments in hedge funds or private equity funds as authorized assets. According to a NASRA official, this was the dominant regulatory approach of state pension investment 40 years ago, and while some states have moved away from this approach, others have continued to maintain legal lists. Illinois has established a legal list of assets that does not include interests in hedge funds or private equity funds, in which certain smaller plans that cover police officers and fire fighters are authorized to invest. Large statewide plans, such those managed by the Illinois State Board of Investment, are governed by a prudent man standard, which does not explicitly restrict investment of pension assets in any particular investment. In some instances, states allow a certain percentage of plan assets to be invested in assets that do not qualify under one of the authorized categories on the legal list. For example, the New York State Common Retirement Fund is governed by a legal list, but the state allows the plan to invest up to 25 percent of its assets in investments not otherwise permitted by the legal list. Finally, public pension plan investments in hedge funds are prohibited or limited in some states by laws restricting pension plan investment in certain investment vehicles or trading strategies. For example, the North Carolina Retirement system can not invest more than 10 percent of plan assets in limited partnerships or limited liability corporations. Similarly, before new legislation broadening investment authority went into effect in April 2008, the Wisconsin Retirement System could not invest assets in vehicles that trade options or engage in short selling, two techniques commonly used by hedge funds. However, with the new statutory authority, the Wisconsin Retirement System may use any investment strategy that meets its prudent investor standard. States we contacted take a variety of approaches to overseeing and monitoring public pension plan investment. In Massachusetts, before conducting a hedge fund manager search, public plans must first obtain PERAC approval and provide the agency with a summary of the plan’s objectives, strategies, and goals in hedge fund investing. PERAC requires pension plans to document the major due diligence steps taken in the hedge fund manager selection process. In addition, prospective hedge fund managers must submit detailed information to PERAC regarding their key personnel, assets under management, investment strategy and process, risk controls, past performance, and organizational structure. Finally, hedge fund managers must also submit quarterly performance and strategy review reports directly to PERAC. Officials in other states we contacted may review hedge fund and private equity investments as part of a broader oversight approach. For example, the Ohio Retirement Study Council reviews the five large statewide public retirement funds semiannually to evaluate a plan’s investment policies and objectives, asset allocations decisions, and risk and return assumptions. In California, individual pension boards have sole and exclusive authority over investment decisions; however, they ensure public information on investment decisions and fund performance, including detailed reports of alternative investments, are publicly available. Available data indicate that pension plans have increasingly invested in hedge funds and have continued to invest in private equity to complement their traditional investments in stocks and bonds. Further, these data indicate that individual plans’ hedge fund or private equity investments typically comprise a small share of total plan assets. However, data are generally not available on the extent to which smaller pension plans have made such investments. Because such investments require a degree of fiduciary effort well beyond that required by more traditional investments, this can be a difficult challenge for plans, especially smaller plans. Smaller plans may not have the expertise or financial resources to be fully aware of these challenges, or have the ability to address them through negotiations, due diligence, and monitoring. In light of this, such investments may not be appropriate for some pension plans. Although plans are responsible for making prudent choices when investing in any asset, EBSA also has a role in helping to ensure that pension plan sponsors fulfill their fiduciary duties in managing pension plans that are subject to ERISA. This can include educating employers and service providers about their fiduciary responsibilities under ERISA. Many private sector plans are insured by the PBGC, which guarantees most benefits when an underfunded plan terminates; however, public sector plans are not insured and may call upon state or local taxpayers to overcome funding shortfalls. The importance of educating investors about the special challenges presented by hedge funds has been recognized by a number of organizations. For example, in 2006, the ERISA Advisory Council recommended that Labor publish guidance about the unique features of hedge funds and matters for consideration in their use by qualified plans. To date, EBSA has not acted on this recommendation. More recently, in April 2008, the Investors’ Committee formed by the President’s Working Group on Financial Markets published draft best practices for investors in hedge funds. This guidance will be applicable to a broad range of investors, such as public and private pension plans, endowments, foundations, and wealthy individuals. EBSA can further enhance the usefulness of this document by ensuring that the guidance is interpreted in light of the fiduciary responsibilities that ERISA places on private sector plans. For example, EBSA could outline the implications of a hedge fund’s or fund of funds’ limited transparency on the fiduciary duty of prudent oversight. EBSA can also reflect on the implications of these best practices for some plans—especially smaller plans—that might not have the resources to take actions consistent with the best practices, and thus would be at risk of making imprudent investments in hedge funds. While EBSA is not tasked with offering guidance to public sector plans, such plans may nonetheless benefit from such guidance. To ensure that all plan fiduciaries can better assess their ability to invest in hedge funds and private equity, and to ensure that those that choose to make such investments are better prepared to meet these challenges, we recommend that the Secretary of Labor provide guidance specifically designed for qualified plans under ERISA. This guidance should include such things as (1) an outline of the unique challenges of investing in hedge funds and private equity; (2) a description of steps that plans should take to address these challenges and help meet ERISA requirements; and (3) an explanation of the implications of these challenges and steps for smaller plans. In doing so, the Secretary may be able to draw extensively from existing sources, such as the finalized best practices document that will be published in 2008 by the Investors’ Committee formed by the President’s Working Group on Financial Markets. We provided a draft copy of this report to the Department of Labor, PBGC, the Department of the Treasury, the SEC, and the Federal Reserve Bank for their review and comment. Labor generally agreed with our findings and recommendation. With regard to our recommendation, Labor stated that providing more specific guidance on investments in hedge funds and private equity may present challenges. Specifically, Labor noted that given the lack of uniformity among hedge funds, private equity funds, and their underlying investments, it may prove difficult to develop comprehensive and useful guidance for plan fiduciaries. Nonetheless, Labor agreed to consider the feasibility of developing such guidance. Labor’s formal comments are reproduced in appendix III. We agree that the lack of uniformity among hedge funds or private equity funds may pose challenges to Labor. However, we do not believe it will be an insurmountable obstacle to developing guidance for plan sponsors. Indeed, the lack of uniformity among hedge funds and private equity funds is itself an important issue to convey to fiduciaries, and highlights the need for an extensive due diligence process preceding any investment. Additionally, as we state in the recommendation, Labor’s efforts can be facilitated through use of existing best practices documents, such as the best practices for investors in hedge funds document that will be published in the summer of 2008 by the Investors’ Committee formed by the President’s Working Group on Financial Markets. The PBGC also provided formal comments, which are reproduced in appendix IV. PBGC generally concurred with our findings. Labor, PBGC, the Department of the Treasury, and the Federal Reserve Bank also provided technical comments and corrections, which we have incorporated where appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees and members, federal agencies, and other interested parties. We will also make copies available to others upon request. If you or your staff has any questions concerning this report, please contact Barbara Bovbjerg on (202) 512-7215 or Orice Williams on (202) 512-8678. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Key contributors are listed in appendix V. Our objectives were to address the following questions: 1. To what extent do public and private sector pension plans invest in hedge funds and private equity funds? 2. What are the potential benefits, risks, and challenges pension plans face in making hedge fund investments, and how do plans address the risks and challenges? 3. What are the potential benefits, risks, and challenges pension plans face in making private equity fund investments, and how do plans address the risks and challenges? 4. What mechanisms regulate and monitor pension plan investments in hedge funds and private equity funds? To answer the first question, we obtained and analyzed survey data of private and public sector defined benefit (DB) plans on the extent of plan investments in hedge funds and private equity from three private organizations: Greenwich Associates, Pensions & Investments, and Pyramis Global Advisors. We identified the three surveys through our literature review and interviews with plan representatives and industry experts. As seen in table 4, the surveys varied in the number and size of plans surveyed. Using the available survey data, we determined the percentage of plans surveyed that reported investments in hedge funds or private equity. Using data from Greenwich Associates, we also determined the percentage of plans surveyed that invested in hedge funds or private equity by category of plan size, measured by total plan assets. We further examined data from each survey on the size of allocations to hedge funds or private equity as a share of total plan assets. Using the Pensions & Investments data, we analyzed allocations to these investments for individual plans and calculated the average allocation for hedge funds and private equity, separately, among all plans surveyed that reported these investments. The Greenwich Associates and Pyramis data reported the size of allocations to hedge funds or private equity as an average for all plans surveyed. Through our research and interviews, we were not able to identify any relevant surveys that included plans with less than $200 million in total assets. While the information collected by each of the surveys is limited in some ways, we conducted a data reliability assessment of each survey and determined that the data were sufficiently reliable for purposes of this study. These surveys did not specifically define the terms hedge fund and private equity; rather, respondents reported allocations based on their own classifications. Pensions & Investments reported private equity in three mutually-exclusive categories—buyout, venture capital, and an “other” private equity category, which includes investments such as mezzanine financing and private equity investments traded on the secondary market. Data from all three surveys are reflective only of the plans surveyed and cannot be generalized to all plans. To answer the second and third questions, we conducted in-depth interviews with representatives of 26 private and public sector DB plans, listed in table 5, from June 2007 to January 2008 and, where possible, obtained and reviewed supporting documentation. Interviews related to hedge fund investments were conducted from June 2007 to December 2007. Interviews related to private equity investments were conducted from October 2007 to January 2008. The interviews with plan representatives were conducted using a semi-structured interview format, which included open-ended questions on the following topics, asked separately about hedge funds or private equity: the plan’s history of investment in hedge funds or private equity; the plan’s experiences with these investments to date; the plan’s expected benefits from these investments; challenges the plan has faced with these investments; and steps the plan has taken to mitigate these challenges, including due diligence and ongoing monitoring. We interviewed five plans that did not invest in hedge funds to discuss the reasons the plan decided not have such investments. We also interviewed officials of government agencies, relevant industry organizations, investment consulting firms, and other national experts listed in appendix II. In addition, we interviewed officials from the Arizona State Retirement System and Missouri Local Government Employees’ Retirement System to discuss the recent decision of these plans to invest in private equity. The plans we interviewed were selected based on several criteria. We attempted to select plans that varied in the size of allocations to hedge funds and private equity as a share of total plan assets. We also attempted to select plans with a range of total plan assets, as outlined in table 6. We identified these plans using data from the Pensions & Investments 2006 survey and through our interviews with industry experts. To identify and analyze the regulation of public DB pension investments by states we consulted officials at the Department of Labor and representatives of relevant agencies in selected states, and reviewed relevant policy documents. The states we selected included the 10 states with the largest public pension assets according to our review of the National Association of State Retirement Administrators (NASRA) Public Funds Survey data listed in table 7. We also included Massachusetts because our previous contact with that state produced valuable information for this objective. Those states chosen based on the size of plan assets were: California, New York, Texas, Ohio, Florida, Illinois, Pennsylvania, New Jersey, Wisconsin, and North Carolina. In 9 of 10 states we spoke with the offices of the State Auditor, the State Treasurer, and the State Comptroller or equivalent offices. North Carolina’s Chief Investment Officer of the State Treasurer’s Office affirmed our analysis through e- mail. Finally we informed each of these states of our analysis and gave them the opportunity to comment on our description of regulations in their state. We conducted this performance audit from June 2007 to July 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Department of Treasury Department of Labor, Employee Benefit Security Administration Board of Governors of the Federal Reserve System Pension Benefit Guaranty Corporation Securities and Exchange Commission Hedge fund and private equity industry organizations Managed Funds Association National Venture Capital Association (NVCA) Private Equity Council (PEC) Cambridge Associates Cliffwater, LLC Fiduciary Counselors McCarter & English, LLP Mercer Associates Offices of Wilkie, Farr, and Gallagher, LLP Pension Governance, LLC American Benefits Council (ABC) American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) American Federation of State, County, and Municipal Employees (AFSCME) Committee on the Investment of Employee Benefit Assets (CIEBA) Financial Policy Forum National Association of State Retirement Administrators (NASRA) North American Securities Administrators Association (NASAA) National Conference of State Legislatures (NCSL) roundtable: National Association of Police Organizations (NAPO) National Conference on Public Employee Retirement Systems (NCPERS) National Association of State Treasurers National Association of Counties (NACo) Grand Lodge Fraternal Order of Police National Association of State Auditors, Comptrollers, and Treasurers (NASACT) National Education Association (NEA) National Council on Teacher Retirement (NCTR) and California Public National Conference of State Legislatures (NCSL) National Association of State Retirement Administrators (NASRA) David Lehrer, Assistant Director, and Michael Hartnett managed this report. Sharon Hermes, Angela Jacobs, and Ryan Siegel made important contributions throughout this assignment. Joseph A. Applebaum, Joe Hunter, Ashley McCall, Jay Smale Jr., Jena Sinkfield, Frank S. Synowiec, Karen Tremba, Rich Tsuhara, Charlie Willson, and Craig Winslow also provided key support.

Millions of retired Americans rely on defined benefit pension plans for their financial well-being. Recent reports have noted that some plans are investing in 'alternative' investments such as hedge funds and private equity funds. This has raised concerns, given that these two types of investments have qualified for exemptions from federal regulations, and could present more risk to retirement assets than traditional investments. To better understand this trend and its implications, GAO was asked to examine (1) the extent to which plans invest in hedge funds and private equity; (2) the potential benefits and challenges of hedge fund investments; (3) the potential benefits and challenges of private equity investments; and (4) what mechanisms regulate and monitor pension plan investments in hedge funds and private equity. To answer these questions GAO interviewed relevant federal agencies, public and private pension plans, industry groups and investment professionals, and analyzed available survey data. According to several recent surveys of private and public sector plans, investments in hedge funds and private equity generally comprise a small share of total plan assets, but a considerable and growing number of plans have such investments. Available survey data of mid to large-size plans indicate that between 21 and 27 percent invest in hedge funds while over 40 percent invest in private equity; such investments are more prevalent among larger plans, as shown below. The extent of investment in hedge funds and private equity by plans with less than $200 million in total assets is unknown. Pension plans invest in hedge funds to obtain a number of potential benefits, such as returns greater than the stock market and stable returns on investment. However, hedge funds also pose challenges and risks beyond those posed by traditional investments. For example, some investors may have little information on funds' underlying assets and their values, which limits the opportunity for oversight. Plan representatives said they take steps to mitigate these and other challenges, but doing so requires resourcesbeyond the means of some plans. Pension plans primarily invest in private equity funds to attain returns superior to the stock market. Pension plan officials GAO spoke with generally had a long history of investing in private equity and said such investments have met expectations for returns. However, these investments present several challenges, such as wide variation in performance among funds, and the resources required to mitigate these challenges may be too substantial for some plans. The federal government does not specifically limit or monitor private sector plan investment in hedge funds or private equity, and state approaches to public plans vary. Under federal law, fiduciaries must comply with a standard of prudence, but no explicit restrictions on hedge funds or private equity exist. Although a federal advisory council recommended that the Department of Labor (Labor) develop guidance for plans to use in investing in hedge funds, Labor has not yet done so. While most states also rely on a standard of investor prudence, some also have legislation that restricts or prohibits plan investment in hedge funds or private equity. For example, one state prohibits plans below a certain size from investing directly in hedge funds.

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American Samoa, CNMI, Guam, Puerto Rico, and the U.S. Virgin Islands are five territories of the United States. With the exception of Puerto Rico, the populations in the territories are small relative to the states, and are generally poorer. Within broad federal guidelines and under federally approved plans, territories have some discretion in setting Medicaid and CHIP eligibility standards and provider payment rates; determining the amount, scope, and duration of covered benefits; and developing their own administrative structures. For example, similar to the states, unless they have obtained a waiver, the territories’ Medicaid programs are required to cover certain benefits—known as mandatory Medicaid benefits—and can choose to cover additional benefits, known as optional benefits. While the states also have similar discretion, the territories have been afforded greater flexibility, including the ability to set their own income eligibility levels for certain populations and determine income eligibility using a locally established poverty level instead of the federal poverty level (FPL). Also like the states, territories can operate their CHIP programs as a separate program, include CHIP-eligible children in their Medicaid program, or use a combination of the two approaches. Significant differences exist in how Medicaid and, to a lesser extent, CHIP are funded in the territories as compared with the states. For example, the federal matching rate for states’ Medicaid programs, the Federal Medical Assistance Percentage (FMAP), is based on a state’s per capita income in relation to the national per capita income, with poorer states receiving higher federal matching rates than wealthier states. In contrast, the Medicaid FMAP for the territories does not recognize their capacity to pay for program expenses. Although PPACA increased the territories’ FMAP from 50 to 55 percent, this percentage is fixed at the lower end of the range available to states. For the CHIP program, the federal government matches states’ and territories’ program spending at a rate higher than Medicaid, known as the enhanced FMAP. However, territories’ matching rate for CHIP spending is similarly fixed at the lower end of the range available to the states. Additionally, federal Medicaid funding in states is not subject to a limit, provided the states contribute their share of program expenditures for services provided. In contrast, federal Medicaid funding in each territory is subject to a statutory cap. In general, once their Medicaid and CHIP funding is exhausted, territories must assume the full costs of their programs. These funding differences, along with differences in the costs of health care in the territories compared with the states, have contributed to lower federal and territory Medicaid program expenditures in the territories. For example, in the aggregate, total Medicaid expenditures in all five territories comprised less than one half of one percent of the total national Medicaid expenditures in fiscal year 2014. However, when examined separately, Puerto Rico had Medicaid enrollment and expenditures similar to some states. Specifically, in fiscal year 2014, Puerto Rico ranked 11th in Medicaid enrollment nationally and ranked 42nd in total Medicaid expenditures. Like the states, territories must report their quarterly program expenditures for Medicaid and CHIP on the CMS-64 no later than 30 days after the end of each quarter, which is used to reimburse them for their federal share of these expenditures. In recent years, legislation to provide temporary increases in Medicaid and CHIP funding has been enacted. For example, the American Recovery and Reinvestment Act of 2009 (Recovery Act) provided the territories with a 30 percent increase in their Medicaid caps from fiscal year 2009 through the first quarter of fiscal year 2011, as well as federal matching funds to encourage Medicaid providers to undertake health information technology (HIT) initiatives. Most recently, PPACA appropriated $7.3 billion in additional Medicaid funding to the territories, the majority of which is available through fiscal year 2019. According to CMS officials, this funding can be used once territories expend their Medicaid and CHIP funding each year. PPACA also permanently increased territories’ Medicaid FMAPs and CHIP enhanced FMAPs to 55 percent and 68.5 percent, respectively. Federal law generally requires state, territory, and federal entities to ensure program integrity by protecting the Medicaid and CHIP programs from fraud, waste, and abuse. Like the states, territories have primary responsibility for such program integrity because they enroll providers, establish payment policies, process claims, and pay for services furnished to beneficiaries. To execute this responsibility, territories may undertake a variety of efforts. For example, although not required, they can establish program integrity units, which are tasked with identifying and recovering improper payments. Territories, like the states, are also required to implement certain program integrity mechanisms or receive an exemption from CMS for doing so. For example, territories must establish Medicaid Fraud Control Units (MFCU), which are tasked with investigating Medicaid fraud and other health care law violations, or receive an exemption from CMS from establishing one. The territories are also required to implement a Medicaid Management Information System (MMIS), which is a claims processing and information retrieval system that includes capabilities for reporting claims data, enrollee encounter data, and conducting pre- and post-payment review. Such information can assist in identifying improper payments. Federal mechanisms are also available to assist in program oversight. For example, CMS can conduct comprehensive or focused program integrity reviews, which assess the effectiveness of state and territory program integrity efforts, including compliance with federal statutory and regulatory requirements. Further, through the Payment Error Rate Measurement (PERM) program, CMS requires states to estimate improper payments in the Medicaid and CHIP program to identify program vulnerabilities and actions to reduce improper payments; however, the agency has excluded the territories from this program. Additionally, OMB’s annual A-133 single audits examine internal controls and compliance deficiencies in certain federal programs, including Medicaid and CHIP, and can be a resource to inform program oversight. Due to the flexibility territories have in administering their Medicaid and CHIP programs, the territories’ program eligibility and benefits not only reflect their unique circumstances, but also differ from one another and from the states. For example, a notable distinction among territories’ program eligibility is that Puerto Rico is the only territory that uses its CHIP funds to cover additional children in its Medicaid programs whose income levels exceed Medicaid eligibility levels. The other four territories use their CHIP funds to pay for services provided to children up to the age of 19 in their Medicaid programs. Additionally, Guam, Puerto Rico and the U.S. Virgin Islands base program eligibility on local poverty levels (LPL) that are more restrictive than federal standards, which has resulted in lower program enrollment than would otherwise be the case. Additionally, unlike the states and other territories, American Samoa does not determine eligibility for its Medicaid program on an individual basis. Instead, it presumes that all individuals with incomes at or below 200 percent of the FPL are eligible. The different methods territories use to determine eligibility affect Medicaid enrollment in each territory, with the estimated percentage of territories’ populations enrolled in Medicaid in fiscal year 2015 ranging from about 17 percent in the U.S. Virgin Islands to 88 percent in American Samoa. (See table 1.) Territories also vary in terms of the range of benefits covered by their respective Medicaid programs. Specifically, Guam covers all of the 17 mandatory Medicaid benefits; CNMI and the U.S. Virgin Islands cover nearly all of the benefits; and American Samoa and Puerto Rico cover 10 of the 17 benefits. American Samoa and CNMI operate their Medicaid programs under broad waiver authority under section 1902(j) of the Social Security Act and, therefore, are not required to cover all mandatory benefits. While the other territories do not operate under this broad waiver authority, CMS acknowledged that the agency has not required them to cover all mandatory Medicaid benefits, citing limited federal Medicaid funding and the unavailability of certain services. Examples of the mandatory benefits most commonly covered by all five territories include Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services for individuals under 21; inpatient hospital services; outpatient hospital services; and physician services. In contrast, the territories’ coverage of other benefits, such as nursing facility and rural health clinic services, was less widespread, and only Guam covered freestanding birth center services. (See fig. 1.) Officials from the four territories that do not cover all mandatory Medicaid benefits cited multiple reasons for not doing so, including limited funding and a lack of infrastructure. In particular, officials from Puerto Rico and American Samoa said that their programs do not cover nursing facility services due to insufficient funding and because they do not have nursing homes; CNMI officials noted that its program does not cover freestanding birth center services because there are no such facilities in the territory; and due to the lack of available providers, certain specialty services covered by American Samoa, CNMI, and Guam are only available off- island. For example, in CNMI, most cardiac, orthopedic, chemotherapy, and radiation services are only available off-island; in Guam, pediatric oncology, hematology, dermatology, and procedures such as cardiac bypass surgery, are only available off-island. In addition to mandatory Medicaid benefits, each territory has chosen to cover optional benefits, with all five territories providing coverage for outpatient prescription drugs, clinic services, dental and eyeglasses, prosthetics, physical therapy, and rehabilitative services. Optional services commonly covered by states—such as targeted case management, personal care services, and intermediate care facilities for individuals with intellectual disabilities—are not covered by any of the five territories. (See fig. 2.) The recent temporary increases in federal funding have enabled the territories to increase Medicaid and CHIP spending, and avoid federal funding shortfalls. Most notably, PPACA’s appropriation of an additional $7.3 billion in Medicaid funding for the territories—available for expenditure through at least fiscal year 2019—provided them flexibility in terms of when they choose to draw down the additional funds. For example, between fiscal year 2010 when PPACA funds were not available and fiscal year 2014 when they were, the average annual percentage change in total Medicaid and CHIP spending in CNMI and Guam was 23 percent and 19 percent, respectively, with total spending in these territories more than double in fiscal year 2014 compared to fiscal year 2010. (See table 2.) Prior to the availability of these temporary funds, the territories often exhausted their Medicaid funds anywhere from the first through the third quarter of each fiscal year, and generally utilized all of their CHIP funding each year. The territories used various strategies to address these federal funding shortfalls. For example, Puerto Rico officials said that prior to the PPACA funding, the federal Medicaid funds covered only 16 percent of their planned annual expenditures and were expended during the first quarter of the federal fiscal year, after which time the territory had to rely entirely on local funding to cover program spending. Further, a CNMI official said it was normal for their providers to provide services in one year and be paid the following year. In addition to all five territories avoiding federal funding shortfalls, officials in three of the territories noted that these temporary funds have allowed them to improve their programs by covering more benefits, enrolling more providers, or both. For example, American Samoa officials said they plan to use some of their PPACA funds to pay for services provided by new providers, thereby expanding access to services beyond the island’s only hospital. Puerto Rico officials said they used some of their PPACA funds to add coverage for certain organ transplants, which, according to CMS officials, the territory must cover due to other changes in law enacted under PPACA. Despite the influx of temporary PPACA funding, territories may nonetheless experience funding shortfalls in the near future, according to CMS and territory officials. Specifically, certain territories may exhaust their PPACA funding before the end of fiscal year 2019, as there are no restrictions on the rate at which territories may access their allotted funds. For example, CNMI and Puerto Rico, which used 49 percent and 56 percent of their allotments between fiscal years 2011 and 2015, respectively, are spending these temporary funds at a rate that could deplete their allotments early, as the amount they have spent has increased each year. (See table 3.) While the rate of expenditures to date may not reflect future spending rates, some territory officials expressed concerns about the temporary availability of the PPACA funds and the fact that their capped allotments will be reduced to pre-PPACA levels beginning in fiscal year 2019, or earlier if they expend the PPACA funds before 2019. As a result, the territory officials noted that the territories may run out of the temporary funding early, have to make program cuts once the funding is exhausted, or both. For example, Puerto Rico Medicaid officials said they determined they could exhaust their entire PPACA allotment as early as fiscal year 2017. Additionally, officials from Puerto Rico and Guam expressed concern that they may need to restrict eligibility or reduce benefits once the PPACA funding is exhausted. Territory and federal oversight efforts provide little assurance that the territories’ Medicaid and CHIP funds are protected from fraud, waste, and abuse. Citing limited resources, territory officials acknowledge a general lack of program integrity efforts. Further, federal officials cite the territories’ smaller Medicaid expenditures in limiting their program integrity efforts to technical assistance. Although the territories have primary responsibility for Medicaid program oversight, limited assurance exists that they are identifying and recovering improper payments or investigating fraud in their Medicaid programs. With the exception of Puerto Rico, the territories have not established program integrity units, which are dedicated to identifying and reducing improper payments. Although Medicaid agencies are not required to establish program integrity units, the lack of a separate entity is counter to internal controls standards regarding segregation of key duties and responsibilities for reducing the risk of error and fraud. Specifically, in four of the territories, the Medicaid Director is responsible for program oversight, including program integrity efforts, according to CMS officials. This lack of segregation of key duties and responsibilities could be remedied through the establishment of a program integrity unit or other division of labor. According to CMS officials, the territories have not established separate program integrity units because they lack adequate funding and personnel to do so, and funds spent on such an oversight effort would reduce the amount of funds available for the provision of health care services. Further, an American Samoa official said the territory is very interested in undertaking program integrity efforts, but is unable to hire additional staff to do so because of budgetary constraints. Although Puerto Rico has a program integrity unit, according to Puerto Rico officials, this unit’s responsibilities are limited to eligibility fraud and acting as a liaison regarding concerns of provider fraud with the Administración de Seguros de Salud de Puerto Rico (ASES), the Puerto Rico government entity that manages managed care organization (MCO) contracts. ASES delegates primary responsibility for program integrity efforts to the MCOs and requires them to have policies and procedures for the identification, investigation, and referral of suspected fraud. Both we and the HHS-OIG have previously reported concerns that MCOs might not have an incentive to identify and recover improper payments. For example, as we previously reported, officials from state program integrity units noted that they believed MCOs were not consistently reporting improper payments in order to avoid appearing vulnerable to fraud and abuse. In this same report, state program integrity unit officials also noted a potential conflict of interest for MCOs because reporting improper payments could reduce their future federal funding. In addition to the general absence of program integrity units, none of the territories has established a MFCU—units that investigate and prosecute Medicaid fraud and other health care law violations—or obtained an exemption from the requirement to establish one from CMS. According to CMS officials, territories have not established MFCUs because the costs associated with establishing them count against the territories’ capped Medicaid allotment and would reduce the funds available for providing services. Further, Puerto Rico officials told us they had considered developing a MFCU, but decided against it after learning that the funds used to develop it would reduce funds for services. These officials said they made this decision despite knowing that a MFCU could eventually be cost effective because they believed they could not afford the initial investment. While the establishment of a MFCU may not make sense, given the size and spending of the territories, the territories are required to demonstrate that minimal fraud exists in their programs if they do not have a MFCU. The territories’ incomplete service-level expenditure reporting also contributes to limited assurance of Medicaid program integrity in the territories. Specifically, the limited detail on the types and volume of services provided in the territories can hinder program integrity efforts, including making it difficult to identify potential fraud, waste, and abuse. As with states, different reporting requirements exist for fee-for-service and managed care spending in the territories. According to CMS officials, the health care delivery systems in American Samoa, CNMI, Guam, and the U.S. Virgin Islands are entirely fee-for-service, and therefore these territories are required to report service-level spending on the CMS-64. CMS officials cited the CMS-64 as the only data source for Medicaid and CHIP spending in these territories, underscoring the importance of accurate service-level expenditure reporting for territories’ program integrity efforts. However, we reviewed the territories’ Medicaid spending for fiscal year 2014 and found that none of the territories had reported service-level spending for all the Medicaid benefits they covered. Specifically, for the benefits we reviewed, American Samoa, CNMI, and Guam reported service-level spending for 24 percent, 55 percent, and 63 percent, respectively, of the Medicaid benefits they covered. (See table 4.) This limited reporting is the result of various circumstances. For example, Medicaid enrollees in American Samoa are serviced by a single hospital that reports costs by only three mandatory benefits—inpatient hospital services, outpatient hospital services, and emergency services for certain legalized aliens and undocumented aliens. With regard to managed care, Puerto Rico’s Medicaid managed care program, which provides coverage to all Medicaid and CHIP enrollees, is not subject to service-level reporting requirements. However, under their contracts with Puerto Rico Medicaid, the MCOs in Puerto Rico are required to submit encounter data to ASES. Although these data could provide insight on service-level utilization, CMS officials told us they do not collect or review these data on a regular basis. With regard to program oversight, CMS’s general practice has been to conduct comprehensive program integrity reviews in all of the states; however, of the five territories, it has conducted such reviews only in Puerto Rico, the most recent of which was released in January 2012 and produced multiple findings. CMS officials told us they are switching from comprehensive and more focused program integrity reviews in the states and plan to conduct such a review for Puerto Rico in 2016. Citing the other territories’ smaller Medicaid expenditures, however, CMS has neither conducted similar reviews of their Medicaid programs, nor does it plan to conduct more focused program reviews. While Medicaid spending in the territories is small as a proportion of total Medicaid spending, such limited federal oversight efforts provide little assurance that Medicaid is protected from fraud, waste, and abuse, and are inconsistent with federal internal control standards regarding the identification, analysis, and response to relevant risks as part of achieving program objectives. Given that governmental, economic, industry, regulatory, and operating conditions continually change—such as when PPACA significantly increased territory Medicaid funding—mechanisms should be provided to identify and manage any special risks prompted by such changes in program conditions. Additionally, other factors—such as the lack of enforcement of program integrity mechanisms and information systems—have contributed to the limited federal program integrity efforts in the territories. For example, CMS has neither required the territories to establish MFCUs, nor has the agency granted them an exemption, because agency officials were unclear whether they had the authority to grant such exemptions. Additionally, until recently, CMS regulations exempted territories from the requirement to develop an MMIS, which could provide more detail on the territories’ Medicaid and CHIP spending, including increasing the level of detail on the territories’ CMS-64 reporting. In December 2015, CMS amended its regulations to eliminate the MMIS exemptions for the territories, effective January 1, 2016. Despite the fact that an exemption had been in place, the U.S. Virgin Islands established a partnership with West Virginia, which allowed territory officials to make use of the state’s MMIS beginning in 2013. This has improved the level of detail on the U.S. Virgin Islands’ CMS-64 reporting. Specifically, in fiscal year 2012, prior to the implementation of its MMIS, the U.S. Virgin Islands reported service-level expenditures for 30 percent of the Medicaid benefits they covered; after the implementation, this percentage increased to 91 percent in fiscal year 2014. According to Puerto Rico Medicaid officials, the territory’s Medicaid agency is in the process of establishing a similar partnership with Florida and anticipates implementation by the end of 2016. Having additional details on program spending could strengthen CMS’s and territories’ program oversight. According to agency officials, CMS has assigned officials to the five territories to assist in program integrity efforts, and their role is generally focused on providing technical assistance. The activities of these officials vary across the territories, ranging from resolving complaints to more proactive efforts to identify trends indicating fraud, waste, and abuse. In addition, CMS officials reported that Puerto Rico and the U.S. Virgin Islands requested and received on-site training on the proper reporting of federal expenditures. Other federal oversight efforts provide insight on Medicaid program integrity needs in the territories, and CMS has reported making use of these efforts. Specifically, OMB’s annual A-133 single audits—conducted by contracted independent auditors—examine internal controls and compliance in the territories’ programs, and have identified deficiencies in each of the territories. Examples of the findings from the 2013 single audits are listed below. CNMI – the single audit found a significant deficiency in internal control over compliance. Specifically, the payments for certain Medicaid services and medications exceeded permissible amounts. This finding was resolved and closed in September 2015. Guam – the single audit found a material weakness in internal control over compliance. Specifically, the single audit found that no documentation was provided to show that eligibility specialists used the available income and eligibility verification system to determine eligibility. This finding was resolved and closed in February 2015. U.S. Virgin Islands – the single audit found a material weakness in internal control over compliance. Specifically, the audit revealed that sufficient controls did not exist for the required investigation of Medicaid utilization related to fraud. As a result, there may be prolonged, ongoing cases of fraud, which may be unreported. As of March 2015, according to CMS officials, the status of this finding was cleared, meaning that the next step is for the U.S. Virgin Islands to develop a corrective action plan for approval by CMS. CMS has a single audit coordinator that receives the single audit reports and notifies CMS’s regional offices, which are then responsible for working with the territories to correct any deficiencies that were identified. For example, CMS regional office officials help the territories develop corrective action plans, if required. However, CMS officials noted that it is not uncommon for territories to take multiple years to resolve certain deficiencies. CMS officials told us that the limited funding and staff created particular challenges for the territories when responding to single audit findings. For example, CNMI officials reported to CMS that the territory lacked sufficient staff to perform post-payment reviews in response to a finding from a single audit that found the territory incorrectly paid certain Medicaid claims. The Medicaid and CHIP programs provide critical financial support to the U.S. territories’ health care systems. However, citing the territories’ limited resources and the relatively small size of their programs, CMS has not required the territories to follow certain program requirements. In particular, this includes requirements for complete service-level expenditure reporting and the establishment of a MFCU or the receipt of an exemption—obtained by demonstrating that the operation of such a unit would not be cost effective, because minimal fraud exits in a territory’s Medicaid program. Although American Samoa and CNMI’s Medicaid programs operate under broad waivers that exempt them from many of these requirements, this is not the case for Guam, Puerto Rico, and the U.S. Virgin Islands, which have not received exemptions or waivers from these requirements. Despite acknowledging the territories’ limited resources, CMS provides limited assurance and oversight to support program integrity efforts in the territories, and undertakes limited efforts of its own in this regard. Such limited federal efforts in the territories are inconsistent with federal internal control standards regarding identifying and responding to relevant risks when conditions change, such as when PPACA significantly increased territories’ federal Medicaid funding. Without additional efforts by CMS, there is limited assurance that territories have the capacity to identify fraud, recover improper payments, or provide complete information on program spending. While Medicaid funding to the territories represents a small share of national program expenditures and may not warrant the same level of program integrity oversight as the states, additional actions are needed by CMS to ensure an appropriate level of program integrity in these areas. To ensure the appropriate level of Medicaid program integrity oversight in the territories, we recommend that the Acting Administrator of CMS reexamine CMS’s program integrity strategy and develop a cost-effective approach to enhancing Medicaid program integrity in the territories. Such an approach could select from a broad array of activities, including—but not limited to—establishing program oversight mechanisms, such as requiring territories to establish a MFCU or working with them to obtain necessary exemptions or waivers from applicable program oversight requirements; assisting territories in improving their information on Medicaid and CHIP program spending; and conducting additional program assessments of program integrity as warranted. We provided a draft of this report to the HHS and the Department of the Interior (DOI) for comment. In its written comments, HHS concurred with our recommendation and acknowledged that many territories face challenges in addressing program integrity and finding a balance between applying funds towards providing services and program integrity efforts. Further, HHS noted that it will work with territory Medicaid officials to determine the feasibility of enhancing program integrity activities, including, but not limited to, establishing MFCUs or obtaining the necessary exemptions when MFCUs are not warranted. HHS also provided technical comments, which we incorporated as appropriate. In its written comments, DOI noted the financial and infrastructure challenges related to health care faced by all territories, despite the additional funding under PPACA, which is temporary, and raised concerns about future reductions in Medicaid once PPACA funds are depleted. HHS’s and DOI’s comments are reproduced in appendices I and II. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issuance date. At that time, we will send copies of this report to the Secretary of Health and Human Services and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix II. In addition to the contact named above, Susan Anthony, Assistant Director; Manuel Buentello; Sandra George; Giselle Hicks; Drew Long; Amber Sinclair; and Teresa Tam made key contributions to this report.

Notable differences exist in the funding and operation of Medicaid and CHIP—joint federal-state health financing programs for low-income and medically needy individuals—in the territories versus the states. For example, the territories are subject to certain funding restrictions, such as capped annual federal funding, that are not applicable to the states. Further, certain federal requirements regarding eligibility, benefits, and program integrity do not apply to the territories' programs, and certain otherwise applicable requirements have not been enforced. In recent years, various laws—such as PPACA—have increased funding for Medicaid and CHIP in the territories. This report examines (1) eligibility and benefit characteristics of the territories' Medicaid and CHIP programs, (2) Medicaid and CHIP spending in the territories, and (3) Medicaid and CHIP program integrity efforts in the territories. GAO reviewed laws and regulations, data on five territories' Medicaid and CHIP spending, and federal internal control standards. GAO also interviewed CMS and territory Medicaid officials. Eligibility and benefits for Medicaid and the state Children's Health Insurance Program (CHIP) in five U.S. territories—American Samoa, Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico and the U. S. Virgin Islands—differ from one another and from the states, generally reflecting the territories' unique circumstances. For example, Guam is the only territory that covers all 17 mandatory Medicaid benefits, while American Samoa and Puerto Rico cover 10 of the 17 benefits. Officials from the territories that do not cover all mandatory benefits cited multiple reasons for not doing so, including limited funding and a lack of infrastructure, and, in some cases, exercised available flexibility to exclude certain benefits. Temporary increases in federal funding have enabled the territories to increase Medicaid and CHIP spending. Unlike the states, whose Medicaid funding is not subject to a capped allotment—provided they contribute their share—territories are subject to a capped allotment, and historically have exhausted available federal Medicaid and CHIP funds each year. Most notably, the Patient Protection and Affordable Care Act (PPACA) provided the territories an additional $7.3 billion through at least fiscal year 2019. Officials in four territories cited positive effects of the additional funding, such as the ability to enroll more providers and cover more services; however, some officials also expressed concerns about the temporary nature of the funding, noting that they may have to make program cuts once the funding is exhausted—and that future shortfalls remain a concern. Despite temporary increases in Medicaid funding, GAO found little assurance that territory Medicaid funds are protected from fraud, waste, and abuse. Program oversight mechanisms : Only Puerto Rico has developed a program integrity unit, which, although not required, is tasked with identifying and recovering improper payments and is a management best practice. Additionally, no territory has established a Medicaid Fraud Control Unit—which identify and prosecute Medicaid fraud—or received an exemption from doing so, as required by federal law. Program information : Territories lack detail on the types and volume of services they provide, contrary to federal reporting requirements, resulting in limited information on how territories spend their federal Medicaid funding. Until recently, the Centers for Medicare & Medicaid Services (CMS), within the Department of Health and Human Services (HHS), exempted the territories from the requirement to implement a claims processing and information retrieval system with program integrity capabilities, although the U.S. Virgin Islands has established a partnership to use such a system. Program assessments : CMS has performed assessments on Medicaid program integrity effectiveness and compliance only for Puerto Rico. Although not required, such assessments have been conducted on all states. CMS does provide technical assistance, with the activities of CMS officials varying across the territories. Officials from CMS noted that funding for program integrity would count against the territories' capped allotments. Nonetheless, such limited efforts by the territories and federal government are inconsistent with federal internal control standards regarding identifying and responding to risks, particularly in light of increased federal Medicaid spending in the territories as a result of PPACA. GAO recommends that the Acting Administrator of CMS examine and select from a broad array of activities—such as establishing program oversight mechanisms, assisting in improving program information, and conducting program assessments—to develop a cost-effective approach to protecting territories' Medicaid programs from fraud, waste, and abuse. HHS concurred with GAO's recommendation.

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In 1980, the Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which established the Superfund program to clean up highly contaminated hazardous waste sites. EPA administers the program, oversees cleanups performed by the parties responsible for contaminating the sites, and performs cleanups itself. State governments also have a role in the Superfund process. States may enter into contracts or cooperative agreements with EPA to carry out certain Superfund actions, including evaluating sites, cleaning them up, and overseeing the cleanups. In addition, most states have established their own hazardous waste programs that can clean up sites independently of the federal Superfund program. State cleanup programs include efforts to enforce state cleanup laws on responsible parties and to encourage them to “voluntarily” clean up contaminated sites. CERCLA requires EPA to develop and maintain a list of hazardous sites, known as the National Priorities List, that the agency considers to present the most serious threats to human health and the environment. These sites represent EPA’s highest priorities for cleanup nationwide. Although EPA may undertake cleanup actions at contaminated sites not on the National Priorities List, the agency’s regulations stipulate that only sites placed on the list are eligible for long-term cleanup (“remedial action”) financed by the agency under the trust fund established by CERCLA. Additional details on EPA’s process for placing sites on the National Priorities List are included in appendix I. The 3,036 sites that were awaiting a National Priorities List decision as of October 1997 represent only a portion of the sites that EPA has evaluated and classified over the history of the Superfund program. According to EPA, as of November 1998, the Superfund program had investigated over 40,000 potential hazardous waste sites and made final decisions about whether or not to include almost 35,000 sites on the National Priorities List. EPA also reported that it has removed waste or taken other interim cleanup actions at over 5,500 sites—most of which are not on the National Priorities List—to address the most urgent risks and stabilize conditions to prevent further releases of contamination. For the more than 1,400 sites EPA has placed on the list, it has completed cleanup studies at most and has completed cleanup construction at 585. States have reported cleaning up thousands of sites under their own programs and authorities. To obtain information on the 3,036 sites that EPA identified as awaiting a National Priorities List decision, we developed and mailed two surveys for each nonfederal site and three surveys for each federal facility. We sent surveys to site assessment officials in EPA’s 10 regional offices, and since state officials might have more knowledge of some of the sites, we also sent surveys to the 50 states, the District of Columbia, Guam, Midway Island, the Northern Mariana Islands, Puerto Rico, and the Navajo Nation (collectively referred to as states in this report). In addition, if a federal agency is responsible for cleaning up sites, we also sent surveys to that agency: We surveyed 14 federal agencies for 157 of the 3,036 sites that are federally owned and/or operated. Because we did not receive responses from some states and incomplete responses from others, we sent follow-up surveys to state officials. In total, we received one or more survey responses for 3,023 (99.5 percent) of the 3,036 sites identified by EPA as awaiting a National Priorities List decision. We discuss our methodology in greater detail in appendix II, and appendix III includes reproductions of our surveys. The responses to our surveys of officials of EPA, other federal agencies, and states indicate that 1,789 of the 3,036 sites classified by EPA’s database as awaiting a National Priorities List decision are potentially eligible for the list. Another 1,234 sites are unlikely to become eligible for the Superfund program for various reasons. First, EPA’s database of potentially contaminated sites, known as the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS), inaccurately lists some sites as awaiting a National Priorities List decision although they are not eligible for listing. EPA regions reported that about 19 percent of the 3,036 sites should not be considered eligible sites because (1) they received preliminary hazard ranking scores below the qualifying level or (2) EPA has already proposed them for the list or decided not to propose them for the list. According to an EPA Superfund program official, the incorrect data entries may have resulted from regional program managers’ misinterpretation of EPA’s guidance on CERCLIS coding. We consider another 22 percent of the sites unlikely to become eligible for the National Priorities List because, according to responding officials, they either do not require any cleanup action (183 sites), have already been cleaned up (182 sites), or are currently undergoing final cleanup (304 sites) under state programs. No information is available on the status of the remaining 13 sites because of missing survey responses (see fig. 1). Final cleanup under way (304 sites) Sites potentially eligible for the NPL (1,789 sites) We performed most of our analysis of site conditions, cleanup activities, and plans for future cleanups for the 1,789 sites remaining after we excluded the categories of sites that are shaded in the figure. We refer to the remaining sites as potentially eligible sites. They include 1,739 nonfederal sites and 50 federal facilities. Responses to our surveys indicate that many of the 1,789 sites that are potentially eligible for the National Priorities List pose risks to human health or the environment. Most of them threaten drinking water sources or groundwater; they are generally located in populated areas; and although many of the sites are fenced to prevent entry, workers, visitors, and trespassers may have direct contact with contaminants at more than half of the sites. The sites are contaminated most often with metals, but other contaminants are also present. Officials of EPA, other federal agencies, and states who responded to our survey characterized the risks presented by about two-thirds of the potentially eligible sites. They said that about 17 percent of the sites currently pose high human health and environmental risks; another 10 percent of the sites potentially pose high future risks. In addition, officials were unsure about the severity of site conditions for a large proportion of potentially eligible sites. A large portion of the potentially eligible sites have contaminated nearby groundwater, drinking water sources, or both. As figures 2 and 3 indicate, about 73 percent of the potentially eligible sites have already contaminated groundwater, and another 22 percent of the sites, approximately, could contaminate groundwater in the future. In addition, about 32 percent of the potentially eligible sites have already contaminated drinking water sources, and about 56 percent more could contaminate drinking water sources in the future. Actual groundwater contamination (1,301 sites) The contamination at many of the potentially eligible sites is also resulting in a number of other adverse conditions. Table 1 shows the percentage of potentially eligible sites that have experienced or contributed to specific conditions. As the table also shows, respondents to our surveys were uncertain whether the conditions were present at a relatively large percentage of the potentially eligible sites. As figure 4 shows, the sites that are potentially eligible for the National Priorities List are contaminated by a variety of pollutants. Metals—primarily heavy metals such as lead, mercury, or cadmium—are the principal contaminants at these sites. These metals can cause brain and kidney damage and birth defects. The second most prominent contaminants at these sites are volatile organic compounds (VOC). VOCs are carbon-based compounds, such as benzene, that easily become vapors or gases and can cause cancer, as well as damage to the blood, immune, and reproductive systems. A large portion of the potentially eligible sites are also contaminated by semivolatile organic compounds (SVOC), which are similar to VOCs and can result in human respiratory illnesses. Additional major contaminants at the sites are pesticides, the most toxic of which can cause acute nervous system effects and skin irritations and may cause reproductive system effects and cancer; polychlorinated biphenyls (PCB), which can cause skin irritations and other related conditions and may contribute to causing cancers, liver damage, and reproductive and developmental effects; dioxins, which are also a suspected human carcinogen; and other unspecified contaminants. The potentially eligible sites are generally located in populated areas: Ninety-six percent are within a half mile of residences or places of regular employment. We asked officials of EPA, other federal agencies, and states to rank the relative risks of potentially eligible sites. The officials responding to our surveys said that they could assess the current risks of 67 percent of the sites and the potential risks of 68 percent of the sites. According to these officials, about 17 percent of the potentially eligible sites currently pose high risks (see fig. 5), and another 10 percent of the sites (for a total of 27 percent) could pose high risks in the future (see fig. 6) if they are not cleaned up. Average current risks (455 sites) Low current risks (443 sites) The 1,789 sites that are potentially eligible for the National Priorities List include (1) 686 sites where some cleanup activities have reportedly taken place or are currently being conducted but the final cleanup remedies are not yet under way and (2) 1,103 sites where officials reported that no substantive cleanup activities beyond initial site assessments or investigations have occurred or no information on cleanup progress is available. Data on the year in which each potentially eligible site was entered into EPA’s records—the “discovery date”—indicate that a significant portion of these sites have been in EPA’s and states’ inventories of known hazardous waste sites for more than a decade. Furthermore, 45 percent of the sites reported to have high current risks and 47 percent of the sites with high potential risks have not had any cleanup activities, or no information on their cleanup progress is available. EPA, other federal agencies, and the states reported conducting some cleanup actions at 38 percent of the potentially eligible sites. Figure 7 shows the number and percentage of potentially eligible sites at which federal and state agencies have undertaken some cleanup activities or conducted other actions such as providing alternative water supplies. (App. IV presents data on the distribution of the sites with and without reported cleanup actions among states and responsible federal agencies.) EPA, other federal agencies, and the states have completed removal actions or interim, partial response actions (not characterized by survey respondents as final cleanup solutions), including changing the water supplies of affected residents, at 576 of the 686 sites with cleanup actions. At the other 110 sites, responding officials told us that some cleanup is under way, but they are not sure if it will be a final response. EPA, other federal agencies, and the states reported conducting no cleanup activities beyond site assessments at the remaining 1,103 potentially eligible sites, or no information on cleanup progress at these sites is available. One hundred and seventy (55 percent) of the 307 sites that are estimated to currently pose high risks have undergone some cleanup activities, while 137 (45 percent) of these sites reportedly have seen no cleanup activities, or no information on cleanup progress is available (see fig. 8). Similarly, 254 (53 percent) of the 476 sites said to potentially pose high risks have undergone some cleanup actions, and 222 (47 percent) have reportedly undergone none, or information is lacking (see fig. 9). See appendix V for additional discussion of the sites at which cleanup actions have been taken. Most of the hazardous waste sites that are potentially eligible for the National Priorities List were “discovered,” that is, entered into EPA’s inventory of sites needing examination, more than a decade ago. As table 2 indicates, 10 percent of the potentially eligible sites were discovered in 1979 or earlier, and 42 percent were discovered before 1985. As shown in figure 10, one-third of the sites that have been known for 10 to 14 years and another third of the sites that have been in the inventory for 15 years or more have undergone some cleanup activities. Conversely, the majority of the sites that have been known for 10 years or more have reportedly made no cleanup progress, or no information on cleanup progress is available. According to the CERCLIS database, many of the potentially eligible sites have not only been in the inventory for a long time but have also been awaiting a National Priorities List decision for several years. The CERCLIS database records the date of the “last action” taken at the inventory sites, including, among other actions, the completion of site inspections or expanded site inspections. These dates generally can be used as an indication of when the sites became potentially eligible for placement on the National Priorities List. The last action recorded for 87 percent of the potentially eligible sites is the completion of a site inspection. Another 12 percent of the sites have completed or are undergoing expanded site inspections. The data show that the last action at half of the potentially eligible sites occurred in 1994 or earlier. The last action date for 24 percent of the sites is 1995, and for 27 percent, 1996 or later. For 4 percent of the sites, the last recorded action took place before 1990. It is uncertain whether most potentially eligible sites will be cleaned up; who will do the cleanup; under what programs these activities will occur; what the extent of responsible parties’ participation will be; and when cleanup actions, if any, are likely to begin. Responding officials did not indicate the final outcome for 53 percent of the 1,789 potentially eligible sites (see fig. 11). They estimated that 536 (30 percent) of the sites will be cleaned up under state programs but usually could not give a date for the start of cleanup or say whether responsible parties would participate. Collectively, they believed that 232 (13 percent) of the potentially eligible sites may be listed on the National Priorities List and cleaned up under the Superfund program, but there are few sites that both federal and state officials agreed would be listed (see fig. 12). Sites likely to be cleaned up under state programs (536) Respondents thought that the largest portion of the potentially eligible sites for which they could predict a cleanup outcome—536 sites, or 30 percent of the 1,789 sites—are likely to be cleaned up under state enforcement or voluntary cleanup programs. However, state officials were able to estimate when they were likely to begin cleaning up only 121 (23 percent) of the 536 sites. They expected to begin cleanup activities at 84 of these sites before the end of 1998 and at 35 sites by the year 2000. State officials also said that parties responsible for the waste at the sites that are expected to be cleaned up under state programs are likely to clean up only 172 (32 percent) of the 536 sites. Such parties are unlikely to participate in cleanups at another 29 (5 percent) of these sites. For the remaining two-thirds of the sites that states reported are likely to be cleaned up under state programs, the extent of responsible parties’ participation is uncertain. Our survey data also show that states are more likely to have cleanup plans for the near future (within 5 years) if responsible parties are available to pay for cleanups. If responsible parties are expected to clean up a site, states are more than twice as likely to have plans to begin work on the cleanup within the next 5 years (10 percent) as for a site at which cleanup by responsible parties is unlikely (4 percent). Furthermore, states are most likely to have plans to complete the cleanup within 5 years if responsible parties are likely to clean up all or almost all of the site. Twenty-one percent of the sites with such parties are expected to be completed by 2003. State officials also provided information about their state’s capabilities for compelling responsible parties to clean up potentially eligible sites or to fund cleanup activities, if necessary. Officials of 33 (75 percent) of the 44 states participating in our telephone survey said that their state’s enforcement capacity (including resources and legal authority) to compel responsible parties to clean up potentially eligible sites is excellent or good. Officials of 5 (11 percent) of the participating states believed that their state’s enforcement capacity is fair, and another 5 (11 percent) said that their state’s enforcement capacity is poor or very poor. The remaining state official was uncertain about the state’s enforcement capability. Furthermore, officials of 11 states (25 percent) told us that their state’s financial capability to clean up potentially eligible sites, if necessary, is excellent or good. Officials of 7 (16 percent) of the states said that their state’s ability to fund cleanups is fair, and 23 (52 percent) said that their state’s ability to fund these cleanups is poor or very poor. The remaining three officials were uncertain about their state’s funding capability. (App. VI presents, by state, officials’ assessments of their state’s ability to fund cleanup activities at potentially eligible sites). EPA officials told us that 43 potentially eligible sites are likely to be cleaned up under other programs such as the Resource Conservation and Recovery Act program. EPA or state officials said that, in their opinion, as many as 232 (13 percent) of the potentially eligible sites may be listed on the National Priorities List in the future. As shown in figure 12, EPA and the states agreed on the possible listing of only a few sites. In general, EPA and state officials believed that those sites with responsible parties who are likely to clean them up are less likely candidates for placement on the National Priorities List. Of the 232 sites cited as possible National Priorities List candidates, 154 (66 percent) have no identified responsible party or no responsible party who officials felt certain is able and willing to conduct cleanup activities. Survey respondents considered such parties likely to clean up all or almost all of only 22 (9 percent) of the 232 sites. No information was provided on the likely extent of responsible parties’ participation in cleaning up the remaining 24 percent of these sites. High-risk sites are more likely to be cited as National Priorities List candidates than others. One hundred twenty-nine (56 percent) of the sites that may be listed on the National Priorities List currently pose high risks, according to survey respondents. Another 45 (19 percent) of the sites pose average risks, and 12 sites (5 percent) pose low risks. Responding officials were unable to estimate the risks of the remaining 46 (20 percent) of these sites. In our telephone surveys, we asked state officials about the types of sites that the states prefer to be placed on the National Priorities List. Officials of 26 (60 percent) of the 44 states that participated in the surveys told us that they are more likely to support listing sites with cleanup costs that are very high compared to those for other types of sites. Although respondents from EPA, other federal agencies, and states jointly believed that as many as 232 of the potentially eligible sites may eventually be placed on the list, none of these sites has yet been proposed for listing. EPA respondents cited several major reasons that the agency has not yet decided whether to propose these sites for the National Priorities List or remove them from further consideration for listing. The most common reasons were that EPA considers the state program to have the lead for cleanup or more data on the current risks of the sites are needed. Other major factors are shown in figure 13. EPA has already made decisions about whether or not to place on the National Priorities List most of the sites that have come into its hazardous waste site inventory. However, decisions to list a large number of sites potentially eligible to enter the Superfund program or to exclude them from further consideration for listing have been deferred, in many cases for over a decade. Our surveys of officials of EPA, other federal agencies, and states indicate that there is a need to decide on how to address these potentially eligible sites. First, about a quarter of the sites may pose high risks to human health and the environment, in the opinion of officials responding to our surveys. Responding officials said that they cannot rank the risks of another third of the sites. Second, some cleanup activities were reported to have occurred at only about half of the sites whose risks were rated high by survey respondents. Third, although all 1,789 potentially eligible sites included in our surveys may require cleanup, officials of EPA, other federal agencies, and states are uncertain about what cleanup actions will be taken at more than half of them and whether EPA or the states should take these actions. Furthermore, some states have concerns about their enforcement and resource capabilities for cleaning up sites. In view of the risks associated with many of the potentially eligible sites and the length of time that EPA or the states have known of them, timely action by EPA and the states is needed to obtain the information required to assess the sites’ risks, set priorities for cleanups, assign responsibility to EPA or the states for arranging the cleanups, and inform the public as to which party is responsible for each site’s cleanup. Also, as part of the process, inaccurate or out-of-date information on sites that are classified in the CERCLIS database as awaiting a National Priorities List decision needs to be corrected. Because of the need for current and accurate information on the risks posed by the 1,789 sites that are potentially eligible for the National Priorities List in order to set cleanup priorities and delineate cleanup responsibilities, we recommend that the Administrator, EPA, in consultation with each applicable state, (1) develop a timetable for EPA or the state to characterize and rank the risks associated with the potentially eligible sites and (2) establish interim cleanup measures that may be appropriate for EPA and the state to take at potentially eligible sites that pose the highest risks while these sites await either placement on the National Priorities List or state action to fully clean them up; in consultation with each applicable state, (1) develop a timetable for determining whether EPA or the state will be responsible for cleaning up individual sites, taking into consideration, among other factors, some states’ limited resources and enforcement authority, and (2) once a determination is made, notify the public as to which party is responsible for cleaning up each site; and correct the errors in the CERCLIS database that incorrectly classify sites as awaiting a National Priorities List decision and prevent the recurrence of such errors so that the database accurately reflects whether sites are awaiting a listing decision. We provided copies of a draft of this report to EPA for its review and comment. EPA provided written comments, which are reproduced in appendix VII. Overall, EPA agreed with the basic findings and recommendations of the report and stated that it believes that the report will be useful to the Congress, the agency, states, and others interested in the future of the Superfund program. EPA also said that it has made National Priorities List decisions for many of the sites in its hazardous waste site inventory and made significant progress toward cleaning up listed sites. We have added this information to the report. EPA also provided technical and clarifying comments that we have incorporated in the report as appropriate. We attempted to obtain information on all 3,036 sites that EPA has identified as awaiting a National Priorities List decision, including 157 federal sites and 2,879 nonfederal sites. To obtain this information, we developed surveys that we sent to officials in EPA’s 10 regional offices, the 50 states, the District of Columbia, Guam, Midway Island, the Northern Mariana Islands, Puerto Rico, the Navajo Nation, and 14 other federal agencies with responsibility for sites that are potentially eligible for the National Priorities List and awaiting EPA’s decision on their disposition. These agencies include the departments of Agriculture, the Air Force, the Army, Defense, Energy, the Interior, the Navy, and Transportation; the Bureau of Land Management; the General Services Administration; the National Aeronautics and Space Administration; the U.S. Army Corps of Engineers; the U.S. Coast Guard; and the U.S. Forest Service. We also conducted a telephone survey with officials in 44 states to determine general information on their hazardous waste management programs and sites within their jurisdiction. (App. II discusses our scope and methodology in greater detail.) We conducted our review between May 1997 and November 1998 in accordance with generally accepted government auditing standards. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the appropriate congressional committees; the Administrator, EPA; and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix VIII. The Environmental Protection Agency’s (EPA) regulations outline a formal process for assessing hazardous waste sites and placing them on the National Priorities List (NPL). The process begins when EPA receives a report of a potentially hazardous waste site from a state government, a private citizen, or a responsible federal agency. EPA enters a potentially contaminated site into a database known as the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS). EPA or the state in which the potentially contaminated site is located then conducts a preliminary assessment to decide whether the site poses a potential threat to human health and the environment. (According to EPA, about half of the assessments are conducted by states under funding from EPA.) If the preliminary assessment shows that contamination may exist, EPA or a state under an agreement with the agency may conduct a site inspection, a more detailed examination of possible contamination, and in some cases a follow-on examination called an expanded site inspection. Using information from the preliminary assessment and site inspection, EPA applies its Hazard Ranking System to evaluate the site’s potential threat to the public health and the environment. The system assigns each site a score ranging from 0 to 100 for use as a screening tool to determine whether the site should be considered for further action under Superfund. A site with a score of 28.5 or higher is considered for placement on the NPL. Once EPA determines that an eligible site warrants listing, the agency first proposes that the site be placed on the NPL and then, after receiving public comments, either lists it or removes it from further consideration. EPA may choose not to list a site if a state prefers to deal with it under its own cleanup program. Generally, EPA’s policy is to not list sites on the NPL unless the governor of the state in which the site is located concurs with its listing. Our objectives in this review were to (1) determine the number of sites awaiting an NPL decision that remain potentially eligible for the list; (2) describe the characteristics of these sites, including their health and environmental risks; (3) determine the status of any actions to clean up these sites; and (4) collect the opinions of EPA and other federal and state officials on the likely final disposition of these sites, including the number of sites that are likely to be added to the Superfund program. EPA’s CERCLIS database indicates that as of October 8, 1997, 3,036 sites were potentially eligible for the NPL on the basis of a combination of criteria. These criteria include a preliminary hazardous ranking system score of 28.5 or above, the completion of a site inspection or the initiation of an expanded site inspection, and a status that neither eliminates the site from consideration for the NPL nor includes a proposal to list it. Because our objectives require data for each site, we did not sample the sites but included all 3,036 in our survey. To obtain information on all 3,036 sites that EPA identified as awaiting an NPL decision, we developed three mail surveys. These surveys appear in appendix III. We sent the first of the surveys to officials in EPA’s 10 regional offices responsible for evaluating the sites and making decisions about listing. Because state officials may have closer contact with some of the sites, we sent the second survey to officials in the 50 states, the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands, Midway Island, and the Navajo Nation (collectively referred to as states in this report). In addition, we sent a third survey to federal agencies that are responsible for cleaning up the 157 federally owned and/or operated sites that were classified as awaiting an NPL decision. We sent surveys on the 157 sites to 14 federal agencies, including the departments of Agriculture, the Air Force, the Army, Defense, Energy, the Interior, the Navy, and Transportation; the Bureau of Land Management; the General Services Administration; the National Aeronautics and Space Administration; the U.S. Army Corps of Engineers; the U.S. Coast Guard; and the U.S. Forest Service. The three surveys asked respondents for detailed information on the conditions at each site, including the site’s current and potential risks, and their opinions on the involvement of potentially responsible parties and the likely outcome for the site’s cleanup, including any potential for NPL listing. We mailed our three surveys in November and December 1997 and received the final survey responses in September 1998. We received one or more survey responses for 3,023 (99.6 percent) of the 3,036 sites identified by EPA as awaiting an NPL decision. On the basis of these responses, we identified 1,234 sites that are no longer eligible for the NPL or no longer awaiting an NPL decision. Because we received no survey responses for 13 sites, we could not determine whether they are still eligible for the NPL; therefore, we excluded these sites from our analyses. The remaining 1,789 sites are analyzed in this report as potentially eligible sites. Of these sites, 1,739 were nonfederal sites, and 50 were federally owned and/or operated sites. Through our surveys, we obtained information from both EPA and the states on 1,319 (76 percent) of the 1,739 potentially eligible nonfederal sites. This information includes 1,326 state responses (76 percent) and 1,732 responses from EPA (99.6 percent). Similarly, we obtained information from at least two of the three possible respondents—EPA, other federal agencies, and states—for 45 (90 percent) of the 50 potentially eligible federal sites. Responsible federal agencies provided information for 39 (78 percent) of the 50 potentially eligible federal sites, states provided responses for 26 (52 percent) of the federal sites, and EPA regions provided responses for 49 (98 percent) of the federal sites. Because 19 states—including California, Massachusetts, and New York, which account for 19 percent of the 3,036 sites—did not fully respond to our initial survey mailing, in July 1998 we sent a second survey to these states. In order to minimize the effort required for states to complete this follow-up survey, we eliminated sites that EPA and other federal agencies had identified as no longer eligible for the NPL. In addition, the follow-up survey included as a starting point the information on each site that EPA regions had provided in their responses. We asked state officials to confirm or correct the information provided to us by EPA regions. In the follow-up survey, we also repeated the original questions asked of the states but not of EPA regions. The original state survey was included as a reference source. This follow-up effort resulted in our receiving an additional 85 completed surveys from some states. However, despite numerous contacts, we received no survey responses from California, Massachusetts, Nebraska, and the District of Columbia. Rather than responding to our survey, California officials suggested that we obtain their responses to a brief 1-page survey on NPL-eligible sites conducted by the Association of State and Territorial Solid Waste Management Officials. Similarly, Massachusetts officials provided us copies of their responses to the Association’s survey. However, because of differences in the format, specificity of answers, comparability of answers, and topics covered, we could not incorporate the results of that survey into our analyses. In addition, New York State officials agreed to respond to only three survey questions for the sites in the state that EPA classified as awaiting an NPL decision. The three questions asked for information about whether sites would be listed on the NPL and what state cleanup activities had occurred at the sites. The responses to these questions were incorporated into our analyses. While our overall survey response rate was high, our data for some states are incomplete. We did not receive fully completed state surveys for 491 of the 1,789 potentially eligible sites. Nearly three-quarters of these sites are located in California (125 sites) and Massachusetts (190 sites). In addition, we received only partial information from New York for 54 of its 56 potentially eligible sites. Table II.1 shows the 16 states that either did not respond to our survey or responded only in part, and the number and percentage of potentially eligible sites in each state for which we did not receive fully completed surveys. EPA regions I and V notified us that because of time and resource constraints, they had taken a generic approach to answering certain survey questions: That is, they answered certain questions in a standardized manner for all sites in the region rather than on a site-specific basis. Questions addressed in this manner included, among others, those relating to the likely placement of sites on the NPL and the risks posed by the sites. For example, for most sites, Region I answered our questions about the degree of human health or environmental risks posed by each site by responding that it is “too early to tell/more information is needed to answer” because, according to Region I officials, “risk assessments are not conducted for most CERCLIS sites, and thus the current risks posed by these sites are difficult to determine.” EPA Region II responded to key survey questions in a similar manner. Consequently, because neither EPA regions I, II, and V nor three states in those regions —Massachusetts (190 sites), New Jersey (66 sites), and New York (54 sites)—provided complete survey information, we could not characterize the conditions at these sites with the same degree of accuracy as for other sites. For example, these three states account for 54 percent of the sites for which we could not obtain an official’s estimate of the risks to human health and the environment. We conducted pretests of our surveys with officials in six states, at two federal agencies, and in five EPA regional offices. Each pretest consisted of a visit with an official by GAO staff. We attempted to vary the types of sites for which we conducted pretests and the familiarity of the respondents with the sites. In some cases, the respondent used only site records to answer our survey. In other cases, the respondent knew most of the answers without consulting records. The pretest attempted to simulate the actual survey experience by asking the official to fill out the survey while GAO staff observed and took notes. Then the official was interviewed about the survey items to ensure that (1) the questions were readable and clear, (2) terms were precise, (3) the survey was not a burden that would result in a lack of cooperation, and (4) the survey appeared independent and unbiased. We made appropriate changes to the final survey on the basis of our pretesting. In addition to our pretesting, we obtained views on our surveys from managers in EPA’s Office of Emergency and Remedial Response in Washington, D.C., which oversees the Superfund program. We incorporated comments from these reviews as appropriate. In analyzing survey responses, we reviewed comments written by respondents on the surveys, including marginal comments, comments at the end of the survey, and comments when the respondents provided explanations after checking “other.” If a respondent’s comment explaining the selection of “other” could reasonably be interpreted as another of the answer choices provided for the question, we revised the response as appropriate. In some cases, respondents’ comments indicated a misunderstanding of our questions or answer choices. In these cases, where possible, we revised the response to reflect the appropriate answer. In other cases, respondents checked more than one answer; we then selected, where possible, what we considered to be the appropriate answer, on the basis of other responses in the survey or our own judgment. The procedures used in this editing process were documented in an internal 17-page document provided to all of the GAO reviewers of the survey responses. At least two reviewers analyzed each survey response, and the reviewers coordinated their efforts to ensure that all reviewers followed the established procedures. Both the original answers and the answers revised by reviewers were recorded. In our surveys of officials of EPA regions, states, and federal agencies, some of the questions we asked about particular sites were identical. We combined the responses to these questions where possible in this report. If opinions differed, we used a set of criteria to combine answers. Namely, we chose the answer that seemed to reflect the most knowledge of the site. For site conditions, we assumed that any affirmative answer was the more knowledgeable. For example, if one respondent said that a site has groundwater contamination and the other respondent was unable to comment on that site’s contamination, we recorded the site as having groundwater contamination. We also sought to avoid understatement of the risks posed by a site. Therefore, if respondents disagreed on the level of a site’s risks, we selected the response indicating the more severe threat. For example, sites scored by any respondent as high-risk were recorded as high-risk sites. Furthermore, if a respondent indicated in any survey response that a site might be included on the NPL, we recorded the site as a possible candidate for the NPL. Finally, when opinions about the most likely outcome for a site were in conflict—for example, if the state thought that EPA would clean up a site but EPA thought the state would conduct the cleanup—we recorded the most likely outcome as unknown. In addition to our mail surveys, we also conducted a telephone survey with officials in 44 states to determine general information on their hazardous waste management programs and sites within their states. State officials in Idaho, New York, Missouri, Utah, Virginia, and Wyoming declined to participate in our telephone survey. We conducted our review between May 1997 and November 1998 in accordance with generally accepted government auditing standards. The 1,789 sites that are potentially eligible for the NPL include 1,739 nonfederal sites and 50 federal facilities. Among the 1,789 sites, there are (1) 686 sites at which some cleanup activities have taken place or are currently being conducted, but the final cleanup remedy is not yet under way, and (2) 1,103 sites for which no substantive cleanup activities have been reported or no information on cleanup progress is available. The 1,789 sites that are potentially eligible for placement on the NPL are located in 48 states, the District of Columbia, Puerto Rico, and the Northern Mariana Islands and under the jurisdiction of the Navajo Nation (hereinafter referred to as states). Table IV.1 shows, for each state, the number of (1) sites classified in EPA’s inventory as awaiting an NPL decision as of October 8, 1997, (2) sites that our surveys indicate are unlikely to become eligible for the NPL, (3) potentially eligible sites at which some cleanup activities have been conducted, (4) potentially eligible sites at which there has been no reported cleanup progress or for which no information on cleanup progress is available, and (5) sites for which we received no surveys. Number of sites for which no surveys were received (continued) Number of sites for which no surveys were received (continued) California, the District of Columbia, Massachusetts, and Nebraska did not respond to our surveys. For these states, the data in table IV.1 are based on EPA’s survey responses alone and, for that reason, may be less reliable than for states having responses from both EPA and states. New York provided responses to only a few questions in our survey. Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), federal agencies are responsible, under EPA’s supervision, for evaluating and cleaning up properties under their jurisdiction. As required by CERCLA, EPA has established a Federal Agency Hazardous Waste Compliance Docket that lists federal facilities awaiting evaluation for possible cleanup. Once a federal facility is listed on the docket, the responsible agency then conducts a preliminary assessment to gather data on the facility and performs a site inspection, which may involve taking and analyzing samples, to learn more about potential contamination there. Ten federal agencies other than EPA have primary responsibility for managing the 50 federal facilities that are potentially eligible for the NPL. Table IV.2 presents for each agency the number of (1) sites classified in EPA’s inventory as awaiting an NPL decision as of October 8, 1997, (2) sites that our surveys indicate are unlikely to become eligible for the NPL, (3) potentially eligible sites at which some cleanup activities have been conducted, and (4) potentially eligible sites at which there has been no reported cleanup progress or for which no information on cleanup progress is available. We asked officials of EPA, other federal agencies, and states about the cleanup actions that have been conducted at the potentially eligible sites. These activities include interim measures to mitigate the contamination, such as removing waste or taking action to protect people against contaminated drinking water sources. These actions were not considered by the officials to be final cleanup remedies. As figure V.1 shows, of the total 1,789 potentially eligible sites, 13 percent exhibit one or more of the conditions associated with contaminated drinking water sources. The majority of these sites have undergone some cleanup activities. Survey data indicate that some cleanup activities have occurred at 77 percent of the sites for which nearby residents are advised not to use wells and at 72 percent of the sites for which residents are advised to use bottled water. Figure V.1 includes, among other factors, the five most prevalent adverse conditions identified by officials responding to our surveys. As this figure indicates, the majority of the sites with these conditions reportedly have made no cleanup progress, or no information on cleanup progress is available. No known cleanup actions have been taken at (1) 56 percent of the sites at which workers or visitors may come into direct contact with contaminants; (2) 57 percent of the sites at which trespassers may come into direct contact with contaminants; (3) 52 percent of the sites with fences, barriers, and/or signs to prevent entry into contaminated areas; (4) 61 percent of the sites associated with fish that may be unsafe to eat; and (5) 48 percent of the sites about which nearby residents have expressed some health concerns. During our telephone survey of officials in 44 states to obtain general information on their hazardous waste management programs, officials gave their opinions about their state’s capability to fund cleanup activities if responsible parties were not willing or able to pay for these actions. Officials of about a quarter of the responding states told us that their state’s financial capability to clean up potentially eligible sites, if necessary, is excellent or good, and more than half said that their state’s ability to fund these cleanups is poor or very poor. Table VI.1 presents, by state, the responding officials’ assessments of each state’s ability to fund cleanup activities at potentially eligible sites. State officials’ assessment of state’s financial capability to clean up potentially eligible sites (continued) James F. Donaghy, Assistant Director Vincent P. Price, Senior Evaluator Rosemary Torres Lerma, Staff Evaluator Fran Featherston, Senior Social Science Analyst Alice Feldesman, Assistant Director The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO surveyed Environmental Protection Agency (EPA) regions, other federal agencies, and states to: (1) determine the number of sites classified as awaiting a National Priorities List (NPL) decision that remain potentially eligible for the list; (2) describe the characteristics of these sites, including their health and environmental risks; (3) determine the status of any actions to clean up these sites; and (4) collect the opinions of EPA and other federal and state officials on the likely final disposition of these sites, including the number of sites that are expected to be added to the NPL. GAO noted that: (1) on the basis of surveys of EPA regions, other federal agencies, and states, GAO has determined that 1,789 of the 3,036 sites that EPA's database classified as awaiting a NPL decision in October 1997 are still potentially eligible for placement on the list; (2) GAO considered the 1,234 other sites as unlikely to become eligible for various reasons; (3) the other sites do not require cleanup in the view of the responding officials, have already been cleaned up, or have final cleanup activities under way; (4) officials of EPA, other federal agencies, and states said that many of the potentially eligible sites present risks to human health and the environment; (5) the potentially eligible sites are generally located in populated areas; (6) officials of EPA, other federal agencies, and states said that about 17 percent of the potentially eligible sites currently pose high human health and environmental risks and that another 10 percent could also pose high risks in the future if they are not cleaned up; (7) however, these officials were unsure about the severity of risks for a large proportion of the sites; (8) responding officials said that some cleanup actions have taken place at 686 of the potentially eligible sites; (9) no cleanup activities beyond initial site assessments or investigations have been conducted, or no information is available on any such actions, at the other 1,103 potentially eligible sites; (10) many of the potentially eligible sites have been in states' and EPA's inventories of hazardous sites for extended periods; (11) 73 percent have been in EPA's inventory for more than a decade; (12) no cleanup progress was reported at the majority of the sites that have been known for 10 years or more; (13) responding officials did not indicate whether or how more than half of the potentially eligible sites would be cleaned up; (14) collectively, EPA and state officials believed that 232 of the potentially eligible sites might be placed on the NPL in the future; (15) however, EPA and the states agreed on the listing prospects of only a small number of specific sites; (16) officials estimated that almost one third of the potentially eligible sites are likely to be cleaned up under state programs but usually could not give a date for the start of cleanup activities; (17) officials of about 20 percent of the states said that their state's enforcement capacity to compel responsible parties to clean up potentially eligible sites is fair to very poor; and (18) officials of about half of the states told GAO that their state's financial capability to clean up potentially eligible sites is poor or very poor.

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Foreign nationals who wish to come to the United States on a temporary basis must generally obtain an NIV to be admitted. State manages the visa process, as well as the consular officer corps and its functions, at 219 visa- issuing posts overseas. The process for determining who will be issued or refused a visa contains several steps, including documentation reviews, in- person interviews, collection of biometrics (fingerprints), and cross- referencing an applicant’s name against the Consular Lookout and Support System—State’s name-check database that posts use to access critical information for visa adjudication. In some cases, a consular officer may determine the need for a Security Advisory Opinion, which is a recommendation from Washington on whether to issue a visa to the applicant. Depending on a post’s applicant pool and the number of visa applications that a post receives, each stage of the visa process varies in length. For an overview of the visa process see figure 1. Congress, State, and DHS have initiated new policies and procedures since the 9/11 terrorist attacks to strengthen the security of the visa process. These changes have added to the complexity of consular workload and have increased the amount of time needed to adjudicate a visa. Such changes include the following: Beginning in fiscal year 2002, State began a 3-year transition to remove visa adjudication functions from consular associates. All NIVs must now be adjudicated by consular officers. Personal interviews are required by law for most foreign nationals seeking NIVs. As of October 2004, consular officers are required to scan visa applicants’ right and left index fingers through the DHS Automated Biometric Identification System before an applicant can receive a visa. In 2005, the Secretary of Homeland Security announced that the U.S. government had adopted a 10-fingerscan standard for biometric collection of fingerprints. In February 2006, State reported that it would begin pilot testing and procuring 10-print equipment to ensure that all visa-issuing posts have collection capability by the end of fiscal year 2007. According to State, consular officers face increased requirements to consult with headquarters and other U.S. agencies prior to visa issuance in the form of Security Advisory Opinions. According to State, as a result of the Patriot Act, consular officers have access to, and are required to consult, far greater amounts of interagency data regarding potential terrorists and individuals who would harm U.S. interests. A number of potential factors can contribute to delays for visa interview appointments at consular posts. For example, increased consular officer workload at posts, which can be caused by factors such as increased security screening procedures or increased visa demand, can exacerbate delays because there are more work requirements for each available officer to complete. Other factors such as staffing gaps and ongoing consular facility limitations could also affect waits because they may limit the number of applicants that can be seen for an interview in a given day. Following the 9/11 terrorist attacks, applications for visas declined from a high of over 10.4 million in fiscal year 2001 to a low of approximately 7 million in 2003. For fiscal years 2004 through 2006, the number of visa applications increased, according to State’s data (see fig. 2). State anticipates that 8.1 million visas applications will be received in fiscal year 2007 and 8.6 million in 2008. State’s visa workload increased by almost 16 percent between 2004 and 2006. In addition, several countries and posts have seen large growth in visa demand, and State has projected these trends to continue well into the future. Following are examples of these trends: India had an 18 percent increase in visa adjudications between 2002 and 2006. Posts in China reported that their visa adjudication volume increased between 18 and 21 percent last year alone, and growth is expected to continue. We have previously reported on visa delays at overseas posts. In particular, we have reported on the following delays in Brazil, China, India, and Mexico: In March 1998, we reported that the post in Sao Paolo, Brazil, was facing extensive delays due to staffing and facilities constraints. In February 2004, we reported delays at consular posts in India and China. For example, in September 2003, applicants at one post we visited in China were facing waits of about 5 to 6 weeks. Also, we reported that, in summer 2003, applicants in Chennai, India, faced waits as long as 12 weeks. In April 2006, we testified that, of nine posts with waits in excess of 90 days in February 2006, six were in Mexico, India, and Brazil. According to State, wait times for visa interviews have improved at many overseas consular posts in the past year. However, despite recent improvements—such as those at posts in India, Mexico, and Brazil—a number of posts reported long waits at times during the past year. Believing the waits at some posts are excessive, in February of this year, State announced its goal of providing all applicants an interview within 30 days. We identified a number of shortcomings in the way in which State’s visa waits data is developed, which could mask the severity of the delays for visa interviews at some posts and limit the extent to which State can monitor whether the visa wait problem has been addressed. To better understand and manage post workload, State has begun to develop a measure of applicant backlog. In recent months, reported wait times for visa appointments have generally improved. For example, in reviewing visa waits data provided to us by the Bureau of Consular Affairs for the period of September 2006 to February 2007, we found that 53 of State’s 219 visa-issuing posts had reported maximum wait times of 30 or more days in at least 1 month—44 fewer posts than had reported this figure when we reviewed the same period during the previous year (see fig. 3). Furthermore, wait times reported by several consular posts have improved during the past year, including for a number of high volume posts in India, Brazil, and Mexico that had previously reported extensive delays. In April 2007, wait times at all posts in India were under 2 weeks, down from previous waits that exceeded 140 days at four key posts, as recently as August 2006, in most cases. For example, Mumbai reported a reduction in wait times from a high of 186 days in September 2006 to 10 days as of April 9, 2007. Reported wait times at some key posts in Mexico also significantly declined, as have wait times for several posts in Brazil in the past year. Furthermore, an additional number of posts with delays experienced large reductions in wait times over a recent 12 month period. Despite recent improvements in wait times at a number of consular posts, at times during the past year, especially during peak processing periods, a number of visa adjudicating posts have faced challenges in reporting wait times of less than 30 days. For example, during typical peak demand season, 29 posts reported maximum monthly waits exceeding 30 days over the entire 6-month period of March through August 2006 (see fig. 4). We observed that long waits had occurred over the summer months in Tegucigalpa, Honduras; San Jose, Costa Rica; and several posts in India. Furthermore, some posts we reviewed developed increased wait times. For example, in Caracas, the reported visa waits significantly increased— from 34 days in February 2006 to 116 days in April 2007. In addition, several other posts, including Sao Paolo, Brazil; Monterrey, Mexico; Tel Aviv, Israel; and Kingston, Jamaica; have experienced increases in wait times since February 2006. Moreover, 20 posts reported experiencing maximum monthly wait times in excess of 90 days at least once over the past year. In February 2007, State’s Bureau of Consular Affairs distributed guidance setting a global standard that all visa applicants should receive an appointment for a visa interview within 30 days. Previously, State had not set a formal performance standard for visa waits but had set a requirement that posts report their wait times on a weekly basis and make this information publicly available through post Web sites. In setting the 30– day standard for visa waits, officials acknowledged that wait times are not only a measure of customer service but also help posts to better manage their workload and visa demand. Furthermore, State identified that such a standard allows it to better track post performance, helps with resource allocation, and provides transparency in consular operations. Consular officials explained to us that posts that consistently have wait times for visa interview appointments of 30 days or longer may have a resource or management problem. In setting its 30-day performance benchmark, State also distributed information to posts on how wait times data is to be used by Bureau of Consular Affairs management. For example, State indicated it will review all posts that have reported waits over 20 days to determine if remedial measures are needed. State has provided guidance indicating that posts are required to report wait times on a weekly basis, even if the times have not changed from the previous week. However, we found posts are not reporting waits data consistently, which impacts the reliability of State’s visa waits figures. In September 2005, our analysis of State’s data on reported wait times revealed significant numbers of posts that did not report this information on a weekly basis during the 6-month period we reviewed. In reviewing data over the past year, we again found that a large number of posts were not consistently reporting waits data on a weekly basis, as required by State. For example, post reporting of wait times from January 2006 to February 2007 showed that, while a large number of posts (about 79 percent) had reported waits at least monthly, only 21 posts (about 10 percent) reported waits at least weekly. Inconsistencies among posts in the reporting of visa waits data impacts the reliability of visa waits figures and limits State’s ability to assess whether the problem has been addressed by posts. However, State does not appear to be enforcing its weekly reporting requirement. State acknowledges that it has had difficulties in getting all 219 consular posts to report this data consistently. According to cables provided to us by State, posts are directed to provide the “typical” appointment wait time applicable to the majority of applicants applying for a given category of visas on a given day. Several of the posts we visited calculated wait times based on the first appointment available to the next applicant in a given visa category; however, other posts we reviewed calculated waits differently. For example, one post we visited computed wait times by taking the average of several available appointment slots. In addition, several consular officials we spoke with overseas said that they are still unclear on the exact method posts are to use to calculate wait times, and some managers were unsure if they were calculating wait times correctly. Additionally, we observed that some posts artificially limit wait times by tightly controlling the availability of future appointment slots—such as by not making appointments available beyond a certain date, which can make appointment scheduling burdensome for the applicant who must continually check for new openings. State officials admitted that posts should not be controlling the availability of appointment slots to artificially limit wait times but, to date, there has not been specific guidance distributed to posts on this issue. We determined that State’s data are sufficiently reliable for providing a broad indication of posts that have had problems with wait times over a period of time and for general trends in the number of posts that have had problems with wait times over the period we reviewed; however, the data were not sufficiently reliable to determine the exact magnitude of the delays because the exact number of posts with a wait of 30 days or more at any given time could not be determined. Until State updates and enforces its collection standards for visa waits data, precise determinations about the extent to which posts face visa delays cannot be made. State officials acknowledge that current wait times data is of limited reliability. State officials have also said that visa waits data was not originally designed for the purpose of performance measurement but to provide applicants with information on interview availability. According to State, a current goal of the Bureau of Consular Affairs is to refine collection standards for wait times information to provide more uniform and transparent information to applicants and management; however, the bureau has not yet done so. State’s reported wait time data generally reflect the wait, at a moment in time, for new applicants, and do not reflect the actual wait time for an average applicant at a given post. Furthermore, wait times generally do not provide a sense of applicant backlog, which is the number of people who are waiting to be scheduled for an appointment or the number of people who have an appointment but have yet to be seen. To better understand and manage post workload, State officials we spoke with said that they were in the process of developing a measure of applicant backlog. Although State has not yet developed the measure of backlog, officials we spoke with said that they expect to begin testing methods for measuring applicant backlog by the end of 2007. State has implemented a number of measures to increase productivity and better manage visa workload, as well as measures to address shortcomings in staffing and facilities for a number of consular posts experiencing visa delays. State has provided temporary duty staff to assist in adjudicating visas at several locations with long wait times, particularly at posts in India, and recently developed a plan to relocate consular positions to locations where large disparities in staff and visa demand were apparent. In addition, State has continued to upgrade embassies and consulates overseas to aid in processing visa applicants. Furthermore, State has implemented some procedures and policies to maximize efficiency and better manage visa workload. However, despite the measures State has taken to address staffing, facilities, and other constraints at some posts, State’s current efforts are generally temporary, nonsustainable, and are insufficient to meet the expected increases in demand at some posts. State has recently taken action at several posts to address current staffing gaps to minimize the impact on visa wait times. State has deployed temporary duty staff from other consular posts and from headquarters to help process and adjudicate visa applicants. For example, State deployed 166 officials to staff consular sections in fiscal year 2006 and through April of fiscal year 2007. In addition, at the order of the Ambassador to India, beginning in 2006, posts in India utilized consular-commissioned officials from other offices in the embassy and consulates to assist the consular section in handling its workload, including fingerprinting applicants and interviewing some applicants, which helped reduce the wait times at posts. According to consular officials, the additional assistance in India was necessary as posts there did not have enough permanent consular staff to handle the demand and reduce wait times. In addition, in February 2007, State completed a review of consular officer positions that examined the disparity between visa workload and the number of consular officers at posts. As a result of this study, State will transfer consular positions from certain posts that are capable of handling the workload without reporting long visa waits to posts where there has not been adequate staff to handle the visa workload. The majority of the positions are being transferred from posts in the European and Eurasian Affairs Bureau to posts in the Western Hemisphere, East Asia and Pacific, and South and Central Asian bureaus. Of these transferred and newly created consular officer positions, the majority will be located in Brazil, China, India, and Mexico—posts with a history of long wait times and high demand for visas. State acknowledges that the repositioning of consular staff, while necessary, may not adequately address the increasing demand for visas worldwide. Despite the measures State has taken to address the staffing issues at some posts, State’s current consular staffing efforts are generally temporary, nonsustainable, and insufficient to meet the expected increases in demand at some posts. First, when-actually-employed staff are only allowed to work 1,040 hours per year due to federal regulations. Second, posts are typically required to cover the housing costs of assigned temporary staff, which is not always feasible if posts are facing budget constraints. Third, embassy or consulate officials that were temporarily assigned to support consular operations indicated that their new duties negatively affected their ability to perform their regular assignments, as they were spending time performing consular duties instead of their typical functions at post. Fourth, although temporary staff have helped to improve wait times at select posts, current efforts—and some recent temporary assignments, such as over the past 7 months in India—have been undertaken during a period of lower applicant volume. It is unknown whether State will be able to maintain the improved wait times during the summer of 2007, as the period between May and August is typically when posts have the largest influx of visa applicants and, in turn, longer waits. For example, one post in India recently reported wait times now exceed 30 days. Moreover, the temporary staff assisting with visa adjudications during our visit to posts in India was expected to leave by the end of May 2007. According to State’s Assistant Deputy Secretary for Visa Services, surges in temporary duty staff, such as the ones State employed for India, can be useful in tackling short-term situations but are not a viable long- term solution in places with high visa demand. Furthermore, consular staffing gaps are a long-standing problem for State and have been caused by such factors as State’s annual staffing process, low hiring levels for entry-level junior officer positions, and insufficient numbers of midlevel consular officers. We have previously reported that factors such as staffing shortages have contributed to long wait times for visas at some posts. A number of State’s visa-adjudicating posts reported shortages in consular staff for 2006, and we observed gaps that contributed to visa wait times at several posts overseas. Furthermore, we reviewed reports for 32 select consular posts abroad to assess visa workload, consular staffing and facilities, as well as other issues affecting visa wait times. We found that of the 32 posts, 19 posts (or about 60 percent) indicated the need for additional consular staff to address increasing workload. State has improved a number of consular sections at embassies and consulates worldwide. According to the Bureau of Overseas Buildings Operations, since September 2001, State has improved almost 100 embassies and consulates, improving the consular section facilities at a number of these locations. For example, between fiscal years 2003 and 2005, State obligated $26.9 million to fund consular workspace improvement projects at 101 posts. Although these improvement projects have been completed, according to the Bureau of Consular Affairs, most were designed as temporary solutions that may require additional construction in the future. Moreover, although some consular improvement projects were recently completed or were under way when we visited Mumbai and Chennai, India, these posts did not have adequate office, waiting room, security screening, or window space to accommodate the volume of visa applicants. State’s construction project in Chennai to add windows and additional processing areas was expected to be completed by May 2007, and State has begun construction on a new consulate in Mumbai that will be completed in 2008 and will add more space for additional consular staff and 26 more windows for interviewing. In addition, State is planning new consulate and embassy construction projects for New Delhi and Hyderabad, India, as well as at a number of other posts. We also found that a number of posts we reviewed currently face facility constraints, which limit the number of visa interviews that can take place in a given day and, in some cases, prevent posts from keeping pace with the current or expected future demand for visas. For example, 21 of 32 posts reported, in their consular packages, that limitations to their facilities affected their ability to increase the number of applicants they could interview, which can contribute to longer wait times. Although State has taken steps to improve consular facilities and has plans to rebuild a number of posts, it is unclear whether the facilities will be adequate to handle the future demand. Two posts that we reviewed are already predicting that future increased demand will outstrip visa processing capacities given existing facilities constraints. For example, in Seoul, South Korea, post officials report that, despite recent improvements to the facility, the post will soon have no additional space to accommodate future applicant growth. Moreover, there is no current viable option to build a new facility due to continuing land negotiations between the U.S. and South Korean governments. In addition, a number of State’s recent facilities projects have not incorporated planned projections of increased workload growth and are expected to soon face challenges meeting demand. For example, even though a new embassy construction project is currently under way in Beijing, China, State officials indicated that the number of planned interviewing windows and space in the new facility will be insufficient to allow for future increases in visa demand. In addition, in Shanghai, China, even though the consular section was moved to an off- site location to process visa applications, the post has indicated that it already has reached visa-adjudicating capacity because it cannot add any more interviewing windows in the current space, and construction on a new consulate will not begin until 2009. According to the Director and Chief Operating Officer of the Bureau of Overseas Buildings Operations, the bureau designs and constructs consular facilities with input from Consular Affairs; therefore, Consular Affairs needs to provide more defined assessments of future needs at a facility. The director stated that proper planning and stronger estimates of future needs will help in building facilities that can better address wait times at post over the long term. Since the 9/11 terrorist attacks, Congress, State, and DHS have initiated a series of changes to visa policies and procedures, which have added to the complexity of consular officers’ workload and, in turn, exacerbated State’s consular staffing and facilities constraints. For example, most visa applicants are required to be interviewed by a consular officer at post, and applicants’ fingerprints must be scanned. Furthermore, additional procedural changes are expected, including the expansion of the electronic fingerprinting program to the 10-fingerscan standard, which could further increase the workload of officers and the amount of time needed to adjudicate an application. For example, consular officers in London, which is one of the posts piloting the 10-fingerprint scanners, indicated that the 10-fingerscan standard would significantly affect other posts’ operations given that they had experienced about a 13 percent reduction in the number of applicants processed in a day. However, as each post faces slightly different circumstances, it is unclear whether this reduction would take place at all posts. To lessen the increase in wait times caused by of some of these legislative and policy changes, State has promoted some initiatives to aid posts in processing legitimate travelers. For example, State has urged all posts to establish business and student facilitation programs intended to expedite the interviews of legitimate travelers. State also continues to use Consular Management Assistance Teams to conduct management reviews of consular sections worldwide, which have provided guidance to posts on standard operating procedures, as well as other areas where consular services could become more efficient. In addition, according to State officials, State has developed a Two-Year Plan, an overall visa processing strategy to coordinate changes to the visa process that will ensure consular officers focus on tasks that can only be accomplished overseas, and is also contemplating other changes to reduce the burden placed on applicants and consular officers. These changes include the following: the deployment of a worldwide appointment system, use of a domestic office to verify information on visa petitions, a revalidation of fingerprints for applicants who have already completed the 10-fingerprint scan, and the implementation of an entirely paperless visa application process and remote or off-site interviewing of visa applicants. Furthermore, some posts have taken action to reduce their increased workload. For example, the following actions have been taken: The consular sections in South Korea and Brazil have established expedited appointment systems for certain applicant groups, including students. Consular officers in Manila, Philippines, redesigned the flow of applicants through the facility to ease congestion and utilized space designated to the immigrant visa unit to add three new visa processing stations. Posts in Brazil have waived interviews for applicants who were renewing valid U.S. visas that were expiring within 12 months and had met additional criteria under the law. The embassy in Seoul, South Korea, implemented a ticketing system that tracks applicants through the various stages of processing and provides notification to consular section management if backups are occurring. The system will also automatically assign applicants to the first available interviewing window in order to balance the workload of applicant interviews between all available interviewing windows. The embassies in El Salvador and South Korea have conducted workflow studies in order to identify obstructions to efficient applicant processing. Although State has recently implemented a number of policy and procedural changes to address increased consular workload and is considering additional adjustments, more could be done to assist posts in their workload management. Moreover, the effective practices and procedures implemented by individual posts that help manage workload and assist in improving applicant wait times are not consistently shared with the other consular posts. While recognizing that not all the policies and procedures used by posts to help manage visa workload are transferable to other posts, State officials indicated that, although there is currently not a forum available for consular officers to share such ideas, State is in the process of developing some online capabilities for posts to share visa practices and procedures. With worldwide nonimmigrant visa demand rising closer to pre-9/11 levels, and current projections showing a dramatic increase in demand over time, State will continue to face challenges in managing its visa workload and maintaining its goal of keeping interview wait times under 30 days at all posts. State has not developed a strategy for addressing increasing visa demand that balances such factors as available resources and the need for national security in the visa process against its goal that visas are processed in a reasonable amount of time. In 2005, State contracted with an independent consulting firm to analyze several factors to help predict future visa demand in 20 select countries, which, according to State officials, constituted approximately 75 percent of the visa workload at the time. The consulting firm identified some demographic, economic, political, commercial, and other factors that it believed would affect visa demand over a 15-year period, beginning in 2005, and estimated a likely rate of growth in demand in those select countries. The study predicted the growth in demand in these countries would range between 8 percent and 232 percent, with Argentina, Brazil, China, India, Mexico, and Saudi Arabia all projected to experience significant growth of more than 90 percent (see fig. 5). State officials indicated that they used the futures study to assist in determining consular resource allocations and in the repositioning of consular staff in State’s review of consular positions in February 2007. However, State has not analyzed the 5-, 10-, or 20-year future staffing and other resource needs based on the demand projections found in the study. Although officials indicated that State continues to use the visa demand projections in the Consular Affairs Futures Study to assist in making staffing and resource decisions, some of the study’s projections have already been proven to underestimate growth in demand. In addition, State has not taken action to update the study to reflect changes in visa workload since 2005. More than half of the countries reviewed are already facing surges in visa demand greater than the levels predicted in the Consular Affairs Futures Study for fiscal year 2006 and beyond. For example, Brazil adjudicated more visas in 2006 than the volume of applications the study projected for Brazil for 2010. In addition, Mexico adjudicated approximately 126,000 more visas in 2006 than the study projected. Also, the Ambassador to India recently stated that all posts in India would process over 800,000 applications in 2007, which exceeds the study’s forecasts for India’s demand in 2016. The Deputy Assistant Secretary for Visa Services testified to Congress in March 2007 of the need to consider and implement viable long-term solutions for posts with high visa demand and indicated that State needed to ensure it aligns consular assets to meet the demand. In November 2006, State developed a plan for improving the visa process that details several steps it intends to implement, or pilot, by 2009. Although the visa improvement plan can assist State in improving the visa process, and State has taken some steps to address wait times at a number of overseas posts, State has not determined how it will keep pace with continued growth in visa demand over the long term. For example, the strategies in the plan do not identify the resources State would need to increase staff or construct adequate facilities to handle the projected demand increases. Moreover, State has not proposed plans to significantly reduce the workload of available officers or the amount of time needed to adjudicate a visa if such resources are not available. Without a long-term plan to address increasing demand, State does not have a tool to make decisions that will maximize efficiency, minimize wait times, and strengthen its ability to support and sustain its funding needs. In order to develop a strategy addressing future visa demand, State may want to make use of operations research methods and optimization modeling techniques. These approaches can allow State to develop a long- term plan that takes into account various factors—such as State’s security standards for visas, its policies and procedures to maximize efficiency and minimize waits, and available resources. Researchers have developed statistical techniques to analyze and minimize wait times in a wide variety of situations, such as when cars queue to cross toll bridges or customers call service centers. These techniques consider the key variables that influence wait times, such as the likely demand, the number of people already waiting, the number of staff that can provide the service required, the time it takes to process each person, and the cost of each transaction; consider a range of scenarios; and provide options to minimize wait times, bearing in mind the relevant factors. The analyses can, for instance, provide quantitative data on the extent to which wait times could be reduced if more staff were assigned or the time for each transaction were decreased. For example, State could determine the approximate number of additional resources it would need in order to meet its stated goal of providing an appointment to all applicants within 30 days despite increased visa demand. Such a response would either require State to provide additional staff through new hires or by using other staffing methods, such as utilizing civil servants to adjudicate visas overseas. Alternatively, State could require consular officers to process applicants more efficiently and quickly. State may require multiple new facilities to support an increase in the number of Foreign Service officers and allow posts to process more applicants daily. However, if State were to determine that a significant increase in resources for staffing and facilities is not feasible, then State would have to evaluate the efficacy of its 30-day standard for visa appointments or consider requesting Congress to allow for changes in the adjudication process, such as allowing additional flexibility in the personal appearance requirement for visa applicants. It is dependent upon State to determine the specific techniques and appropriate variables or factors required to optimize its capability to address the demand for visas. Expediting the adjudication of NIV applications is important to U.S. national interests because legitimate travelers forced to wait long periods of time for a visa interview may be discouraged from visiting the country, potentially costing the United States billions of dollars in travel and tourism revenues over time. Moreover, State officials have previously testified that long waits for visa appointments can negatively impact our image as a nation that openly welcomes foreign visitors. Given projected increases in visa demand, State should develop a strategy that identifies the possible actions that will allow it to maintain the security of the visa process and its interest in facilitating legitimate travel in a timely manner. The development of such a plan will strengthen State’s ability to manage visa demand, support and sustain its funding needs, encourage dialogue with relevant congressional committees on the challenges to addressing waits, and promote consensus by decision makers on funding levels and expectations for eliminating visa delays. Furthermore, there are several measures State could take in the short run to improve the wait times for interviews of NIV applicants and the reliability of visa waits information for management purposes. To improve the Bureau of Consular Affair’s oversight and management of visa-adjudicating posts, we recommend that the Secretary of State take the following actions: Develop a strategy to address worldwide increases in visa demand that balances the security responsibility of protecting the United States from potential terrorists and individuals who would harm U.S. interests with the need to facilitate legitimate travel to the United States. In doing so, State should take into consideration relevant factors, such as the flow of visa applicants, the backlog of applicants, the availability of consular officers, and the time required to process each visa application. State’s analysis should be informed by reliable data on the factors that influence wait times. State should update any plan annually to reflect new information on visa demand. Improve the reliability and utility of visa waits data by defining collection standards and ensuring that posts report the data according to the standards. Identify practices and procedures used by posts to manage workload and reduce wait times and encourage the dissemination and use of successful practices. We provided a draft of this report to the Departments of State and Homeland Security. The Department of Homeland Security did not comment on the draft but provided a technical comment. State provided written comments on the draft that are reprinted with our comments in appendix II of this report. State concurred with our recommendations to enhance methods of disseminating effective management techniques, to improve the reliability and utility of visa waits data, and to develop a strategy to address increases in visa demand. State noted that any appropriate strategy to address worldwide increases in visa demand must address the need for resources to meet national security goals for both travel facilitation and border security. Furthermore, State said that any suggestion of trade-offs between these two goals would be inappropriate. Clearly we agree that in developing a strategy, State must maintain its security responsibilities while also facilitating legitimate travel to the United States. Our report does not suggest that one of these goals should be sacrificed at the expense of the other. State also provided a number of technical comments, which we have incorporated throughout the report, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees. We will also send copies to the Secretary of State and the Secretary of Homeland Security. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-4128 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions are listed in appendix III. We reviewed (1) Department of State (State) data on the amount of time visa applicants were waiting to obtain a visa interview, (2) actions State has taken to address visa wait times, and (3) State’s strategy for dealing with projected increases in visa demand. To accomplish our objectives, we interviewed officials from State’s bureaus of Consular Affairs, Human Resources, and Overseas Buildings Operations. We also interviewed officials from the Department of Commerce’s Office of Travel and Tourism Industries. In addition, we observed consular operations and interviewed U.S. government officials at 11 posts in eight countries—Brazil, China, Costa Rica, El Salvador, Honduras, India, South Korea, and the United Kingdom. For our site visits, we selected posts that had either (1) recently reported wait times of 60 days or more, (2) had previously experienced long-standing wait time problems, (3) were projected to experience a large future volume of visa adjudications, or (4) were able to process a large volume of visas with little or no wait for applicant interviews. During these visits, we observed visa operations; interviewed consular staff and embassy management about visa adjudication policies, procedures, and resources; and reviewed documents and data. In addition, to obtain a broader view of visa workload, consular staffing and facilities, as well as other issues affecting visa wait times in consular sections, we selected an additional 21 posts for a document review based on the same selection criteria we used for selecting our site visits. Our selection of posts was not intended to provide a generalizable sample but allowed us to observe consular operations under a wide range of conditions. To determine the amount of time visa applicants were waiting to obtain a visa interview, we analyzed interview wait times data for applicants applying for visas for temporary business or tourism purposes, but not for other types of visas, including student visas. Specifically, the data provided to us showed the minimum and maximum wait times for visa-issuing posts for the period January 2006-February 2007. Data were also provided for the same period that indicated the number of posts that reported maximum wait times of 30 or more days in at least 1 month and the number that reported wait times in excess of 30 days for this entire 6- month period. In addition, at various points-in-time, we received information on the most recently reported wait times for visa-issuing posts and the date of last entry. To determine the reliability of State’s data on wait times for applicant interviews, we reviewed the department’s procedures for capturing these data, interviewed the officials in Washington who monitor and use these data, and examined data that was provided to us electronically. In addition, we interviewed the corresponding officials from our visits to select posts overseas and in Washington, who input and use the visa waits data. We found that data was missing throughout the 13-month period because posts were not reporting each week. Based on our analysis, we determined that the data were not sufficiently reliable to determine the exact magnitude of the delays because the exact number of posts with a wait of 30 days or more at any given time could not be determined. Consular officials who manage consular sections overseas acknowledged that many posts are not reporting on a weekly basis. However, we determined that the data are sufficiently reliable for providing a broad indication of posts that have had problems with wait times over a period of time and for general trends in the number of posts that have had problems with wait times over the 13 months we reviewed. To determine the actions State has taken to address visa wait times and its strategy for addressing waits, we analyzed consular policies and procedures cables and staffing and facilities plans developed by the department. In addition, we analyzed consular workload and staffing data. We also reviewed the methodology for the Change Navigations Study and found it to be one of a number of fairly standard approaches that are available for a forecasting exercise of this nature. However, we did not attempt to replicate the methodology or test alternative models that relied on different techniques, data, or assumptions. We conducted our work from August 2006 through May 2007 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of State’s letter dated June 25, 2007. 1. State’s Deputy Assistant Secretary for Visa Services has acknowledged that visa applicants may be deterred from visiting the United States by long appointment wait times and that this could have negative economic consequences and could adversely affect foreign opinions of our country. The Department of Commerce points out that foreign visitors bring economic benefits to our country in excess of $100 billion each year. We agree that it is difficult to correlate visa wait times with specific dollar value losses in travel and tourism revenues. However, given that wait times for interviews are very high at a number of posts, we believe that the loss in economic benefits to our country over time could potentially be significant. Our report acknowledges that visa issuances have increased over the last several years. 2. We believe our report, as well as past GAO reports, shows that long waits for visa interviews have been a long-standing problem for the department. Furthermore, State’s data show that there have been long waits at some posts during peak and nonpeak periods (see fig. 2) and that long waits are not solely cyclical in nature. State acknowledges a number of cyclical factors that affect visa demand and resource availability, such as staffing gaps and the personnel transfer cycle. We believe these and other factors can contribute to chronic as well as cyclical backlogs. In addition, we have modified the draft to acknowledge the fact that wait times may reoccur cyclically as well as unexpectedly. However, the report points toward the need for a strategy for addressing such delays, which State has not developed to address either cyclical or chronic visa waits. 3. We agree that increasing consular staff levels may ultimately be necessary to address increasing visa demand. This is why we recommended that State develop a strategy to address wait times and that, in doing so, identify its resource needs. Such actions could promote consensus by decision makers on funding levels and expectations for eliminating visa delays. 4. We agree that State has taken a number of actions to share information with posts on reducing wait times. However, as noted in the report, during our fieldwork, we found that there were instances where posts were not aware of certain practices and procedures implemented by other posts to help manage workload and assist in improving applicant wait times. We understand that all practices may not be transferable to all posts, but we believe that all posts would benefit from knowing the options that are available for more efficient operations. 5. Our report discusses State’s efforts to estimate visa demand and gives ample credit to the 2006 repositioning exercise to shift some consular staffing to posts with the greatest need. Furthermore, neither the annual consular package exercise nor the Consular Affairs Future Study estimated the resources needed to meet long-term future demand. Our point is that State has not estimated what resources will be required to keep up with the increase in future demand that State forecasts. Because these resources could be substantial, we think it is incumbent on State to develop a long-term strategy now. 6. We based our statements on the testimony of State’s Deputy Assistant Secretary for Visa Services before Congress in March 2007, where he stated, “we strive to constantly strike the right balance between protecting America’s borders and preserving America’s welcome to international visitors.” We acknowledge that in striking this balance security is the primary concern. Clearly the time it takes to process an application affects how many applications an officer can process in a given day. We are not suggesting that State sacrifice security in order to avoid visa waits, but rather that State develop a plan for how it will cope with rising demand, taking these various circumstances and responsibilities into consideration. 7. We agree that these are important factors and have modified the text accordingly. 8. We understand that there are spikes in visa demand for various reasons, some of which are difficult to predict. However, State is aware that such spikes in visa demand can occur. We believe that State needs a strategy to address growing visa demand that includes consideration of how it will meet unanticipated spikes in demand. The development of such a plan would allow State to use its visa surge teams of temporary duty staff to deal with unanticipated spikes, rather than using them to handle the anticipated increasing demand. 9. We have modified language in the report. State’s comment reinforces our belief that it is time for State to develop a strategy for addressing long-term visa demand. If State determines it needs more staff to handle projected demand, then it should detail these needs in its strategy. 10. We based our comment on a cable prepared by the U.S. Embassy in London. State acknowledges that the 10-fingerprint requirement could reduce the number of applicants processed. Applicants are not interviewed until after their fingerprints are taken, so a reduction in the number of applicants processed would subsequently result in a reduction of applicants interviewed. We have modified language in the draft to clarify our point. 11. We have incorporated information on the Visa Office’s Two-Year Plan into the report. 12. State does not have a plan that outlines how it will cope with growing visa demand, which is why we recommend that State develop a strategy that identifies the actions it will take to address increasing demand. We believe that there may be opportunities to achieve efficiencies at some posts and that more resources may be needed. The short-term, temporary measures that State is currently taking to address visa demand are not adequate to handle the projected visa demand. We suggest that State take advantage of available analytical tools in order to identify options for the development of an overall strategy that will address the projected increase in visa demand worldwide. A wide range of sophisticated techniques are available to help manage customer waiting times in many areas of government operations, such as testing drivers at departments of motor vehicles and treating patients at public health clinics. Our report does not recommend that State reduce the processing time at the expense of security. We agree that State must maintain its security responsibilities while facilitating legitimate travel to the United States. In addition to the individual named above, John Brummet, Assistant Director; Joe Brown; Joe Carney; Martin de Alteriis; Jeff Miller; Mary Moutsos; and Melissa Pickworth made key contributions to this report.

After the 9/11 terrorist attacks, Congress and the Department of State (State) initiated changes to the visa process to increase security, but these changes also increased the amount of time needed to adjudicate a visa. Although maintaining security is of paramount importance, State has acknowledged that long waits for visas may discourage legitimate travel to the United States, potentially costing the country billions of dollars in economic benefits over time, and adversely influencing foreign citizens' opinions of our nation. GAO testified in 2006 that a number of consular posts had long visa interview wait times. This report examines (1) State's data on visa interview wait times, (2) actions State has taken to address wait times, and (3) State's strategy for dealing with projected growth in visa demand. According to State, the amount of time that applicants must wait for a visa interview has generally decreased over the last year; however, some applicants continue to face extensive delays. State's data showed that between September 2005 and February 2006, 97 consular posts reported maximum wait times of 30 or more days in at least 1 month, whereas 53 posts reported such waits for the same period 1 year later. However, despite recent improvements, at times during the past year, a number of posts reported long wait times, which could be expected to reoccur during future visa demand surges. In 2007, State announced a goal of providing applicants an interview within 30 days. Although State's data is sufficiently reliable to indicate that wait times continue to be a problem at some posts, GAO identified shortcomings in the way the data is developed that could mask the severity of the problem. State has implemented steps to reduce wait times at several posts including using temporary duty employees to fill staffing gaps at some posts and repositioning some consular positions to better utilize its current workforce. However, these measures are not permanent or sustainable solutions and may not adequately address the increasing demand for visas worldwide. In addition, State has made improvements to several consular facilities and has identified plans for improvements at several other posts with high workload. Some posts have utilized procedures that enable them to process applications more efficiently. However, not all of these procedures are shared among posts in a systematic way and, therefore, not all posts are aware of them. State has not determined how it will keep pace with growth in visa demand over the long-term. State contracted for a study of visa demand, in select countries, over a 15-year period beginning in 2005, which projected that visa demand will increase dramatically at several posts. However, at some posts, demand has already surpassed the study's projected future demand levels. State has not developed a strategy that considers such factors as available resources and the need for maintaining national security in the visa process, along with its goal that visas are processed in a reasonable amount of time. Given dramatic increases in workload expected at many posts, without such a strategy State will be challenged in achieving its current goal for wait times.

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OPM’s mission is to ensure that the federal government has an effective civilian workforce. In this regard, one of the agency’s major human resources tasks is to manage and administer the retirement program for federal employees. According to the agency, the program serves federal employees by providing (1) retirement compensation and (2) tools and options for retirement planning. OPM’s Center for Retirement and Insurance Services administers the two defined benefit retirement plans that provide retirement, disability, and survivor benefits to federal employees. The first plan, the Civil Service Retirement System (CSRS), provides retirement benefits for most federal employees hired before 1984. The second plan, the Federal Employees Retirement System (FERS), covers most employees hired in or after 1984 and provides benefits that include Social Security and a defined contribution system. According to OPM, there are approximately 2.9 million active federal employees and nearly 2.5 million retired federal employees. The agency’s March 2008 analysis of federal employment retirement data estimates that nearly 1 million active federal employees will be eligible to retire and almost 600,000 will most likely retire by 2016. Figure 1 summarizes the estimated number of employees eligible and likely to retire. OPM and employing agencies’ human resources and payroll offices are responsible for processing federal employees’ retirement applications. The process begins when an employee submits a paper retirement application to his or her employer’s human resources office and is completed when the individual begins receiving regular monthly benefit payments (as illustrated in fig. 2). Once an employee submits an application, the employing agency’s human resources office provides retirement counseling services to the employee and augments the retirement application with additional paperwork, such as a separation form that finalizes the date the employee will retire. Then the agency provides the retirement package to the employee’s payroll office. After the employee separates for retirement, the payroll office is responsible for reviewing the documents for correct signatures and information, making sure that all required forms have been submitted, and adding any additional paperwork that will be necessary for processing the retirement package. Once the payroll office has finalized the paperwork, the retirement package is mailed to OPM to continue the retirement process. Payroll offices are expected to submit the package to OPM within 30 days of the retiree’s separation date. Upon receipt of the retirement package, OPM calculates an interim payment based on information provided by the employing agency. The interim payments are partial payments that typically provide retirees with 80 percent of the total monthly benefit they will eventually receive. OPM then starts the process of analyzing the retirement application and associated paperwork to determine the total monthly benefit amount to which the retiree is entitled. This process includes collecting additional information from the employing agency’s human resources and payroll offices or from the retiree to ensure that all necessary data are available before calculating benefits. After OPM completes its review and authorizes payment, the retiree begins receiving 100 percent of the monthly retirement benefit payments. OPM then stores the paper retirement folder at the Retirement Operations Center in Boyers, Pennsylvania. According to the agency’s 2008 performance report, the average processing time from the date OPM receives the initial application to the time the retiree receives a full payment is 42 days. According to the Deputy Associate Director for the Center of Retirement and Insurance Services, about 200 employees are directly involved in processing the approximately 100,000 retirement applications OPM receives annually. This processing includes functions such as determining retirement eligibility, inputting data into benefit calculators, and providing customer service. The agency uses over 500 different procedures, laws, and regulations, which are documented on the agency’s internal Web site, to process retirement applications. For example, the site contains memorandums that outline new procedures for handling special retirement applications, such as those for disability or court orders. Further, OPM’s retirement processing involves the use of over 80 information systems that have approximately 400 interfaces with other internal and external systems. For instance, 26 internal systems interface with the Department of the Treasury to provide, among other things, information regarding the total amount of benefit payments to which an employee is entitled. OPM has stated that the federal employee retirement process currently does not provide prompt and complete benefit payments upon retirement, and that customer service expectations for more timely payments are increasing. The agency also reports that a greater workload is expected due to an anticipated increase in the number of retirement applications over the next decade, yet current retirement processing operations are at full capacity. Further, the agency has identified several factors that limit its ability to process retirement benefits in an efficient and timely manner. Specifically, it noted that current processes are paper-based and manually intensive, resulting in a higher number of errors and delays in providing benefit payments; the high costs, limited capabilities, and other problems with the existing information systems and processes pose increasing risks to the accuracy of benefit payments; current manual capabilities restrict customer service; federal employees have limited access to their retirement records, making planning for retirement difficult; and attracting qualified personnel to operate and maintain the antiquated retirement systems, which have about 3 million lines of custom programming, is challenging. In the late 1980s, OPM recognized the need to automate and modernize its retirement processing and began retirement modernization initiatives that have continuously called for automating its antiquated paper-based processes. The agency’s previously established program management plans included the objectives of having timely and accurate retirement benefit payments and more efficient and flexible processes. For example, the agency’s plans call for processing retirement applications and providing retirees 100 percent of their monthly benefit payments the day it is due versus providing interim monthly payments. Its initial modernization vision called for providing prompt and complete benefit payments by developing an integrated system and automated processes. However, the agency has faced significant and long-standing challenges in doing so. In early 1987, OPM began a program called the FERS Automated Processing System (FAPS). However, after 8 years of planning, the agency decided it needed to reevaluate the program, and the Office of Management and Budget (OMB) requested that an independent board conduct a review to identify critical issues impeding progress and recommend ways to address the issues. The review identified various management weaknesses, including the lack of an established strategic plan, cost estimation methodologies, and baseline; improperly defined and ineffectively managed requirements; and no clear accountability for decision making and oversight. Accordingly, the board suggested areas for improvement and recommended terminating the program if immediate action was not taken. In mid-1996, OPM terminated the program. In 1997, OPM began planning a second modernization initiative, called the Retirement Systems Modernization (RSM) program. The agency originally intended to structure the program as an acquisition of commercially available hardware and software that would be modified in-house to meet its needs. From 1997 to 2001, OPM developed plans and analyses and began developing business and security requirements for the program. However, in June 2001, it decided to change the direction of the retirement modernization initiative. In late 2001, retaining the name RSM, the agency embarked upon its third initiative to modernize the retirement process and examined the possibility of privately sourced technologies and tools. To this end, OPM issued a request for information to obtain private sourcing options and determined that contracting was a viable alternative that would be cost efficient, less risky, and more likely to be completed on time and on budget. In 2006, the agency awarded three contracts for: (1) a commercially available, defined benefits technology solution (DBTS) to automate retirement processing; (2) services to convert paper records to electronic files; and (3) consulting services to support the redesign of its retirement operations. The contract for DBTS was awarded to Hewitt Associates, and the additional contracts to support the technology were awarded to Accenture Ltd. and Northrop Grumman Corporation, as reflected in table 1. OPM produced a December 2007 program management plan that, among other things, described capabilities the agency expected to implement as outcomes of retirement modernization. Among these capabilities, the agency expected to implement retirement benefit modeling and planning tools for active federal employees, a standardized retirement benefit calculation system, and a consolidated system to support all aspects of retirement processing. In February 2008, OPM renamed the program RetireEZ and deployed a limited initial version of DBTS. As the foundation of the modernization initiative, DBTS was to be a comprehensive technology solution that would provide capabilities to substantially automate retirement processing. This technology was to be provided by the contractor for a period of 10 years and was intended to provide, among other things, an integrated database with calculation functionality for retirement processing. In addition to calculating retirement benefit amounts, DBTS was intended to provide active and retired federal employees with self- service, Internet-based tools for accessing accounts, updating retirement records, submitting transactions, monitoring the status of claims, and forecasting retirement income. The technology was also expected to enhance customer service by providing OPM and agency personnel with the capability to access retirement information online. Further, the technology was expected to be integrated with OPM and federal agency electronic retirement records and processes. When fully implemented, the modernized program was expected to serve OPM retirement processing personnel, federal agency human resources and payroll offices, active federal employees, retirees, and the beneficiaries of retirees. According to the agency, in late February 2008, the DBTS was deployed with limited functionality to 26,000 federal employees serviced by the General Services Administration’s (GSA) payroll offices. In April 2008, OPM reported that 13 of the 37 retirement applications received from GSA’s payroll office had been processed through DBTS with manual intervention and provided the retirees 100 percent of their monthly benefits within 30 days from their retirement date. However, a month later, the agency determined that DBTS had not worked as expected and suspended system operation. In October 2008, after 5 months of attempting to address system quality issues, the agency terminated the contract. In November 2008, OPM began restructuring the program and reported that its efforts to modernize retirement processing would continue. Figure 3 illustrates the timeline of retirement modernization initiatives from 1987 to the present. Various entities within OPM are responsible for managing RetireEZ. Specifically, the management is composed of committees, a program office, and operational support, as reflected in table 2. Since 2005, we have conducted several studies of OPM’s retirement modernization noting weaknesses in its management of the initiative. In February of that year, we reported that the agency lacked processes for retirement modernization acquisition activities, such as determining requirements, developing acquisition strategies, and implementing a risk program. Further, the agency had not established effective security management, change management, and program executive oversight. We recommended that the Director of OPM ensure that the retirement modernization program office expeditiously establish processes for effective oversight of the retirement modernization in the areas of system acquisition management, information security, organizational change management, and information technology (IT) investment management. In response, between 2005 and 2007, the agency initiated steps toward establishing management processes for retirement modernization and demonstrated the completion of activities with respect to each of our nine recommendations. However, in January 2008, we reported that the agency still needed to improve its management of the program to ensure a successful outcome for its modernization efforts. Specifically, we reported that initial test results had not provided assurance that DBTS would perform as intended, the testing schedule increased the risk that the agency would not have sufficient resources or time to ensure that all system components were tested before deployment, and trends in identifying and resolving system defects had indicated a growing backlog of problems to be resolved prior to deployment. Further, we reported that although the agency had established a risk management process, it had not reliably estimated the program costs, and its progress reporting was questionable because it did not reflect the actual state of the program. We recommended that the Director of OPM address these deficiencies by conducting effective system tests and resolving urgent and high priority system defects prior to system deployment, in addition to improving program cost estimation and progress reporting. In response to our report, OPM stated that it concurred with our recommendations and was taking steps to address them. However, in March 2008, we determined that the agency was moving forward with system deployment and had not yet implemented its planned actions. OPM subsequently affirmed its agreement with our recommendations in April 2008 and reported that it had implemented or was in the process of implementing each recommendation. As of March 2009, however, these recommendations still had not been fully addressed. OPM remains far from fully implementing the retirement modernization capabilities described when it documented its plans for RetireEZ in 2007. The agency only partially implemented two of eight capabilities that it identified to modernize retirement processing. The remaining six capabilities, which were to be delivered through the DBTS contract, have not been implemented, and OPM’s plans to continue implementing them are uncertain. While the agency has taken steps to restructure the RetireEZ program without the DBTS contract, it has not developed a plan to guide its future modernization efforts. OPM’s retirement modernization plans from 2007 described eight capabilities that were to be implemented to achieve modernized processes and systems. As of late March 2009, the agency had partially implemented two of these capabilities while the remaining six had not been implemented (see table 3). Specifically, it had achieved partial implementation of an integrated database of retirement information that was intended to be accessible to OPM and agency retirement processing personnel. In this regard, the agency implemented a new database, populated with images of retirement information, which is accessible to OPM retirement processing personnel online. This database contains over 8 million files which, according to agency officials, represent approximately 80 to 90 percent of the available retirement information for all active federal employees. However, the capability for the information in the database to be integrated with OPM’s legacy retirement processing systems and to be accessible to other agency retirement processing personnel has not yet been implemented. OPM has also partially implemented enhanced customer service capabilities. Specifically, the agency acquired a new telephone infrastructure (i.e., additional lines) and hired additional customer service representatives to reduce wait times and abandonment rates. However, the agency has not yet developed the capabilities for OPM retirement processing personnel to provide enhanced customer support to active and retired federal employees through online account access and management. Moreover, six other capabilities have not been implemented—and plans to implement them are uncertain—because they were to be delivered through the now-terminated DBTS contract, which had been expected to provide a single system that would automate the processing of retirement applications, calculations, and benefit payments. Among the capabilities not implemented was one for other agencies’ automated submissions of retirement information to OPM that could be used to process retirement applications. While OPM began developing this capability by establishing interfaces with other agencies as part of its effort to implement DBTS, it discontinued the use of the interfaces for processing retirement applications when the DBTS contract was terminated. Thus, federal agencies that submit retirement information to OPM continue to provide paper packages and information when employees are ready to retire. Further, OPM has not implemented a planned capability for active and retired federal employees to access online retirement information through self-service tools. While the agency provided demonstrations of DBTS in April 2008 that showed the ability for employees to access information online, including applying for retirement and modeling future retirement benefits, this capability was to be provided by DBTS, and thus, no longer exists. The contractor had also been expected to deliver a consolidated system to support all aspects of retirement processing and an electronic case management system to support retirement processing. In the absence of these capabilities, the agency continues to manage cases through paper tracking and stand-alone systems. Additionally, OPM and federal agencies continue to rely on nonstandardized systems to determine and calculate retirement benefits, and federal retirees currently have only limited online, self-service tools. Program management principles and best practices emphasize the importance of using a program management plan that, among other things, establishes a complete description that ties together all program activities. An effective plan includes a description of the program’s scope, implementation strategy, lines of responsibility and authority, management processes, and a schedule. Such a plan incorporates all the critical areas of system development and is to be used as a means of determining what needs to be done, by whom, and when. Furthermore, establishing results-oriented (i.e., objective, quantifiable, and measurable) goals and measures, that can be included in a plan, provides stakeholders with the information they need to effectively oversee and manage programs. A plan for the future of the RetireEZ program has not been completed. In November 2008, OPM began restructuring the program and reported it was continuing toward retirement modernization without the DBTS contract. The restructuring efforts have resulted in a wide variety of documentation, including multiple descriptions of the program in formal agency reports, budget documentation, agency briefing slides, and related documents. For example, OPM’s November Fiscal Year 2008 Agency Financial Report described what the RetireEZ program is expected to achieve (e.g., provide retirement modeling tools for federal employees) once implemented. The agency’s Annual Performance Report, dated January 2009, outlined that the new vision for the restructured program is “to support benefit planning and management throughout a participant’s lifecycle through an enhanced federal retirement program.” The agency also presented information to OMB that identified eight fiscal year 2009 program initiatives, as listed in table 4. The agency has developed a variety of informal program documents and briefing slides that describe retirement modernization activities. For instance, one document prepared by the program office describes a five- phased approach that is intended to replace its previous DBTS-reliant strategy. The approach includes the following activities: (1) collecting electronic retirement information, (2) automating the retirement application process, (3) integrating retirement information, (4) developing retirement calculation technologies and tools, and (5) improving post- retirement processes through a technology solution. In addition, briefing slides also prepared by the program office outline a schedule for efforts to identify new technologies to support retirement modernization by drafting a request for information, which OPM expects to issue in late April 2009. Regardless, OPM’s various reports and documents describing its planned retirement modernization activities do not provide a complete plan for its restructured program. Specifically, although agency documents describe program implementation activities, they do not include a definition of the program, its scope, lines of responsibility and authority, management processes, and schedule. Also, the modernization program documentation does not describe results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures. According to the RetireEZ program manager, the agency is developing plans, but they will not be ready for release until the new OPM director has approved them, which is expected to occur in April 2009. Until the agency completes and uses a plan that includes all of the above elements to guide its efforts, it will not be properly positioned to obtain agreement with relevant stakeholders (e.g., Congress, OMB, federal agencies, and OPM senior executives) for its restructured retirement modernization initiative. Further, the agency will also not have a key mechanism that it needs to help ensure successful implementation of future modernization efforts. OPM has significant management weaknesses in five areas that are important to the success of its retirement modernization program: cost estimating, EVM, requirements management, testing, and program oversight. For example, the agency has not performed key steps, including the development of a cost estimating plan or completion of a work breakdown structure, both of which are necessary to develop a reliable program cost estimate. Also, OPM has not established and validated a performance measurement baseline, which is essential for reliable EVM. Further, although OPM is revising its previously developed system requirements, it has not established processes and plans to guide this work. Nor has the agency addressed test activities, even though developing processes and planning test activities early in the life cycle are recognized best practices for effective testing. Furthermore, although OPM’s Executive Steering Committee and Investment Review Board have recently become more active regarding RetireEZ, these bodies did not exercise effective oversight in the past, which has allowed the aforementioned management weaknesses to persist. Notably, OPM has not established guidance regarding how these entities are to engage with the program when corrective actions are needed. Until OPM addresses these weaknesses, many of which we and others made recommendations to correct, the agency’s retirement modernization initiative remains at risk of failure. The establishment of a reliable cost estimate is a necessary element for informed investment decision making, realistic budget formulation, and meaningful progress measurement. A cost estimate is the summation of individual program cost elements that have been developed by using established methods and validated data to estimate future costs. According to federal policy, programs must maintain current and well- documented estimates of program costs, and these estimates must span the full expected life of the program. Our Cost Estimating and Assessment Guide includes best practices that agencies can use for developing and managing program cost estimates that are comprehensive, well-documented, accurate, and credible, and provide management with a sound basis for establishing a baseline to measure program performance and formulate budgets. This guide identifies a cost estimating process that includes initial steps such as defining the estimate’s purpose (i.e., its intended use, scope, and level of detail); developing the estimating plan (i.e., the estimating approach, team, and timeline); defining the program (e.g., technical baseline description); and determining the estimating structure (e.g., work breakdown structure). According to best practices, these initial steps in the cost estimating process are of the utmost importance, and should be fully completed in order for the estimate to be considered valid and reliable. OPM officials stated that they intend to complete a modernization program cost estimate by July 2009. However, the agency has not yet fully completed initial steps for developing the new estimate. Specifically, the agency has not yet fully defined the estimate’s purpose, developed the estimating plan, defined program characteristics in a technical baseline description, or determined the estimating structure. With respect to the estimate’s purpose, agency officials stated that the estimate will inform the budget justification of RetireEZ for fiscal year 2011 and beyond. However, the agency has not clearly defined the scope or level of detail of the estimate. Regarding the estimating plan, agency officials stated that they have created a timeline to complete the estimate by July 2009. However, the agency has not documented an estimating plan that includes the approach and resources required to complete the estimate in the time period identified. With respect to the technical baseline description, agency officials stated that they are in the advanced stages of developing a request for information and a concept of operations that will serve as the basis for a technical baseline description. These documents are expected to be reviewed for approval in April 2009. Regarding the estimating structure, the agency has developed a work breakdown structure that identifies elements of the program to be estimated. However, the agency has not yet developed a work breakdown structure dictionary that clearly defines each element. Weaknesses in the reliability of OPM’s retirement modernization cost estimate have been long-standing. We first reported on the agency’s lack of a reliable cost estimate in January 2008 when we noted that critical activities, including documentation of a technical baseline description, had not been performed, and we recommended that the agency revise the estimate. Although OPM agreed to produce a reliable program cost estimate, the agency has not yet done so. Until OPM fully completes each of the steps, the agency increases the risk that it will produce an unreliable estimate and will not have a sound basis for measuring program performance and formulating retirement modernization program budgets. OMB and OPM policies require major IT programs to use EVM to measure and report program progress. EVM is a tool for measuring program progress by comparing the value of work accomplished with the amount of work expected to be accomplished. Such a comparison permits actual performance to be evaluated, based on variances from the planned cost and schedule, and future performance to be forecasted. Identification of significant variances and analysis of their causes helps program managers determine the need for corrective actions. Before EVM analysis can be reliably performed, developing a credible cost estimate is necessary. In addition to developing a cost estimate, an integrated baseline review must be conducted to validate a performance measurement baseline and attain agreement of program stakeholders (e.g., agency and contractor officials) before reliable EVM reporting can begin. The establishment of a baseline depends on the completion of a work breakdown structure, an integrated master schedule, and budgets for planned work. Although the agency plans to begin reporting on the restructured program’s progress using EVM in April 2009, the agency is not yet prepared to do so because initial steps have not been completed and are dependent on decisions about the program that have not been made. Specifically, the agency has not yet developed a reliable cost estimate for the program; such an estimate, which is critical for establishing reliable EVM, is not expected to be complete until July 2009; the agency does not plan to conduct an integrated baseline review to establish a reliable performance measurement baseline before beginning EVM reporting; and the work breakdown structure and integrated master schedule that agency officials report they have developed may not accurately reflect the full scope and schedule because key program documentation, such as the concept of operations, has not been completed. This situation resembles the state of affairs that existed in January 2008, when we reported that OPM’s EVM was unreliable because an integrated baseline review had not been conducted to validate the program baseline. At that time we recommended, among other things, that the agency establish a basis for effective use of EVM by validating a program performance measurement baseline through a program-level integrated baseline review. Although the agency stated that it agreed, it did not address this recommendation. Until the agency has developed a reliable cost estimate, performed an integrated baseline review, and validated a performance measurement baseline that reflect its program restructuring, the agency is not prepared to perform reliable EVM. Engaging in EVM reporting without first performing these fundamental steps could again render the agency’s assessment unreliable. Well-defined and managed requirements are a cornerstone of effective system development and acquisition. According to recognized guidance, disciplined processes for developing and managing requirements can help reduce the risks of developing a system that does not meet user and operational needs. Such processes include (1) developing detailed requirements that have been derived from the organization’s concept of operations and are complete and sufficiently detailed to guide system development and (2) establishing policies and plans, including defining roles and responsibilities, for managing changes to requirements and maintaining bidirectional requirements traceability. OPM’s retirement modernization requirements processes include some, but not all, of the elements needed to effectively develop and manage requirements. The agency began an effort to better develop its retirement modernization requirements in November 2008. This effort was in response to the agency’s recognition that its over 1,400 requirements lacked sufficient detail, were incomplete, and required further development. The agency intends to complete this requirements development effort in April 2009. However, the requirements will not be derived from OPM’s concept of operations because the agency is revising the concept of operations expected to be completed by April 2009, to reflect the program restructuring. Further, OPM documentation indicates that the agency has not yet determined the level of detail to which requirements should be developed. Additionally, agency officials stated that OPM is developing a requirements development process for retirement modernization. With respect to requirements management, OPM developed an organizational charter that outlined roles and responsibilities for supporting efforts to manage requirements. However, the agency does not yet have a requirements management plan. OPM’s prior experience with DBTS illustrates the importance of effective requirements development and management. According to RetireEZ program officials, insufficiently detailed requirements, poorly controlled requirements changes, and inadequate requirements traceability were factors that contributed to DBTS not performing as expected. Moreover, these requirements development and management weaknesses were identified, and recommendations for improvement were made by OPM’s independent verification and validation contractor before DBTS deployment. However, the agency has not yet corrected these weaknesses. Until OPM fully establishes requirements development and management processes, the agency increases the risk that it will (1) identify requirements that are neither complete nor sufficiently detailed and (2) not effectively manage requirements changes or maintain bidirectional traceability, thus further increasing agency risk that it will produce a system that does not meet user and operational needs. Effective testing is an essential component of any program that includes developing systems. Generally, the purpose of testing is to identify defects or problems in meeting defined system requirements and satisfying user needs. To be effectively managed, testing should be planned and conducted in a structured and disciplined fashion that adheres to recognized guidance and is coordinated with the requirements development process. Beginning the test planning process in the early stages of a program life cycle can reduce rework later in the program. Early test planning in coordination with requirements development can provide major benefits. For example, planning for test activities during the development of requirements may reduce the number of defects identified later and the costs related to requirements rework or change requests. Further, planning test activities early in a program’s life cycle can inform requests for proposals and help communicate testing expectations to potential vendors. OPM has not begun to plan test activities in coordination with developing its requirements for the RetireEZ program. According to OPM officials, the agency intends to begin its test planning by revising the previously developed DBTS test plans after requirements have been developed. However, the agency has not yet added test planning to its project schedule. Early test planning is especially important to avoid repeating the agency’s experience during DBTS testing when it identified more defects than it could resolve before system deployment. In January 2008, we reported that an unexpectedly high number of defects were identified during testing; yet, the deployment schedule had increased the risk of not resolving all defects that needed to be corrected before deploying DBTS. According to the RetireEZ program officials, the failure to fully address these defects contributed to the limited number of federal employees who were successfully processed by the system when it was deployed in February 2008. If it does not plan test activities early in the life cycle of RetireEZ, OPM increases the risk that it will again deploy a system that does not satisfy user expectations and meet requirements (i.e., accurately calculate retirement benefits) because of its potential inability to address a higher number of defects than expected. Moreover, criteria used to develop requests for proposals and communicate testing expectations to potential vendors could be better informed if the agency plans RetireEZ test activities early in the life cycle. GAO and OMB guidance calls for agencies to ensure effective oversight of IT projects throughout all life-cycle phases. Critical to effective oversight are investment management boards made up of key executives who regularly track the progress of IT projects such as system acquisitions or modernizations. These boards should maintain adequate oversight and track project performance and progress toward predefined cost and schedule goals, as well as monitor project benefits and exposure to risk. Another element of effective IT oversight is employing early warning systems that enable management boards to take corrective actions at the first sign of cost, schedule, and performance slippages. OPM’s Investment Review Board was established to ensure that major investments are on track by reviewing their progress and determining appropriate actions when investments encounter challenges. Despite meeting regularly and being provided with information that indicated problems with the retirement modernization, the board did not ensure that the investment was on track, nor did it determine appropriate actions for course correction when needed. For example, from January 2007 to August 2008 the board met and was presented with reports that described problems the retirement modernization program was facing, such as the lack of an integrated master schedule and earned value data that did not reflect the “reality or current status” of the program. However, meeting minutes indicate that no discussion or action was taken to address these problems. According to a member of the board, OPM guidance regarding how the board is to communicate recommendations and corrective actions when needed for the investments it is responsible for overseeing has not been established. In addition, OPM established an Executive Steering Committee to oversee retirement modernization. According to its charter, the committee is to provide strategic direction, oversight, and issue resolution to ensure that the program maintains alignment with the mission, goals, and objectives of the agency and is supported with required resources and expertise. However, the committee was inactive for most of 2008 and, consequently, did not exercise oversight of the program during a crucial period in its development. For example, from January 2008 until October 2008, the committee discontinued its formal meetings, and as a result, it was not involved in key program decisions, including the deployment of DBTS. Further, a member of the committee noted that OPM guidance for making recommendations and taking corrective actions also has not been provided. The ineffectiveness of the board and the inactivity of the committee allowed program management weaknesses in the areas of cost estimation, EVM, requirements management, and testing to persist and raise concerns about OPM’s ability to provide meaningful oversight as the agency proceeds with its retirement modernization. Without fully functioning oversight bodies, OPM cannot monitor modernization activities and make the course corrections that effective boards and committees are intended to provide. OPM’s retirement modernization initiative is in transition from a program that was highly dependent on the success of a major contract that no longer exists, to a restructured program that has yet to be fully defined. Although the agency has been able to partially implement a database of retirement information and improvements to customer service, it remains far from implementing six other key capabilities. Recognizing that much work remains, OPM has undertaken steps to restructure the retirement modernization program, but it has not yet produced a complete description of its planned program, including fundamental information about the program’s scope, implementation strategy, lines of responsibility and authority, management processes, and schedule. Further, OPM’s retirement modernization program restructuring does not yet include definitions of results-oriented goals and measures against which program performance can be objectively and quantitatively assessed. In addition, OPM has not overcome managerial shortcomings in key areas of program management, including areas that we have previously reported. Specifically, the agency is not yet positioned to develop a reliable program cost estimate or perform reliable EVM, both of which are critical to effective program planning and oversight. Nor has OPM overcome weaknesses in its management of system testing and defects, two activities that proved problematic as the agency was preparing to deploy the RetireEZ system that subsequently was terminated. Adding to these long-standing concerns are weaknesses in OPM’s process to effectively develop and manage requirements for whatever system or service it intends to acquire or develop. Finally, these weaknesses have been allowed to persist by entities within the agency that were ineffective in overseeing the retirement modernization program. As a consequence, the agency is faced with significant challenges on two fronts: defining and transitioning to its restructured program, and addressing new and previously identified managerial weaknesses. Until OPM addresses these weaknesses, many of which were previously identified by GAO and others, the agency’s retirement modernization initiative remains at risk of failure. Institutionalizing effective planning and management is critical not only for the success of this initiative, but also for that of other modernization efforts within the agency. To improve OPM’s effort toward planning and implementing its retirement modernization program by addressing management weaknesses, we recommend that the Director of the Office of Personnel Management provide immediate attention to ensure the following six actions are taken: Develop a complete plan for the restructured program that defines the scope, implementation strategy, lines of responsibility and authority, management processes, and schedule. Further, the plan should establish results-oriented (i.e., objective, quantifiable, and measurable) goals and associated performance measures for the program. Develop a reliable cost estimate by following the best practice steps outlined in our Cost Estimating and Assessment Guide, including definition of the estimate’s purpose, development of an estimating plan, definition of the program’s characteristics, and determination of the estimating structure. Establish a basis for reliable EVM, when appropriate, by developing a reliable program cost estimate, performing an integrated baseline review, and validating a performance measurement baseline that reflects the program restructuring. Develop a requirements management plan and execute processes described in the plan to develop retirement modernization requirements in accordance with recognized guidance. Begin RetireEZ test planning activities early in the life cycle. Develop policies and procedures that would establish meaningful program oversight and require appropriate action to address management deficiencies. The Director of the Office of Personnel Management provided written comments on a draft of this report. (The comments are reproduced in app. II.) In the comments, OPM agreed with our recommendations and stated that it had begun to address them. To this end, the Director stated that the agency had, among other actions, begun revising its retirement modernization plans, developing a new program cost estimate, planning for accurate EVM reporting, incorporating recognized guidance in requirements management planning, and planning test activities during requirements development. If the recommendations are properly implemented, they should better position OPM to effectively manage its retirement modernization initiative. The agency also provided comments on the draft report regarding our description of the federal retirement application process, as well as our characterizations of OPM’s EVM and requirements management capabilities vis-à-vis the retirement modernization program. In each of these instances, we made revisions as appropriate. We are sending copies of this report to the Director of the Office of Personnel Management, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. As requested, the objectives of our study were to (1) assess the status of the Office of Personnel Management’s (OPM) efforts toward planning and implementing the RetireEZ program and (2) evaluate the effectiveness of the agency’s management of the modernization initiative. To assess the status of OPM’s efforts toward planning and implementing the RetireEZ program, we reviewed and analyzed program documentation, including program management plans, briefing slides, and project status documentation, to identify planned retirement modernization capabilities and determine to what extent these capabilities have been implemented; evaluated the agency’s documentation about restructuring the program and analyzed the extent to which the documentation describes current and planned RetireEZ program activities; identified and evaluated the agency’s program goals and measures and compared them to relevant guidance to determine the extent to which the goals and measures are described in results-oriented terms; supplemented agency program documentation and our analyses by interviewing agency and contractor officials, including the OPM Director, Chief Information Officer, Chief Financial Officer, Director of Modernization, Associate Director for Human Resources Products and Services Division, and executives from Hewitt Associates and Northrop Grumman Corporation; and observed retirement operations and ongoing modernization activities at OPM and contractor facilities in Washington, D.C.; Boyers, Pennsylvania; and Herndon, Virginia. To determine the effectiveness of OPM’s management of the retirement modernization initiative, we evaluated the agency’s management of program cost estimating, earned value management (EVM), requirements, test planning, and oversight and compared the agency’s work in each area with recognized best practices and guidance. Specifically, to evaluate whether OPM effectively developed a reliable program cost estimate, we analyzed the agency’s program documentation and determined to what extent the agency had completed key activities described in our Cost Estimating and Assessment Guide; to assess OPM’s implementation of EVM, we reviewed program progress reporting documentation and compared the agency’s plans for restarting its EVM-based progress reporting against relevant guidance, including our Cost Estimating and Assessment Guide; regarding requirements management, we evaluated OPM’s processes for developing and managing retirement systems modernization requirements and compared the effectiveness of those processes against recognized guidance; to determine the effectiveness of the agency’s test planning for the retirement modernization, we reviewed program activities and test plans against best practices and evaluated the extent to which the agency has begun planning for these activities; and we reviewed and analyzed documentation from program oversight entities and evaluated the extent to which these entities took actions toward ensuring the RetireEZ program was being effectively overseen. We also evaluated OPM’s progress toward implementing our open recommendations and interviewed OPM and contractor officials as noted. We conducted this performance audit at OPM headquarters in Washington, D.C., the Retirement Operations Center for OPM in Boyers, Pennsylvania, and contractor facilities in Herndon, Virginia, from May 2008 through April 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributions to this report were made by Mark T. Bird, Assistant Director; Barbara S. Collier; Neil J. Doherty; David A. Hong; Thomas J. Johnson; Rebecca E. LaPaze; Lee A. McCracken; Teresa M. Neven; Melissa K. Schermerhorn; Donald A. Sebers; and John P. Smith.

For the past two decades, the Office of Personnel Management (OPM) has been working to modernize the paper-intensive processes and antiquated systems used to support the retirement of federal employees. By moving to an automated system, OPM intends to improve the program's efficiency and effectiveness. In January 2008, GAO recommended that the agency address risks to successful system deployment. Nevertheless, OPM deployed a limited initial version of the modernized system in February 2008. After unsuccessful efforts to address system quality issues, OPM suspended system operation, terminated a major contract, and began restructuring the modernization effort, also referred to as RetireEZ. For this study, GAO was asked to (1) assess the status of OPM's efforts to plan and implement the RetireEZ program and (2) evaluate the effectiveness of the agency's management of the modernization initiative. To do this, GAO reviewed OPM program documentation and interviewed agency and contractor officials. OPM remains far from achieving the modernized capabilities it had planned. Specifically, the agency has partially implemented two of eight planned capabilities: (1) an integrated database of retirement information accessible to OPM and agency retirement processing personnel and (2) enhanced customer service capabilities that support customer needs and provide self-service tools. However, the remaining six capabilities have yet to be implemented because they depended on deliverables that were to be provided by a contract that is now terminated. Examples of these missing capabilities include: (1) automated submission of retirement information through interfaces with federal agencies and (2) Web-accessible self-service retirement information for active and retired federal employees. Further, OPM has not yet developed a complete plan that describes how the program is to proceed without the system that was to be provided under the terminated contract. Although agency documents describe program implementation activities, they do not include a definition of the program, its scope, lines of responsibility and authority, management processes, and a schedule. Also, modernization program documentation does not describe results-oriented performance goals and measures. Until the agency completes and uses a plan that includes all of the above elements to guide its efforts, it will not be properly positioned to move forward with its restructured retirement modernization initiative. Further, OPM has significant weaknesses in five key management areas that are vital for effective development and implementation of its modernization program: cost estimating, earned value management (a recognized means for measuring program progress), requirements management, testing, and oversight. For example, the agency has not developed a cost estimating plan or established a performance measurement baseline--prerequisites for effective cost estimating and earned value management. Further, although OPM is revising its previously developed system requirements, it has not established processes and plans to guide this work or addressed test activities even though developing processes and plans, as well as planning test activities early in the life cycle, are recognized best practices for effective requirements development and testing. Finally, although OPM's Executive Steering Committee and Investment Review Board have recently become more active regarding RetireEZ, these bodies did not exercise effective oversight in the past, which has allowed the aforementioned management weaknesses to persist and OPM has not established guidance regarding how these entities are to intervene when corrective actions are needed. Until OPM addresses these weaknesses, many of which GAO and others made recommendations to correct, the agency's retirement modernization initiative remains at risk of failure. Institutionalizing effective management is critical not only for the success of this initiative, but also for that of other modernization efforts within the agency.

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Over the last 2 decades, the number of school-aged children with limited English proficiency in the nation has grown dramatically, increasing from less than 1 million in 1980 to more than 3.5 million in 1998. Despite small rates of growth in the total enrollment of all K-12 children, the enrollment of school-aged children with limited English proficiency across the United States grew exponentially between school years 1989-90 and 1997-98 (see fig. 1). While California, Florida, New York, and Texas continue to have the largest number of children with limited English proficiency (see fig. 2), other states that previously had small populations of such children have experienced large increases in recent years. For example, in Alabama, Idaho, Nebraska, Nevada, North Carolina, and Tennessee, the number of children with limited English proficiency more than doubled between school years 1992-93 and 1997-98 (see fig. 3). In 1968, the Congress passed the Bilingual Education Act (BEA). The purpose of the BEA is to educate students with limited English proficiency so that they can reach the academic standards expected of all students. The 1994 reauthorization of BEA created the four bilingual education grant programs—Program Development and Implementation Grants (PDI), Program Enhancement Projects (Enhancement), Comprehensive School Grants (Comprehensive), and Systemwide Improvement Grants (Systemwide)—to distribute funds directly to school districts serving children with limited English proficiency. These are the only federal programs that specifically target instructional services to children with limited English proficiency. In addition to the four federally funded bilingual education programs authorized by the BEA, other federal programs also address the special needs of these children though they do not exclusively target this population. For example, Title I of the Elementary and Secondary Education Act, which gave $8.7 billion in fiscal year 2000 to assist school districts educating disadvantaged students, is the largest federal program that includes support for children with limited English proficiency.However, most services for children with limited English proficiency are funded with local and state—not federal—dollars. Education’s Office of Bilingual Education and Minority Languages Affairs (OBEMLA) administers the four competitive bilingual education grant programs. The cost of administering these programs is funded through Education’s program administration account, while funding for the program grants is included in OBEMLA’s program budget. The bilingual education programs do not receive separate appropriations from the Congress; rather, OBEMLA receives a single budget appropriation to fund programs authorized by the BEA. (See app. I for a listing of all programs funded by the single budget appropriation.) During the grant competition cycle (approximately 4 to 6 months long), application forms are reviewed and scored based on applicants’ responses to the selection criteria (see app. II). The applications for the four programs are very similar and are organized into two main sections. The first section requests such information as a proposed summary budget, a detailed itemization of proposed annual expenses, and student data including the language groups and number of both limited English and English-proficient students to be served. The second section, the bulk of the application, is a narrative in which applicants describe the proposed project by demonstrating how it meets the selection criteria established by Education. Although the application forms and the selection criteria for all four programs are very similar, school districts and schools use the application to describe projects tailored to their specific local needs. School districts may submit applications to receive funding from more than one of the programs. At the end of the grant competition cycle, Education ranks the applications and awards funding to grantees. OBEMLA’s management plan contains safeguards to prevent individual schools from receiving funding from more than one bilingual education program. In fiscal year 2000, Education funded approximately 28 percent of the 665 applications it received. According to OBEMLA staff, the following number of grants were awarded in fiscal year 2000 to school districts to serve children with limited English proficiency: 18 Systemwide grants averaging $551,000 each; 75 Comprehensive grants averaging $245,300 each; and 92 PDI grants averaging $156,200 each. No Enhancement grants were awarded in fiscal year 2000. In coming years, Education plans to award a greater proportion of the grants to schools in the early stages of developing and implementing new programs. Congressional interest in the BEA has centered on the appropriate federal role in meeting the special needs of children with limited English proficiency. The 107th Congress is considering several bills as it deliberates BEA reauthorization in fiscal year 2001. One bill recommends the elimination of the four grant programs and another seeks to significantly increase funding for bilingual education programs and consolidate the four programs into a single grant program. The President’s budget proposes to implement changes in bilingual and immigrant education that would consolidate all currently funded bilingual and immigrant programs, as well as the Foreign Language Assistance program, into a single flexible performance-based state grant program. All four federal bilingual education programs share the same performance goals and measures, possess similar eligibility criteria, and allow similar uses of program funds (see table 1). The four programs target students with limited English proficiency in kindergarten through 12th grade. The overall objectives of these four programs are to provide bilingual or special alternative education programs to children with limited English proficiency and to help such children reach high academic standards. Under each program, students’ achievement is measured biannually to determine if they have demonstrated continuous progress in oral and written English, as well as in language arts, reading, and math. LEAs are eligible to apply for funding under the four bilingual education programs; however, only LEAs with high concentrations of such students are eligible to apply for grants from the Comprehensive and Systemwide programs. LEAs may collaborate on their grant applications with institutions of higher education, community-based organizations, and state education agencies. All four programs also permit the use of funds to provide instructional services and materials, professional staff development for teachers and teacher’s aides, and family education programs. The PDI and Enhancement programs require specific uses of funds; the Comprehensive and Systemwide programs permit funds to be used on services from any of the above broad categories. Only the Systemwide program specifically authorizes services at the school district level, such as those associated with grade promotion and graduation requirements. All school districts and schools receiving funds must coordinate with other relevant programs and services to meet the full range of needs of participating students. The legislative purpose and grant length of the four bilingual education programs also vary. For example, PDI grants are to be used to develop and implement new bilingual education programs. According to Education officials, school districts typically submit applications to the PDI program if the population they intend to serve is new to a community and the students are relatively close in age. The purpose of the Enhancement program, according to the legislation, is to expand existing bilingual education programs. In practice, however, differences between the PDI and Enhancement programs have not been apparent to grantees. Education officials said that the types of programs described in the applications submitted by some school districts are the same for both the PDI and Enhancement programs. School districts typically submit applications to the Comprehensive program if the students they intend to serve are concentrated in one school but are disbursed throughout several grades. School districts typically submit applications to the Systemwide program if students with limited English proficiency of all ages attend schools throughout the district. Both the PDI and Enhancement programs make what are considered short-term grants because they provide funding for 2 to 3 years. Both the Comprehensive and the Systemwide program grants provide funding for 5 years. OBEMLA officials awarded grants to school districts with similar characteristics that provided similar services; however, individual schools typically did not receive funding from more than one bilingual education program. Our review of grantee files confirmed Education officials’ estimate that 80 percent of grants funded projects in elementary schools, and approximately 70 percent of the children served by the programs spoke Spanish as their primary language. A majority of grants funded in fiscal year 2000 went to school districts in states with historically high concentrations of students with limited English proficiency (see fig. 4). However, according to agency officials, Education has begun to award an increasing number of grants to school districts in states that until recently had small numbers of such students. According to Education officials, grantees receiving funding under each of the four programs provided similar services to their students with limited English proficiency. The services provided with program funds fell within three broad categories: instructional activities and materials, professional staff development for teachers and teacher’s aides, and family education programs. However, the precise nature of the services varied by district and school. For instance, some school districts chose an English-based instructional approach to teaching students with limited English proficiency, while others made more extensive use of the students’ native language (bilingual approach). Although schools receiving funds were similar in many respects, according to our file review, there is little evidence to indicate that individual schools received funding from more than one bilingual education program (see table 2). Even in instances where school districts received multiple grants, they were distributed so that individual schools typically did not receive funding from more than one program. On the basis of our file review and discussions with grantees and Education officials, we learned that while large school districts located in New York City and Los Angeles County were among the proportion (18 percent) of school districts receiving funding from more than one bilingual education program, individual grants were targeted to different schools within these large districts. The effectiveness of the four bilingual education programs on a national level is unknown because locally collected data are not comparable. The BEA requires local assessments of student outcomes, and leaves the choice of assessment tests to the local program. Although the legislation does not address how these evaluations are to be funded, grantees are required to submit evaluations every 2 years and can—according to Education officials—use grant funds for that purpose. Grantees use these evaluations to improve the local program, further define local program goals and objectives, and measure student outcomes such as academic achievement. To measure student academic achievement, the legislation specifies that local projects provide data on whether students with limited English proficiency are achieving state performance standards. For example, grantees must provide data comparing the academic achievement and school retention rates of students with limited English proficiency with those of English-proficient students. The legislation also requires data on program implementation and the relationship between activities funded by these programs and those funded by other sources. Because school districts use different assessment tests and define terms differently, student outcome data are not comparable among grantees, or nationally. While the BEA does not require grantees to use specific assessment tests, individual states or school districts may have such requirements. Grantees measure student academic achievement against different performance standards depending on, for instance, whether the standards were set at the state level or by a school district. Furthermore, many grantees have their own definitions and measures of key terms such as school retention. Education’s guidance states that because of the variation in how school retention is defined and measured, it is important that each local program follow its own school, district, or state definition and measure. One study prepared for Education found that it was difficult to aggregate data to provide a national picture of program effectiveness for these reasons, and also because of the variability in the quality and amount of data reported by school districts. However, Education may be able to garner some information about how well local bilingual education programs are meeting program goals by comparing local data with Education’s performance standards. Even if Education were able to obtain uniform data across local programs, it would still be difficult to isolate the effects of BEA funding. As mentioned earlier, funding from other federal programs—the largest of which is Title I—also supports these children. Moreover, state and local funds support most of the services provided to students with limited English proficiency. Because services provided to students with limited English proficiency are funded through multiple federal, state, and local sources, it would be difficult to isolate the effects of the four bilingual education program funds from other funding effects. Because all four bilingual education programs share the same goals, target the same types of children, and provide similar services, these programs lend themselves to consolidation. Though federal cost savings would likely be small, program consolidation would allow Education to redirect some of the resources it uses to manage four separate grant competitions to accomplish other activities, such as conducting site visits, reviewing and evaluating specific aspects of a grantee’s activities, and providing technical assistance. Program consolidation may also reduce applicant burden associated with multiple federal programs designed to achieve the same overall objectives. Education officials believe that consolidating these programs has merit and have already taken some steps to reduce overlap among the four programs. For example, because of similarities between the PDI and Enhancement programs cited by grantees and OBEMLA staff, Education holds grant competitions for these programs on alternating years (except in fiscal year 1999) (see table 3). Although reducing the number of programs for students with limited English proficiency requires congressional action, Education already decides which of the four programs to fund in a particular fiscal year and at what level to fund them. Given the inefficiencies associated with program overlap, the Congress may want to consider consolidating the four bilingual education programs into one program. While opportunities exist for consolidating the four bilingual education programs, federal cost savings, if any, from this action would likely be small for two reasons. First, the way programs are funded may limit any savings. As part of its annual budget request, Education proposes a funding level (as a single line item) for the four bilingual education programs. Because congressional appropriations are made as a single line item for the four programs, Education has the discretion to decide how to distribute the appropriated funds to the individual programs. Therefore, eliminating one or more of the programs would not necessarily change the funding level, which is proposed by Education’s budget request and determined by the Congress. Second, staff reductions are unlikely, thus limiting cost savings. Because the same 28 staff members administer all of OBEMLA’s programs (the four bilingual education programs we examined as well as 10 others), staff reductions could affect the management of all OBEMLA programs. Consolidating the four bilingual education programs may provide benefits other than cost savings to Education. According to OBEMLA officials, a reduction in the number of applications received—and possibly the number of grant competitions held—would allow staff to reallocate some of their time to other important program-related activities. Currently, OBEMLA holds a grant competition lasting approximately 4 to 6 months for each of the bilingual education programs awarded in a given year. According to OBEMLA staff, approximately 10 grant competitions are held for the bilingual education and other OBEMLA programs each year. This process consumes significant staff resources. OBEMLA officials also mentioned that some school districts submit grant applications to more than one bilingual education program in an effort to increase their chances of receiving funding from at least one, but OBEMLA does not maintain data on how widespread this practice is. According to Education officials, reducing the number of programs would likely decrease the number of grant applications received because school districts would be less likely to submit multiple grant applications. As a result, OBEMLA staff would spend less time reviewing applications and, possibly, less time conducting grant competitions. OBEMLA staff stated that, by spending less time reviewing applications and conducting grant competitions, they would have more time to effectively conduct other important activities such as visiting every grantee at least once during the course of its funding cycle, reviewing and evaluating specific aspects of a grantee’s activities, and providing technical assistance. Furthermore, as part of its efforts to provide technical assistance, Education officials might have more time to identify and disseminate information on effective practices gathered from grantees that have been successful in meeting program goals. Education officials also believe that time saved as a result of consolidation may allow for a greater emphasis on building collaborations between grantees and the other programs providing support to children with limited English proficiency. Consolidation may also directly benefit grantees applying to more than one of the bilingual education programs by reducing the burden associated with applying to multiple federal programs designed to achieve the same overall objectives. Several grantees we interviewed said that the application process was time consuming. According to the Office of Management and Budget, each application takes from 80 hours (PDI and Enhancement applications) to 120 hours (Comprehensive and Systemwide applications) to complete. Grantees we spoke with estimated that they spent anywhere from 6 days to 6 weeks completing applications. Furthermore, according to Education officials, grantee applications submitted to the PDI and Enhancement programs often proposed using the grants to fund the same types of activities. Given that applications for funding from the four bilingual education programs we reviewed require extensive time and effort to prepare, reducing the number of programs may decrease the administrative burden experienced by school districts applying for multiple program grants. OBEMLA staff believes that the four bilingual education programs meet two funding priorities for students with limited English proficiency. The first priority is to help school districts and schools that have experience serving students with limited English proficiency, and the second is to help those with little experience serving such students. At present, the Comprehensive and Systemwide programs focus on the first priority by meeting the needs of grantees that are upgrading existing programs, and the PDI and Enhancement programs meet the second priority by awarding grants to educate new populations of limited English-proficient students. Education officials recognize that four bilingual education programs are not necessary to meet the needs of school districts serving students with limited English proficiency. Education has taken steps to reduce redundancy by not awarding new grants under all four programs every year. During the 6-year period between 1995 (when the programs were first funded) and 2000, Education held grant competitions for all four bilingual education programs in only 1 year. Staff members acknowledged that given enough flexibility to meet a variety of funding priorities, they may be able to serve all grantees with one program. The four federal bilingual education programs included in this review overlap in many significant ways, and our current and past work has shown that overlap can create an environment in which programs do not serve participants as efficiently as possible. Education officials and some grantees recognize that fewer than four programs could meet the needs of schools educating students with limited English proficiency. We believe it would be possible for a single federal program to address the agency’s funding priorities if the program has adequate flexibility. To decrease the overlap caused by four bilingual education programs that were designed to achieve the same overall objectives, the Congress may want to consider program consolidation. The Congress could authorize a single federal program that consolidates all four bilingual education programs into one but provides Education with the flexibility to meet the varied needs of school districts serving students with limited English proficiency. Such a program would focus on grantees with experience educating students with limited English proficiency as well as those grantees with little experience in this area. We provided a draft of this report to the Department of Education for comment and we received written comments, which are included in appendix III. Since the discussions we had with program staff during our review, Education has decided that it supports consolidating the four programs into one, which is consistent with the President’s budget proposal. Thus, we have revised the report to reflect Education’s position, which also supports the consolidation of the four programs suggested in our Matter for Congressional Consideration. However, our review did not address whether the federal government or states should administer the program, and Education officials did not discuss this topic with us during our review. In addition, we received technical comments from Education and incorporated these comments where appropriate. We are sending copies of this report to the Honorable Roderick R. Paige, Secretary of Education; relevant congressional committees; and other interested parties. We will also make copies available to others on request. Please contact me on (202) 512-7215 if you or your staff have any questions about this report. Other GAO contacts and staff acknowledgments are listed in appendix IV. During grant competitions, a group of peer reviewers rates applications for each of the four bilingual education programs using the following selection criteria. These criteria help reviewers assess the strength of individual applications. Reviewers assign numerical scores and rank the applications to determine those that merit grant awards. The selection criteria are similar across all four programs. Selection criterion Meeting purpose of statute Extent of need for project Quality of project design Quality of project services Proficiency in English and another language Language skills of personnel Project activities Quality of project personnel Adequacy of resources Quality of management plan Integration of project funds Quality of project evaluation plan Commitment and capacity building *Program uses indicated selection criteria. In addition to those named above, the following individuals made important contributions to this report: Sherri Doughty, Ellen Habenicht, Corinna Nicolaou, James Rebbe, Jay Smale, and Jim Wright.

In fiscal year 2000, the federal government funded four bilingual education programs--Program Development and Implementation Grants, Program Enhancement Projects, Comprehensive School Grants, and Systemwide Improvement Grants--that award grants to school districts to serve children with limited English proficiency. This report reviews (1) how similar the performance goals and measures, eligibility criteria, and allowable services are among the four bilingual education programs; (2) to what extent the different kinds of grants were made to the same types of schools or school districts and were used to provide the same services; (3) what is known about these programs' effectiveness; and (4) whether these programs can be better coordinated or if opportunities exist for program coordination and cost savings. GAO found that all four federal bilingual education programs share the same performance goals and measures, use similar eligibility criteria, and allow for similar uses of program funds. In fiscal year 2000, the four bilingual programs made grants to school districts that shared some characteristics and provided similar services; however, individual schools typically did not receive funding from more than one program. The services provided with program funds are similar, but are tailored by school districts and schools to meet local needs. Currently, the effectiveness of the four bilingual programs on a national level is not known. The authorizing legislation requires the use of local evaluations to assess students' progress in meeting state standards. The variation in local assessment tests complicates the task of providing a national picture of program effectiveness. Even if the Department of Education were able to obtain uniform information on local projects, it faces challenges in trying to isolate the funding effects of the four bilingual programs from funding effects of other programs that support students with limited English proficiency. Finally, these four bilingual programs lend themselves to consolidation. Although cost savings from consolidation would likely be small, there may be advantages to consolidation, such as freeing up staff for other important activities and reducing the administrative burden associated with redundant federal programs.

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NCIC is an extensive computerized criminal justice information system maintained by the FBI that serves as a repository of data on crimes and criminals of nationwide interest and as a locator file for missing and unidentified persons. Over 92,000 law enforcement agencies and other criminal justice partners have access to NCIC, which includes approximately 35,000 federal, state, and local law enforcement agencies in the United States. As of January 1, 2011, NCIC contained 85,820 active records in its missing persons file. See figure 1 for additional information on the age of missing persons reported by law enforcement to NCIC. NCIC is managed cooperatively by FBI’s CJIS—the division within the FBI that operates as the focal point and central repository for criminal justice information services—and the state and local agencies that access the system. An Advisory Process, consisting of an Advisory Policy Board (the Board) with representatives from criminal justice and national security agencies throughout the United States, and working groups are responsible for establishing policy for NCIC use by federal, state, and local agencies and providing advice and guidance on all CJIS Division programs. In addition, the Board creates ad hoc subcommittees as necessary to review policies and develop alternatives or recommendations for the Board’s consideration. NCIC policies and procedures are documented in the NCIC 2000 Operating Manual and the CJIS Security Policy. Local level governance of NCIC use is performed by the CSA. The CSA is a criminal justice agency that has overall responsibility for the administration and usage of NCIC, including providing quality assurance and training and assuring LEA compliance with operating procedures within its jurisdiction. Most CSAs are state agencies that oversee NCIC use by all LEAs that enter data into NCIC in the state. A CSA may be a law enforcement agency, such as a state police agency, that also enters data into NCIC, in addition to overseeing the administration of the state’s NCIC system. Furthermore, the Board requires that each local LEA appoint a Terminal Agency Coordinator who serves as the representative and point of contact for disseminating information on NCIC policies and procedures to that agency. CJIS shares with the CSAs the responsibility for monitoring compliance with NCIC policy, as shown in figure 2. CJIS policy, as approved by the Board, calls for triennial audits of each CSA to assess the CSA’s compliance with NCIC policies, including the 2-hour entry requirement. Further, CJIS relies on the CSAs to audit all LEAs that enter data into NCIC in each state, to help ensure compliance among all NCIC users. CJIS’s NCIC performance-based audit program tasks the CJIS Audit Unit with conducting a compliance audit of each CSA to verify compliance with federal laws, such as the 2-hour entry requirement for reports of missing children, and other CJIS policies and regulations. The purpose of the audit is to: assess CSA compliance with NCIC system policy requirements; assess the quality, integrity, and security of the data maintained in and accessed from a variety of criminal justice information systems and networks; and ensure timely and relevant criminal justice information is made available to authorized users. As part of its audit of CSAs, CJIS reviews random samples of records of missing persons in selected LEAs, and assesses all missing children records contained in the sample to determine compliance with the 2-hour entry requirement. During the current triennial audit cycle, the CJIS Audit Unit plans to audit CSAs in all 50 states plus the District of Columbia from October 1, 2009, through September 30, 2012. CJIS funding for conducting NCIC audits was $207,570 in fiscal year 2009 and $309,854 in fiscal year 2010, and is projected to be $244,202 in fiscal year 2011. CJIS’s audit of CSAs consists of a pre-audit questionnaire, on-site visit, and follow-up report. The pre-audit questionnaire is sent to CSAs and selected LEAs within the state to obtain written responses as well as assist CJIS in gathering the relevant information to better inform the audit process. In selecting LEAs, CJIS takes into account a number of factors, which may include the number of records entered by each LEA, the total number of records to be reviewed in the state, the LEA’s geographic location to reduce the time and travel burden imposed on CJIS audit staff, whether the LEA was previously found to have extensive and/or serious NCIC noncompliance issues, and whether CSA officials request that CJIS include the LEA in its audits based on CSA concerns from prior CSA audits. The on-site visit consists of interviews of CSA and LEA personnel to determine compliance with NCIC policies and procedures, and a data quality review of selected LEA NCIC records. In designing its review of these records, CJIS seeks to balance the need for a cost-effective, logistically feasible approach, with the need to ensure the review obtains statistically valid information on the accuracy, completeness, and timeliness of all missing person records. During the post-audit phase, CJIS prepares a draft audit report that includes findings from the interviews with the agency personnel as well as the data-quality reviews and recommendations for agency compliance. The report is provided to the CSA for review, and the final report, including the CSA’s responses to any recommendations, is forwarded to the Sanctions Ad Hoc Subcommittee of the Board. This subcommittee is responsible for evaluating the results of audits conducted of participants in the CJIS Division programs. The subcommittee makes specific recommendations to the Board concerning sanctions that should be imposed on agencies that are not in compliance with the policies established by the Board for the operation of the CJIS Division programs. Sanctions may be in the form of a letter of concern from the subcommittee enumerating audit problems that had not been resolved from previous audit cycles, or a letter of sanction, which is similar to the letter of concern, but with stronger language and specific compliance terms and procedures. If the CSA does not adequately address noncompliance issues, the Board has the option of terminating the state’s access to NCIC. Each CSA is also required by CJIS and the Board to establish a system to, at a minimum, triennially audit all LEAs that enter data into NCIC within their jurisdiction, to ensure compliance with NCIC policy and regulations. Each CSA is responsible for developing an audit program to meet this requirement and the resulting audit approach can vary across CSAs. We discuss the audit approaches used to assess the timeliness of missing children records by the 6 selected CSAs later in this report. During its audits, CJIS assesses the extent to which the CSAs are fulfilling the requirement to audit all LEAs that enter data into NCIC under their jurisdiction. CJIS and the Board have taken a number of steps to help ensure that LEAs implement the 2-hour entry requirement. Beginning in January 2007, CJIS: informed CSAs and LEAs that the Adam Walsh Act of July 2006 required all reports of missing persons under the age of 21 to be entered into NCIC within 2 hours of receipt; provided guidance to CSAs and LEAs regarding how LEAs might best document compliance with the requirement; and informed CSAs and LEAs that the Board had authorized it to begin assessing noncompliance with the requirement in October 2009 and possibly subject noncompliant CSAs to sanctions beginning in October 2012. Starting with its CSA audits conducted in January 2007, CJIS provided verbal and written information to all CSAs and the selected LEAs it audited that LEAs will have 2 hours to enter reports of missing children into NCIC from the time LEAs complete collecting 10 data elements required by statute. As the Adam Walsh Act did not specify how compliance was to be measured, CJIS started measuring the 2 hours once the required data were obtained because this is how CJIS has measured timely entry requirements for all other types of NCIC records, such as missing persons age 21 and older and wanted persons. In addition, CJIS recognized that law enforcement may face challenges obtaining complete information at the time of the initial report, for example, from parents who are traumatized by a child’s disappearance. If the elapsed time between obtaining and entering the information on a missing child was equal to or less than 2 hours, CJIS would deem the entry to be in compliance with the 2-hour entry requirement. Conversely, if the elapsed time was more than 2 hours, CJIS would deem the entry to be out of compliance with the 2-hour entry requirement. Generally, according to CJIS officials, if CJIS finds that 10 percent or more of missing children records reviewed are out of compliance, CJIS would make an audit recommendation requiring the CSA to take actions to address non-compliance. The officials also said that CJIS provides and discusses all findings from its LEA reviews with the cognizant LEAs. CJIS more broadly disseminated information to CSAs and LEAs regarding how timeliness would be assessed via (1) a January 2008 letter to the heads of all CSAs and (2) a June 2009 update to NCIC’s Operating Manual. In CJIS’s letter to the heads of the CSAs and in the update to the NCIC Operating Manual, CJIS recommended that LEAs use a time and date stamp to document when they completed collecting the required information from the party or parties reporting the missing child. CJIS also informed CSAs and LEAs that it would assess timeliness using the 2-hour criterion and make audit recommendations that would require CSA responses in the audit cycle beginning in October 2009. This start date was selected because of the Board’s decision to grant a grace period to allow agencies time to establish and institute procedures to accurately document the receipt of the minimum data necessary for entry. CJIS did not specifically require LEAs to use the recommended time and date stamps, but if an audited LEA did not document the date and time it received the minimum data, CJIS stated it would consider any unjustified delay in entering information on a missing child into NCIC as untimely. This could result in CJIS making an audit recommendation that the CSA take action to address the noncompliance and the Sanctions Ad Hoc Subcommittee applying sanctions in the future. As of January 2011, CJIS had audited 22 CSAs using the 2-hour criterion for entering reports of missing children into NCIC. Of the 22 audits, 10 audit reports were finalized and 12 were in draft form. Of the 10 CSAs where audit reports were final, CJIS found 9 CSAs to be out of compliance with the 2-hour entry requirement and issued audit recommendations to them to take actions to ensure timely entry. As shown in figure 3, the percentage of missing children records assessed by CJIS as having been entered into NCIC within 2 hours ranged from 53 percent to 91 percent across the 10 states; and the percentage of records entered into NCIC after 2 hours ranged from 9 percent to 47 percent. During the audits, CJIS attempts to capture information on the reasons missing children records are untimely to assist the CSAs in identifying issues that they may need to address statewide in order to become compliant with the 2-hour entry requirement. For each untimely missing child record, CJIS audit staff asks the LEA personnel to provide a description of the reason that led to the delay in entry. However, for 82 percent of the 432 untimely missing children records identified across the 10 states, CJIS officials told us they did not know the reason for the delay because the LEAs could not provide them with information on the reasons why the records were not entered within 2 hours. For the 79 untimely missing children records where LEAs were able to provide CJIS information on the causes for the delay in NCIC entry, two predominant reasons were given: LEA personnel did not know about the 2-hour entry requirement. Responding officers did not provide the information on the missing child in a timely manner. This could occur, for example, if officers began investigating the case before submitting the report of the missing child, waited until the end of the shift to submit a report, were dispatched to another service call prior to submitting the report, or did not deem it necessary to submit the report immediately for NCIC entry because they considered the child to be a frequent run-away. CJIS officials also said that in cases where CJIS auditors could not find documentation of the date and time that the minimum data required for NCIC entry were obtained, they deemed the entry to be untimely. In written responses to CJIS’s findings of untimely entry, CSAs generally focused on their plans to provide training to personnel responsible for entering reports of missing children into NCIC and educate personnel through the CSAs’ audits of LEAs. CJIS informed CSAs that, in order to allow for an appropriate transition period, the Board had decided that audit recommendations based on the 2- hour entry requirement would not be forwarded to the Board’s Sanctions Ad Hoc Subcommittee until the audit cycle beginning in October 2012. Thus, while CSAs must respond to CJIS audit recommendations regarding non-compliance with the 2-hour entry requirement, non-compliance in this area will not be a factor in the Board’s decisions about whether to impose sanctions on a CSA until October 2012. During its audits of CSAs, CJIS verifies that each CSA is conducting the triennial audits that are required by CJIS and the Board. However, the Board has not taken steps to establish audit standards that require CSAs to assess compliance with the 2-hour entry requirement. Standards for Internal Control in the Federal Government call for management to design control activities to help ensure that its control objectives are met. Such standards could better position CJIS and the Board to ensure that the CSA audits accomplish CJIS’s specific oversight and compliance objectives for timely entry of missing children records. In the absence of standards, we found that audit approaches used by the 6 selected CSAs to assess compliance with the 2-hour entry requirement varied. For example, lacking standards, two CSAs were not using the 2- hour criterion to assess timeliness and the six CSAs varied in the number of missing children records reviewed. The number of missing children records reviewed ranged from all active records in one state to no records in another. The fact that CSAs were not consistently applying the 2-hour criterion to review a sample of missing children records raises questions about the reliability of CSA information on LEA compliance. The two CSAs that were not using the 2-hour criterion had different approaches to assessing timeliness: Officials for one CSA stated they used an “immediate” criterion to assess the timeliness of missing children records, which they said was stricter than the 2-hour entry requirement. However, the CSA did not have documentation on the time frame that was to be used for measuring “immediate” entry or how it assessed compliance with this criterion. Thus, CSA auditors could not demonstrate LEAs’ compliance with the 2-hour entry requirement. One CSA relied on LEAs to complete a questionnaire that asks, among other things, if the agencies impose a waiting period before taking reports of missing children and if there is a “large delay” between the time a missing person report is taken and the time it is entered into NCIC. However, the questionnaire does not define what the CSA considers to be a “large delay,” and the CSA does not test for compliance. Therefore, auditors for this CSA also could not demonstrate LEAs’ compliance with the 2-hour entry requirement. CSAs were also not consistent in the number of missing children records they assessed for compliance with the 2-hour entry requirement, specifically: One CSA (the CSA mentioned above that relied on LEA responses to a questionnaire) did not review any missing children records because the state had over 500 LEAs and, according to CSA officials, a limited number of auditing staff. One CSA determined the number of missing children records to review at each LEA based upon the LEA’s entry error rate—the portion of records that were untimely, incomplete, or did not comply with other entry requirements—from its past CSA audit. This approach resulted in the CSA reviewing 2 missing person records out of about 400 at one LEA. One CSA generally reviewed 4 to 10 missing children records from each LEA it audited. This sampling approach resulted in the CSA reviewing about the same number of records from an LEA with over 1,250 active missing children records as from an LEA with about 100 active missing children records. One CSA generally reviewed 10 percent of all missing person records from each LEA it audited, some portion of which would be missing children records. The CSA also imposed a minimum of 20 missing person records to be reviewed. If a LEA had fewer than 20 missing person records in NCIC, then the CSA would review all records. One CSA reviewed 10 percent of active missing children records from large LEAs, such as one with over 800 missing children records in NCIC, and all records from the remaining LEAs it audited. One CSA reviewed all active missing children records from each LEA it audited. We do not know the extent to which the variability we identified in CSA audit approaches exists across all CSAs. However, our findings that one CSA did not assess any missing children records and other CSAs reviewed a relatively small number of records raises questions about the CSAs’ and, in turn, CJIS’s ability to draw conclusions regarding LEAs’ compliance with the 2-hour entry requirement for missing children. CJIS officials acknowledged that CSA audits would be more useful if they measured LEAs’ compliance with the 2-hour criterion and reviewed a sample of missing children records to assess compliance with the entry requirement, but CJIS and the Board do not require CSAs to incorporate either of these into their audits. CJIS officials said that when CSAs request audit guidance, CJIS makes information available to them on its audit methodology and protocols, which include applying the 2-hour criterion to assess a sample of missing children records. Standards for Internal Control in the Federal Government call for agencies to ensure control activities are in place that enforce management’s directives and effectively accomplish agencies’ control objectives. Without such minimum audit standards for assessing compliance with the entry requirement—including applying the 2-hour criterion and how to sample missing children records—CSAs’ audits may not be collecting as consistent and reliable information on LEA compliance with the requirement as they could. Minimum standards could also help CJIS better accomplish its specific oversight and compliance objectives for timely entry of reports of missing children. We recognize that when CSAs conduct audits, they have multiple responsibilities to ensure compliance with all NCIC policies and face resource constraints that may limit their ability to review missing children records for timeliness. Therefore, it could be helpful for CJIS, CSAs, and the Board to collaborate in developing minimum standards that are both feasible to implement and provide reliable information on LEA compliance. Once standards are established, CJIS could help ensure that CSA audits are meeting standards by reviewing the audit approaches that CSAs use to assess timeliness. This type of review is another key internal control activity that could help CJIS achieve its oversight and compliance objectives for the 2-hour entry requirement for reports of missing children. Officials from eight of the nine LEAs we contacted identified custody disputes and coordination with child welfare agencies as potential impediments to reporting missing children to NCIC in a timely manner or investigating these cases. OJJDP has funded research and policy development to produce guidance in these areas, but CJIS and OJJDP could take additional steps to better position DOJ to carry out its oversight role over NCIC, with respect to helping ensure compliance with the 2-hour requirement. Custodial issues may come into play when a child is missing as a result of having been removed from his or her usual place of residence by a family member. Officials from all of the nine LEAs we met with reported that the responding officer may need to ascertain the custodial arrangements for the child and whether the report is the result of a misunderstanding between family members or constitutes an abduction by a family member. More specifically, officials from seven of the nine LEAs reported that challenges in making this determination may delay reporting or investigation of the case. Of the seven LEAs that raised custody- determination issues as a challenge, officials in five LEAs said that where a missing child case may involve interference by a noncustodial family member, the report cannot be taken by law enforcement unless a court docket number or judge’s order establishing custody is first produced. In one case in one of these LEAs, waiting for court paperwork resulted in a 2- day delay between receiving a report from the parent, and entering the report into NCIC. Officials in two of the seven LEAs said that further steps must be taken to determine custody when the missing child’s parents were never married and do not have a custody agreement, or when there are competing custody orders from different states that must be resolved. These steps can delay reporting into NCIC or investigating the case. OJJDP, NCMEC, and the International Association of Chiefs of Police have taken steps to try to address these issues. For example, in 2006, NCMEC and the International Association of Chiefs of Police, with funding from OJJDP, developed a model missing children’s policy for law enforcement agencies, which agencies could use to establish guidelines and responsibilities for agency personnel in responding to reports of missing children. The model policy contains a provision stating that the LEA will accept reports of missing children when it can be demonstrated that the child has been removed, without explanation, from the child’s usual place of residence, even if custody has not been formally established. OJJDP officials stated that NCMEC currently makes use of the model policy in its Missing and Exploited Children Chief Executive Officer Seminars for police chiefs, sheriffs, and communication center managers. NCMEC requests that participants provide a copy of their agency’s policy on missing children in advance of the seminar, and NCMEC will review the policies and offer suggestions for improvement or refer the participants to the model policy developed by NCMEC and the International Association of Chiefs of Police. In 2009, NCMEC also updated guidance for parents and attorneys addressing family abductions, emphasizing in several places the necessity for law enforcement to report to NCIC within 2 hours, even if custody has not yet been determined. Officials from six of the nine LEAs we interviewed reported that difficulty in obtaining information about missing children who are in the child welfare system (which includes individuals in the care of foster-care group homes) may delay reporting to NCIC or the investigation of the episode. These officials stated that the foster-care group homes do not always collect information—such as the child’s height and weight or parental information—that law enforcement needs to complete a missing person report or the mandatory fields in NCIC. Officials from three LEAs stated that while the lack of such information from the foster-care group home does not prevent the initial reporting to NCIC, the lack of additional information—such as a recent photo of the child—may delay the investigation of a missing child because law enforcement must spend time obtaining the necessary information. Furthermore, officials from three of the six LEAs that raised coordination with child welfare agencies as a challenge said that certain practices of foster-care group homes may result in reporting delays. For example, these officials stated that personnel from foster-care group homes sometimes reported the same incident multiple times to law enforcement, which would require law enforcement personnel to determine whether the existing record in NCIC was closed and could be removed from the system in order to enter the most recent reported incident, or whether the new report was the same as the prior report that had already been entered into NCIC. In one LEA, officials stated that in one week, they had received approximately 10 such duplicate reports of missing children, the majority coming from a single foster-care group home. Officials from one LEA stated that some of the foster-care group homes in the jurisdiction do not always inform law enforcement when a child has been located, thus requiring law enforcement, when receiving a new report for the same child, to conduct research into whether a prior case should have been closed before entering a new record. Officials from the three child welfare agencies we contacted in three of the four states where LEA officials reported challenges in coordinating with child welfare agencies noted that in some cases, foster-care group homes may not have the information law enforcement needs to enter reports of missing children into NCIC, but stated that this situation does not occur very frequently. The officials said that ensuring that a recent photograph of a child is available has been a challenge and that they are working to have a recent photograph available for each child under their care. The officials also acknowledged that their law enforcement partners have raised concerns about foster-care group homes filing multiple reports for the same missing child episode and about some child welfare personnel not informing law enforcement when a child has been located. Officials from two of the child welfare agencies stated that high staff turnover among child welfare personnel may be a reason why some personnel do not know how to best coordinate with law enforcement. According to these officials, child welfare agencies may need to provide additional training and oversight to ensure that child welfare personnel understand clearly when a child should be reported missing to law enforcement and communicate in a timely manner with law enforcement officials to inform them when children are located or return. DOJ, NCMEC, and the Child Welfare League of America have taken steps to try to assist LEAs and child welfare agencies in addressing these issues. For example, concerns about timely reporting and investigation of children missing from care were highlighted by NCMEC in guidance it issued in 2006 with funding from OJJDP. The guidance states that collaboration between LEAs and child welfare agencies is necessary to ensure that children missing from care are reported to law enforcement, and provides a sample self-assessment for LEAs to use to help them develop policies and procedures to enhance LEAs’ responses to children missing from care. The self-assessment recommends that LEAs discuss with child welfare agencies the type of information LEAs need from child welfare agencies in order to complete a missing person report, and ensure that law enforcement officers have a way to access child welfare data or caseworkers 24 hours a day, 7 days a week. The Child Welfare League of America, in partnership with NCMEC in 2005, developed guidelines for standardized child welfare intake forms to ensure information necessary for NCIC entry is routinely maintained by foster-care providers. DOJ’s Office of Community Oriented Policing Services in 2006 also funded development of a guide focusing on juvenile runaways that recommended that LEAs work with foster-care group home providers to develop joint protocols for reporting and sharing information. The fact that officials from eight of the nine LEAs we contacted reported facing challenges entering missing children information into NCIC within 2 hours due to custody disputes and coordination with child welfare agencies—even in the context of efforts by DOJ to develop and disseminate guidance regarding these issues—raises questions about the extent to which LEAs are well-positioned to comply with the 2-hour entry requirement. According to OJJDP officials, although guidance relating to custody disputes and coordination with child welfare agencies was, for the most part, developed prior to the passage of the 2-hour entry requirement in 2006, OJJDP believes the guidance remains useful in helping LEAs address these challenges, and has not undertaken additional efforts to update it. According to the officials, the guidance is disseminated widely to law enforcement personnel in the field, through national conferences and other mechanisms, and is used in training courses funded by OJJDP and provided by NCMEC. DOJ does not know the extent to which the challenges we identified in our LEA interviews exist across all LEAs. However, CJIS officials told us that due to the limited scope of its audits and the limited investigative expertise of its auditors, CJIS’s Audit Unit would not be in a position to assess local challenges to reporting missing children to NCIC as part of CJIS’s triennial audit cycle. We recognize that CJIS’s Audit Unit may be limited in its ability to conduct a nationwide assessment of the challenges that LEAs face in meeting the 2-hour reporting requirement. We also recognize that when CSAs conduct local audits of each LEA in their respective states every 3 years, they have multiple responsibilities to ensure compliance with all NCIC policies and face resource constraints that may limit their ability to assess local challenges to reporting. However, there are other existing CJIS and OJJDP mechanisms that could be useful for collecting and sharing information about LEA challenges to timely reporting and the ways in which some LEAs have successfully addressed these challenges. For example, the CJIS Advisory Policy Board’s working groups and subcommittees and CJIS’s voluntary annual training for representatives of all CSAs and selected LEAs in each state could be useful for obtaining information on the extent and severity of challenges faced by LEAs. They could also be useful for disseminating information on how LEAs have successfully implemented forms or protocols or collaborated with foster- care group homes to ensure missing children are reported in a timely fashion. In addition, OJJDP could obtain information on challenges to timely reporting and disseminate information on successful efforts to mitigate these challenges in OJJDP-funded training courses for local law enforcement officials. Standards for Internal Control in the Federal Government call for management to identify and analyze the relative risks from internal and external sources associated with achieving the agency’s objectives. Using existing CJIS and OJJDP mechanisms to (1) obtain information on the extent to which LEAs face the types of challenges we identified, as well as other challenges that may be prevalent or significant and (2) share examples of LEA-reported successes to mitigating the challenges, could better position DOJ to carry out its oversight role over NCIC with respect to helping ensure compliance with the 2-hour requirement. CJIS has a responsibility to ensure that missing children records are complete, accurate, and timely to comply with federal requirements and promote law enforcement’s ability to investigate, locate, and provide support to missing children. CJIS’s reliance on CSAs to ensure compliance with the 2-hour entry requirement underscores the importance of CSAs’ triennial audits of all LEAs that enter data into NCIC within their jurisdiction. Evidence from our review of six CSAs raises questions about the consistency and reliability of information from CSA audits on LEA compliance with the 2-hour entry requirement. Therefore, we believe it could be helpful for CJIS and the Board to consider establishing minimum audit standards for assessing compliance with the entry requirement. Such minimum standards could better position CSAs to design audits of LEAs to obtain more consistent and reliable information on LEA compliance with the requirement. This could also help CJIS better accomplish its specific oversight and compliance objectives for timely entry of reports of missing children. Once these standards are established, by reviewing the CSA audit approaches as part of CJIS’s own triennial audits of CSAs, CJIS could help ensure the standards are being met. Because some LEAs we visited continued to identify challenges due to custody disputes and coordination with child welfare agencies that affected their ability to meet the 2-hour entry requirement despite DOJ’s previous efforts to address such challenges, it could be useful for CJIS and OJJDP to consider using existing mechanisms to determine the extent to which LEAs face these and other kinds of challenges and to share approaches that LEAs have taken to mitigate these challenges. Such actions could better position DOJ to carry out its oversight role over NCIC with respect to helping ensure compliance with the 2-hour requirement. We are making the following three recommendations: To increase the likelihood that CJIS is positioned to oversee compliance with the requirement that LEAs enter records of missing children into NCIC within 2 hours, we recommend that the Director of the FBI direct CJIS to consider: In collaboration with CSAs and the Board, establishing minimum standards that provide CSAs guidance on assessing compliance with timely entry requirements, including applying the 2-hour criterion and how to sample missing children records; and Ensuring that in future triennial audits, CJIS assesses the extent to which CSA audit programs adhere to the minimum standards. To increase the likelihood that LEAs are better positioned to comply with the requirement to enter missing children records into NCIC within 2 hours, we recommend that the Director of the FBI and the Administrator of OJJDP consider opportunities to use existing mechanisms to obtain information on the extent to which LEAs face challenges—such as custodial determinations and coordination with child welfare agencies—in reporting missing children to NCIC, and share examples of successful efforts to mitigate these challenges. We provided a draft of this report to DOJ for its review and comment. We received written comments from the FBI, which are reproduced in full in appendix I. The comments focused on actions the FBI plans to take, to recommend that the CJIS Advisory Policy Board revise its policy so that agencies found to be non-compliant with the 2-hour requirement are referred immediately for sanctions. We did not recommend this as part of our review, however, and so cannot address the extent to which it will impact law enforcement’s ability to comply with the 2-hour requirement. Because DOJ’s comment letter did not state DOJ’s position on our recommendations, we engaged in discussions and e-mail exchanges with DOJ officials and on June 7 the Department’s audit liaison confirmed that the Department concurred with all three recommendations. On May 12, the Unit Chief of CJIS’s Audit Unit provided oral comments regarding our first two recommendations. Specifically, he stated that CJIS plans to suggest that the Board consider and approve our first two recommendations—establishing minimum audit standards for assessing compliance with the 2-hour requirement and assessing adherence to the standards in future CJIS audits. In a June 7 email, DOJ’s audit liaison stated that during meetings in fall 2011, CJIS, through the Advisory Policy Board, plans to solicit the law enforcement community’s input on our third recommendation regarding challenges to timely entry. Specifically, according to DOJ’s audit liaison, CJIS plans to obtain information regarding the challenges of entering missing children reports into NCIC in a timely manner, request examples of successful efforts to mitigate the challenges presented and, among other things, document the lessons learned so that they can be shared among the law enforcement community. Furthermore, the liaison stated that OJJDP will include the subject of timely reporting in at least six training sessions for local law enforcement that OJJDP will sponsor over the next fiscal year. We believe these steps would address the intent of our recommendations. Because CJIS and OJJDP plan to take these steps, we redirected our first two recommendations to the Director of the FBI, and our third recommendation to both the Director of the FBI and the Administrator of OJJDP, rather than the Attorney General. In commenting on the draft, the Unit Chief of CJIS’s Audit Unit reported that CJIS shares responsibility for implementing and monitoring compliance with the 2-hour requirement with the Board. Thus, we have modified language in the objective and in the body of the report to reflect this shared responsibility. Finally, the FBI provided technical comments which we incorporated into the report, as appropriate. As agreed with your offices, we plan no further distribution of this report until 30 days from its date, unless you publicly announce its contents earlier. At that time, we will send copies of this report to the Attorney General, selected congressional committees, and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any further questions about this report, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in app. II. Eileen R. Larence, (202) 512-8777 or [email protected]. In addition to the contact named above, Evi Rezmovic, Assistant Director; Tom Jessor; Heather May; Susan Czachor; Keesha Egebrecht; Sharanjit Singh; Bill Crocker; Janet Temko; Amanda Miller; Linda Miller; Labony Chakraborty; and Cheron Green made significant contributions to this report.

Missing children who are not found quickly are at an increased risk of victimization. The National Child Search Assistance Act, as amended, requires that within 2 hours of receiving a missing child report, law enforcement agencies (LEAs) enter the report into the Department of Justice's (DOJ) National Crime Information Center (NCIC), a clearinghouse of information instantly available to LEAs nationwide. DOJ's Criminal Justice Information Services (CJIS), the CJIS Advisory Policy Board (the Board), and state criminal justice agencies share responsibility for overseeing this requirement. As requested, GAO examined (1) CJIS's and the Board's efforts to implement and monitor compliance with the requirement; and (2) selected LEA-reported challenges with timely entry and DOJ's actions to assist LEAs in addressing them. GAO reviewed documents, such as agency guidelines, and interviewed officials from DOJ, six state criminal justice agencies, and nine LEAs selected in part based on missing children rates. The results are not generalizable to all states and LEAs, but provided insights on this issue. CJIS and the Board have taken steps to help ensure implementation of the 2-hour entry rule, but could strengthen their oversight to better assure compliance with the rule. Starting in 2007, CJIS: (1) informed all state criminal justice agencies that LEAs will have 2 hours to enter reports of missing children into NCIC once they have collected the required data (e.g., child's biographical information); (2) provided guidance on how LEAs could document compliance with the rule; and (3) informed state criminal justice agencies that the Board had authorized CJIS to begin assessing compliance with the rule in audits starting in 2009. To help ensure compliance among all NCIC users, CJIS and the Board require state criminal justice agencies to audit all LEAs in the state that enter data into NCIC. However, CJIS and the Board have not taken steps to establish minimum audit standards for state criminal justice agencies to use in assessing LEAs' compliance with the 2-hour rule. In the absence of such standards, the selected six state criminal justice agencies GAO contacted used varied approaches to assess LEAs' compliance. For example, two were not using the 2-hour criterion, and the number of missing children records the six agencies reviewed to assess timeliness ranged from all records in one state to no records in another. The fact that the state agencies did not consistently apply the 2-hour criterion to review a sample of missing children records raises questions about the reliability of the information the agencies collect on LEA compliance. Establishing minimum standards for state agency audits could help provide CJIS with reasonable assurance that the audits contain reliable information on LEA compliance. Officials from eight of nine LEAs GAO contacted reported challenges to entering information on missing children into NCIC within 2 hours; CJIS and the Office of Juvenile Justice and Delinquency Prevention (OJJDP) could use existing mechanisms to obtain and share information on challenges. Seven LEAs reported challenges determining whether a child is missing when there are custodial disputes. Six LEAs reported challenges obtaining information from child welfare agencies on missing children in the child welfare system. Officials from child welfare agencies in areas where LEAs reported this challenge said that they may not always have the information LEAs need, and are taking steps to ensure timely communication between their staff and LEAs. In association with the National Center for Missing and Exploited Children and other stakeholders, in 2006 OJJDP developed (1) a model policy stating that LEAs will accept reports of missing children even when custody has not been established and (2) sample self-assessments so LEAs could enhance their responses to missing children in the child welfare system. However, eight of the nine LEAs stated that these challenges persist. DOJ does not know the extent of these challenges across all LEAs and has limited capability to conduct such an assessment. By using existing CJIS and OJJDP mechanisms--such as CJIS's training for state agencies and OJJDP-funded training for LEAs--to obtain information on the extent to which LEAs face these and other challenges and provide examples of how some LEAs have mitigated the challenges, DOJ could be better positioned to carry out its oversight of NCIC with respect to assuring compliance with the 2-hour rule. GAO recommends that CJIS and the Board consider establishing minimum standards for states to use to monitor compliance with the 2-hour rule and CJIS and OJJDP use existing mechanisms to obtain and share information on LEA challenges and successful efforts to mitigate them. DOJ concurred.

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